Supporters and Critics Clash Over Fiduciary Proposal

But both sides at a recent hearing agree that the rule would add a new pile of paper to advisors’ workloads.

By Ed Prince

Fiduciary advisors and annuity sellers squared off at a hearing for a proposed Department of Labor rule that proponents say would close loopholes allowing the sale of sub-par and overpriced retirement savings plans.

The DOL proposal, Retirement Security Rule: Definition of an Investment Advice Fiduciary, would define advisors as fiduciaries if they provide investment advice to retirement plan participants and owners of individual retirement accounts. That would include IRA rollovers and the sale of annuities, two areas where the fiduciary standard is currently not required under the Employee Retirement Income Security Act of 1974. Under the proposal, advisors could sell such products only when it is in the client’s best interest.

Among the more than 50 individuals who testified at the two-day hearing, Dec. 12 and 13, were insurance industry representatives who said the DOL proposal maligned their business; was unnecessary, burdensome, and expensive; and would result in a reduction in retirement investment opportunities like annuities.

Proponents said the rule is needed to close loopholes that allow conflicted advice and excessive fees, but some expressed concerns about the increased compliance requirements and costs it could bring for financial advisors.

Fixed-annuity Group Asserts Overreach

“The department has singled out fixed-index annuities for special criticism that is exceedingly misinformed, reflecting a fundamental misunderstanding of what the products accomplish for consumers,” said Charles DiVincenzo, president and CEO the National Association for Fixed Annuities (NAFA).

DiVincenzo and other critics said the proposal is another regulatory overreach by the DOL’s Employee Benefits Security Administration.

EBSA introduced a regulation covering much of the same ground in 2016, but it was struck down by the 5th U.S. Circuit Court of Appeals in 2018.

DiVincenzo said economic analysis data presented in the proposal’s preamble consists of “flawed analysis based on selected pieces of outdated academic research, a back-of-the-envelope calculation to justify a predetermined conclusion.”

The proposed regulation has “a fundamental disconnect,” he said, asserting that ERISA not only created IRAs, but also provided for rollovers. “Congress could have defined sales commission recommendations as fiduciary advice had it intended that result,” he said.

DOL: New Proposal Is Narrower

EBSA Assistant Secretary Lisa Gomez and other proponents said the new rule has been tailored to address the 5th Circuit’s finding that the DOL had exceeded its authority with overbroad regulations.

“This proposed rule is much narrower than the 2016 rule, which broadly addressed virtually all investment recommendations, regardless of whether there was a relationship of trust and confidence with the advice provider,” Gomez said. “Unlike the 2016 rule, the proposal does not impose enforceable contract or warranty requirements on advice providers.”

Proponents of the proposal pushed back against insurance industry claims that current rules like the Securities and Exchange Commission’s Regulation BI, or Best Interest, are sufficient, and that the proposed rule would limit retirees’ access to investment choices.

Nonprofit Is Content with Regs Already on Books

“But access to conflicted and possibly self-serving advice from industry experts does not equate to access to wealth-building opportunities,” said Ivan Cazarin, policy coordinator for the nonprofit Americans for Financial Reform.

Cazarin said that when the previous rule was finalized in 2016, some advisor firms implemented changes to comply with it. Some firms that specialized in serving small accounts reduced account minimums on key accounts, lowered fees on those accounts, and expanded access to advice for smaller accounts, he said. Although it was eventually overturned, the 2016 rule transformed compensation policies across funds and investments, eliminating conflicts of interest without eliminating commission-based pricing, Cazarin said.

“In reality, the rule opened the door for enhanced pricing transparency and brokerage services, allowing compensation to be based on the actual level of service provided and encouraged brokers to compete on price as well as service quality,” he said.

Attorney’s Warning

But attorney Jennifer Eller, principal with Groom Law Group in Washington, D.C., predicted the new rule will, like its predecessor, be overturned by the courts.

“The retirement services industry as a whole spent millions of dollars analyzing and working towards compliance with the 2016 rule,” said Ellis, who advises financial institutions on products and services to the retirement plan marketplace. “And our clients are very concerned that once again, they’ll be compelled to spend significant resources on compliance with without any certainty that at the end of the day, their efforts will be either necessary or sufficient.”

Additional Reading: DOL Proposed More Limits on Financial Advisors

She urged the DOL to pause the proposal and consider whether the issues it sought to address in the 2016 rule have largely been addressed by actions taken by the SEC and other agencies.

CFP Board Supports Proposal

Daniel Moisand, 2023 board chair of the Certified Financial Planner Board of Standards and past president of the Financial Planning Association, also pushed back on predictions that the new rule would result in a thinning of the ranks of financial professionals. The CFP Board adopted the fiduciary standard in 2018, he noted.

