Proposed Fiduciary Rule Elicits Strong Debate
By Mark Johnson, Ph.D., J.D.


The Department of Labor (DOL) in April released a revision to its fiduciary rules intended to close a perceived loophole that allows for potential conflicts of interest between a retirement investment adviser and plan participants.


As reported in June’s article, “Department of Labor Issues Proposed Fiduciary Rule on Investment Advice,” the DOL’s Notice of Proposed Rulemaking (NPRM) revises the longstanding regulation on who is an ERISA fiduciary, extending it to more retirement advisers, investment managers and broker dealers, to further protect retirement savings.


Because these changes will affect millions of IRA savers and retirement participants, the DOL provided an open forum for stakeholders to provide feedback before public hearings took place the week of August 10. The DOL received 2,254 comment letters and hosted four days of hearings featuring 75 witnesses.


Proposed Fiduciary Rule Recap


The DOL believes it has put forth a proposed regulatory package that is balanced in terms of increasing protections while minimizing disruptions to good market advice. It seeks to:


• Make more advisers fiduciaries and ensure they are held accountable to their clients if they provide advice that is not in their clients’ best interest.


• Require more retirement investment advisers to put their client’s best interest first, by expanding the types of retirement investment advice.


• Preserve access to retirement education.


• Distinguish “order-taking” as a non-fiduciary activity.


• Carve out sales pitches to plan fiduciaries with financial expertise.


• Commit the firm and adviser to providing advice in the client’s best interest.


• Warrant that the firm has adopted policies and procedures designed to mitigate conflicts of interest.


• Disclose any conflicts of interest clearly and prominently. This includes hidden fees often buried in the fine print or backdoor payments that might prevent the adviser from providing advice in the client’s best interest.


Pros & Cons - Weighing In


Ask and you shall receive. Highly-charged commentary from a wide variety of letter-writers and testimony from witnesses at the hearings—including insurers, asset managers, attorneys, compliance officers, investor advocates, CEOs, and even a fraud inspector—pointed to the proposed rule’s far-reaching impact.


Proponents of the measure assert that the rule would curtail broker incentives that essentially put clients into high-fee products and erode their retirement savings. Critics argue the rule is flawed and will leave lasting negative effects that will actually harm modest investors in the long run.


Here is a sampling of some of the pros and cons brought forth:


• The Plan Sponsor Council of America asked the DOL to change their stance on investment education materials, so investment alternatives available under a plan could be identified on these materials without being deemed investment advice.


• Kenneth E. Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association (SIFMA), is in agreement that more can be done to help Americans save for retirement, but “We believe DOL is the wrong regulator to be in the lead here and the rule as written completely misses the mark.”


• The ERISA Industry Committee wrote that more changes were needed to avoid increasing regulatory burdens, costs and uncertainty among plan sponsors, plan participants and service providers.


• The CFA Institute, representing 120,000 chartered financial analysts and other investment professional members, “believes the proposal does a good job of accommodating various business models while still requiring investment service providers to act in their clients' best interest.”


• Charles Nelson, CEO of retirement at Voya Financial, testified that a customer bill of rights would be better than a new fiduciary standard and go “a long way toward informing participants” in retirement savings accounts about what they are paying in fees and transaction costs.


• Don Trone, CEO of 3ethos, a company that focuses on regulatory and compliance issues, believes the DOL’s procedures could be challenged in court.


Congress also added its comments:


• Rep. Maxine Waters, D-Calif., ranking member of the Financial Services Committee, and Bobby Scott, D-Va., ranking member of the Education and Workforce Committee, along with several other Democratic House members, called for a new standard to address IRA rollover advice and other recent practices, in their letter to Secretary of Labor Thomas Perez.


• GOP members said the rule as written would “cut off vital financial advice” for low- and middle-income families and small business owners, and ban “some of the most basic advice,” such as rolling over assets from 401(k) accounts.


What’s Next


Although momentum is supposedly with proponents, it is expected that even more modifications will be made before a final rule is approved as a result of the vigorous response. Once the transcript of the hearings is published in the Federal Register, another comment period will re-open for up to 45 days.


Labor Secretary Thomas Perez has indicated that the DOL is open to making alterations, but with a final rule scheduled to be released next spring, time is short to make widespread changes to the 1,000+ page measure. In the meantime, some financial services firms are preparing for potential new compliance costs, while others just see this as a first step in a longer process of fiduciary evolution.


August, 2015



ABOUT THE AUTHOR: Mark Johnson, J.D., Ph.D. Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.


ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.


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