DOL to Re-Propose Fiduciary Rule for Retirement Advisors

A revised Department of Labor proposal, now under review, remains highly contentious

By Stephen Miller, CEBS Feb 23, 2015

For updated information on this topic, please see the April 2015 SHRM Online article DOL Seeks Comments on Proposed Retirement Advice Rule.

President Barack Obama announced on Feb. 23, 2015, that a long-awaited redrafting of a Department of Labor (DOL) rule requiring investment professionals to adhere to a higher standard when advising retirement plan participants was being submitted for review by the Office of Management and Budget. The review is a precondition to formally issuing a proposed rule, expected later this year.

The DOL proposal would mean those advising holders of 401(k) plan accounts, individual retirement accounts (IRAs) and other self-directed retirement plan accounts must act as fiduciaries. Under a “fiduciary standard,” advisors must recommend investment products that are in their clients’ “best interest” as opposed to products that are deemed to be “suitable” but may reward the advisors more than competing, lower-fee investment funds.

Access to this retirement investment advice may be paid by employer plan sponsors as an employee benefit. Currently, employers can contract with independent third-party advisers who typically operate on a fee-only basis and adhere to the fiduciary standard, or (often at a lower cost) procure participant advice as part of a bundled package of services through the financial firm that administers their plan. Many of these brokerage and mutual fund firm representatives who provide retirement advice to 401(k) account holders adhere to the “suitability” standard and not the fiduciary “best interest” standard.

On Feb. 23, 2015, the day of the president’s announcement, the White House issued a fact sheet stating:

Because of outdated rules protecting retirement savings, we’re seeing … bad incentives and bad advice lead to billions of dollars of losses for American families saving for retirement every year—with some families losing tens of thousands of dollars of their retirement savings. That’s why today, the President directed the Department of Labor to move forward with a proposed rulemaking to protect families from bad retirement advice by requiring retirement advisers to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits.

The fact sheet added, “A strong set of independent research shows that … losses result from brokers getting backdoor payments or hidden fees for steering clients’ savings into funds with higher fees and lower returns even before fees [and] inappropriate rollovers out of lower-cost retirement plans into higher-cost vehicles.”

Also on Feb. 23, the White House Council of Economic Advisers released a report showing how conflicts of interest on retirement assets result in average annual losses of 1 percentage point for affected investors.

Earlier Proposal Withdrawn

In October 2010, the DOL initially proposed a rule to update and expand the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) to cover more broadly those who provide retirement investment advice. That proposal encountered strong resistance from the financial services industry, which claimed its added compliance costs—and the increased legal liability for advisors—would limit both general financial education and individual advice available to account holders with modest savings.

Subsequently, in September 2011, the DOL announced it would revise and reissue its proposed fiduciary rule to “protect consumers while avoiding unjustified costs and burdens." The DOL also indicated its re-proposed rule would only impose fiduciary status on those advisors who provide “individualized” advice to plan clients, which would allow advisers to provide general education on retirement savings to plan participants without triggering fiduciary duties.

While the revised proposal was originally expected sometime in 2013, it has been subject to repeated delays.

Still a Contentious Issue

A fiduciary standard requirement for those advising retirement plan participants remains highly contentious, dividing not only financial industry representatives from consumer advocates, but also participant advisors who adhere to the fiduciary standard from those who don’t.

“The imposition of fiduciary duties, at its core, acts as a restraint on greed,” commented Ron Rhoades, an attorney, investment advisor and incoming program chair for the financial planning program at Western Kentucky University, in a Feb. 20, 2015, blog post. “An economic war is taking place, pitting the manufacturers and sellers of investment products (Wall Street and the insurance companies) against Main Street consumers who so strongly desire to be served by trusted advisors. Battlegrounds in this war are many, and include (but are not limited to) a proposed rule which is forthcoming from the U.S. Department of Labor.”

In a subsequent Feb. 23 post, Rhoades pointed to the issue of plans sponsors, as fiduciaries, being liable for conflicted decisions recommended by nonfiduciary advisors:

The result is often that the plan sponsor is “on the hook” while the “retirement consultant” (a brokerage firm) is “off the hook” by hiding behind the very low and ineffective suitability standard. And therein lies the rub—large and small business owners are often left by nonfiduciary retirement consultants to fend for themselves in class action litigation, with no recourse against the brokerage firm.

But Brian Graff, executive director of the National Association of Plan Advisors, argued in a released statement following the president's announcement on Feb. 23:

People should be protected from unfair and deceptive practices, but all indications are that this rule will block Americans from working with the financial advisors and investment providers they trust simply because they offer different financial products—like annuities and mutual funds—with different fees. This rule could even restrict who can help you with your 401(k) rollover.

The best way to address concerns about “hidden” fees is through better transparency, not by blocking 401(k) participants from working with the advisor of their choice. If the administration moves forward with this proposed rule, American savers will be forced to pay out-of-pocket for their financial advice, or be limited to financial products with identical fees. Tens of millions of American savers who cannot afford to pay out-of-pocket will lose access to their financial advisor or be severely restricted in their choice of financial products. This is a wolf in sheep’s clothing. This so-called “conflict-of-interest” rule is really the “No Advice” rule.

A Feb. 17 memorandum from Debevoise & Plimpton LLP, a business law firm, to the Financial Service Roundtable, an industry group, stated: “The interests of retirement savers are served by enhancing access to professional retirement planning and guidance at an affordable price rather than imposing barriers,” and that “Any change to the current rules under ERISA that would limit access to professional retirement planning, guidance and investment products would potentially reduce workers’ overall level of retirement savings.”

SEC Action Also Awaited

In addition to the DOL’s forthcoming action, the U.S. Securities and Exchange Commission (SEC) has been weighing its own fiduciary requirements for the brokers it regulates. On Feb. 20, SEC Chairwoman Mary Jo White said she will seek a decision later in 2015 on whether to raise investment advice standards for brokers but declined to provide a timeline for agency action.

A lack of coordination and sometimes-conflicting efforts between the DOL and SEC on proposed fiduciary regulations has been a long-standing complaint by the financial services industry.

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

Related News Articles:

What Proposed Rule Changes for Retirement Advice Would Mean, Los Angeles Times, February 2015

Obama Fires Fiduciary Starter Pistol to Mixed Reviews, Fiduciary News, February 2015

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