“And at the time, we were told that the consequence of having a fiduciary duty that applies to all financial advice would be that we would have fewer CFP professionals. That did not happen. In fact, the very opposite is true. The number of CFP professionals has grown by about a third since that time in just five years,” Moisand said. That increase was seen across all business models, including registered representatives of broker-dealers, investment advisor representatives and those with insurance licenses, he added.

Moisand also disputed claims that the DOL’s proposed rule is not needed because of the National Association of Insurance Commissioners’ model regulation for insurance producers recommending annuities. “The NAIC model rate regulation does not apply a fiduciary standard. It does not rise to Reg BI best interest, which is not a fiduciary standard,” Moisand said.

Others Think Model Rule Is Sufficient

But Mark Cadin, CEO of Finseca, the financial trade group, said NAIC’s Model Rule 25 adequately protects consumers and has been adopted by 40 states. “Now, I know some have said these rules don’t go far enough. They’re not sufficient in their consumer protections. But I would submit that anyone who makes this point is almost certainly pushing their own agenda —not the financial security the American people — and they certainly don’t have a clue of what actually happens in the real world.”

Saying the new rule would dump more paperwork on an industry already overburdened by regulatory requirements, Cadin cited the case of “Jacob,” who he said is a financial security professional from Indiana. “When I talked to Jacob, he described the regulatory burden as being more disruptive to his business than was Covid,” he said. “Now, your latest fiduciary proposal seems designed to make it impossible for millions of Americans to get the advice and products they need.”

Institute Favors Closing Rollover Gap

Knut Rostad, co-founder and president of the Institute for the Fiduciary Standard, praised the proposed rule, saying that the inclusion of one-time rollovers to IRAs would close a big gap. The SEC’s Regulation BI is insufficient to regulate broker-dealers not held to a fiduciary standard, he said.

“Some results of this environment that we have today — we see retirement investors facing the obfuscating communications and the opaque products. This may be most apparent when it comes to knowing investment and financial costs. Consumers are regularly chided for not knowing what they pay for or believing that the services they receive are free,” Rostad said.

FPA Seeks Phased Implementation

Patrick Mahoney, CEO of the Financial Planning Association, said his organization supports the proposed regulation but believes EBSA’s 60-day implementation period is too short for many smaller firms.

“They will require significantly more time to review and fully understand any proposal, which must be considered in light of all the other existing regulatory obligations at play in our industry. … A two-month implementation period following any final rule is simply not enough time,” he said.

Mahoney asked the DOL to implement the new rule using a phased approach with education rather than punitive enforcement. He also requested more detail and clarity around how compliance with existing fiduciary standards and best interest obligations are already in place.

“While the department has done a noteworthy effort to harmonize the rule with existing industry regulations, it does remain unclear how these competing frameworks would interact in practice,” he said. “ … the DOL should provide clear implementation guidance and compliance tools and coordinate with other regulatory agencies … to ensure consistency, not just for the industry, but for consumers who are negatively impacted by the plethora of complexity.”

Plan Sponsors Voice Concerns

Lynn Dudley, senior vice president of global retirement and compensation policy for the American Benefits Council, said employers who are retirement plan sponsors report that the breadth of the redefinition of fiduciary advice will force them to “pull back tools that provide important benefits to plan participants. The new rules will make some of their plan operations more difficult, more expensive, because they will add uncertainty, cost, and potential liability,” she said.

The proposed regulation should clearly state that it does not cover human resource employees or any other plan sponsor employees who provide assistance to plan participants, Dudley said. She urged the DOL to exclude outsourced financial wellbeing programs that provide information to some plan-sponsor employees. “We think isolated calls for assistance to an unknown person at a call center is not the trust and confidence relationship that you are thinking about with regard to fiduciary advice,” she said.

Small Business Owners Need Protection, Too

Brian Graff, CEO of the American Retirement Association, an umbrella organization representing several retirement industry professional groups, said the proposed rule would rectify a serious loophole in the current system. Selling a small business retirement plan, including the specific investment options offered to participants, is not investment advice under the current 1975 ERISA regulation, he said.

“It is simply nonsensical to give an unsophisticated small-business owner, who is arguably making a more consequential set of investment decisions on behalf of his or her employees, less investor protection than that same small-business owner would likely get with respect to investment advice received on his or her own personal investments,” Graff said.

“ARA believes it’s absolutely essential … that such a fiduciary plan sponsor be able to rely on the fact that their investment advisor will be subject to the same fiduciary standard of care, regardless of whether such advice is just once or on a regular basis.”

Additionally, commission-based compensation must continue to be permitted, Graff said, because it can reduce out-of-pocket costs to the small-business owner who might not otherwise be able to afford the plan.

