Legislative Fight Heats Up over Investment Advice Rule

Proposed legislation addresses fees charged for retirement plan advice

By Feb 9, 2016

Congress is considering an alternative to applying the so-called fiduciary standard to retirement plan advisors as proposed by the U.S. Department of Labor (DOL).

On Feb. 2, the House Committee on Education and the Workforce and the House Ways and Means Committee approved two complementary bills—the Affordable Retirement Advice Protection Act and the Strengthening Access to Valuable Education and Retirement Support Act (also referred to by its short title, The Savers Act)—with the full House expected to vote on the measures soon.

On Feb. 4, parallel bills were introduced in the Senate.

The DOL’s proposed conflict-of-interest rule, issued last April and expected to be finalized shortly, puts constraints on professionals who provide investment advice to participants in 401(k) and similar workplace plans, and to employers who sponsors these plans. The rule would require advisors to follow the fiduciary standard by only offering advice that can be shown to be in their clients’ “best interest” and by disclosing any potential conflicts of interest. Currently, many retirement plan advisors associated with mutual fund and brokerage firms that administer 401(k) and similar plans are held to a “suitability” standard, under which they can recommend investment products that are deemed to be broadly suitable for their clients but that may reward the advisors more than competing, lower-fee investments.

The rule would, in most cases, stop advisors from being compensated through commissions received on the sale of investments to retirement plan clients, unless the advisors comply with the rule's Best Interest Contract Exemption, a prospect that many service providers have called unworkable. Instead, retirement plan sponsors or participants would be required to pay advisors on a fee-only basis.

“It now appears that the pending release of the Department of Labor’s fiduciary rule will be the hot issue for financial advisors in 2016,” said financial planner Michael Kitces in a recent blog post. “The rule has the potential to completely reshape the landscape of financial advice, force broker-dealers to reinvent themselves … and force financial services product manufacturers for the first time ever to compete solely on the merits of their products rather than the size of the commissions they can pay.”

Opponents of the rule, including many financial services firms, say the regulation would increase the cost of providing investment advice to plan participants. That could result in account holders losing access to advice they currently receive as part of bundled plan services packages from firms that administer workplace retirement plans.

Flexibility on Compensation

The proposed legislation now before Congress also would require financial advisors to serve their clients' best interests but would allow more flexibility regarding commission-based payments, sponsors of the legislation said.

“These bills are an important part of a much broader effort to ensure Americans are able to retire with the financial security and peace of mind they deserve,” said Rep. Phil Roe, R-Tenn., chairman of the House subcommittee on Health, Employment, Labor and Pensions (HELP), during the Feb. 2 markup session on the legislation. “These bipartisan proposals will deliver the protections working families need to plan for the years ahead, and unlike other flawed proposals we’ve seen, they’ll do so without hurting those most in need.”

“The Department of Labor is pursuing a reckless regulatory scheme that will make it harder for low- and middle-income families to save for retirement,” said Education and the Workforce Committee Chairman John Kline, R-Minn. The proposed legislation “achieves the same goal as the Department of Labor’s proposal, but in a way that doesn’t hurt small businesses and working families,” he said.

“The new [DOL] regulation would make the Labor Department the primary financial regulator of retirement savings financial advice,” according to a Feb. 3 statement from the U.S. Chamber of Commerce. “And unfortunately, small businesses and individual retirement savers are the ones who will pay the price for this ill-conceived and poorly executed regulatory overreach.”

Defending the proposed rule during a hearing last June before the House’s HELP subcommittee, Secretary of Labor Tom Perez testified, “Some financial advisors commit to serve your best interests. But others operate under no such commitment, and there’s nothing stopping them from getting backdoor payments at their clients’ expense.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Article:

Fiduciary Standard for Advisors Sparks Contentious Debate, SHRM Online Benefits, June 2015

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