Sifma: Courts Will Likely Cancel Proposal

Lisa Bleier of the Securities Industry and Financial Markets Association (Sifma), which represents securities firms, banks and asset managers, said the proposed rule is “so broad as to make all conversations between a financial professional and an investor into an ERISA fiduciary conversation,” including conversations that are merely educational. “The department will simply deem any conversation about a rollover as a fiduciary conversation,” she said.

Current SEC and Finra rules are sufficient, and the proposed rule would result “only in conflicts and inconsistencies,” Bleier said. Like other critics, she said the proposal will likely be vacated by the courts because the DOL exceeded its jurisdiction.

Blue-collar Firm Backs Proposal

Dan Danford, CFP, whose small firm, Family Investment Center, serves mostly blue collar and middle-income clients from the greater Kansas City, Mo., region, praised the DOL proposal, saying it would close regulatory loopholes that could cause a retirement saver to lose “tens of thousands if not hundreds of thousands of dollars.”

But he expressed a common concern: increased compliance requirements.

“A large part of our time, money and effort is spent on legal and regulatory compliance. Our compliance obligations are burdensome, but we do it because we are fiduciary,” Danford said.

“We ask the department to carefully assess the potential regulatory burdens and compliance costs that the old rule imposed on smaller firms like ours that did not have the large compliance departments and resources that bigger firms have. We ask that wherever possible, the department consider and adopt compliance guidance that does not increase the already burdensome compliance obligations that firms like ours already face.”

AFL-CIO: Proposal Will Close Loopholes

Candace Archer, policy director for the AFL-CIO, said the 12.5 million-member union fully supports the proposed rule, which addresses concerns about conflicted retirement advice it has had for decades.

“The current loophole-written rule was promulgated in 1975 and clearly a lot has happened and changed since then,” Archer said, noting that at that time IRAs had only been recently created, 401(k) plans did not yet exist, and private retirement savings were largely held in employer-sponsored defined-benefit plans. “And so there was no need for participants to concern themselves with how their retirement money should be invested.” Today, 78% of retirement plan participants are covered by defined-contribution plans and by 2020, 94% of these plans’ active participants were responsible for directing some or all of their account balances, she said.

Sophisticated Investors Don’t Need a Carveout, Says CFA

Micah Hauptman, director of investment protections, Consumer Federation of America, praised the plan, which he said would provide the greatest benefit to small savers. Neither SEC or NAIC have fully addressed the issue, he said. Reg BI (from the SEC) doesn’t apply to non-securities and retirement plans. The NAIC Model Rules only serve the insurance industry, he elaborated.

During questioning, Hauptman was asked whether there should be an exception for sophisticated-advice recipients. “We would oppose any carveout and we don’t think that it’s necessary given how the proposal is drafted,” he said.

“It’s based on the best interest of the investor, it’s based on the investors’ needs and circumstances, and so that circumstances ensure that it’s advice that can and should be relied upon.” He added that it would be helpful if the DOL provided guidance on what circumstances would meet the definition.

FSI Opposes Stepped-Up Compliance Burden

Attorney Mark Smith, testifying for the Financial Services Institute (FSI), decried the increased compliance burden the proposed rule would impose.

Smith stacked up hundreds of pages of forms that transactions already require, including an application, IRS form 5305, disclosures about applicable tax rules, financial protections, disclosures about conflicts, IRA rollover disclosures, PTE 2020-02 fiduciary acknowledgement, a summary prospectus, and a statutory prospectus. He said the proposal would add an additional 15 or more documents exceeding 500 pages.

“What are we accomplishing here?” he asked. “To avoid duplicate remedies for a very limited number of bad actors in the professional community, we’re engaging in regulatory overkill that is massively beyond any practical utility to retirement investors, driving up costs and complexity, driving firms to limit their services for retirement investors, reducing much needed access to retirement investments services for middle class Americans.”

‘Level Playing Field’ Appeals to Napfa

Daphne Jordan, chair of the National Association of Personal Financial Advisors, urged the department to adopt the proposed rule. It would establish a level playing field for all retirement advice and retirement investments, require that all retirement advice and retirement investments meet stringent fiduciary standards, and provide other urgently needed regulatory protections for retirement savers, Jordan said.

In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.

Latest news

Losing a Spouse Hits Most Women Hard Financially: Thrivent

Many widowed women had no financial conversations or plans in place before their spouse died, Thrivent's new survey finds.

Schwab Survey Finds Increased Opportunities for Advisors

Americans are most likely to seek financial guidance from an advisor, and three-quarters avoid social media influencers, the survey reveals.

The Sky’s the Limit for CEO Pay

Companies now must disclose how much CEO stock holdings increase when the market rises.

Advisors Boost Allocation to Private Markets as Client Interest Grows

Over half the investment advisors surveyed by Hamilton Lane plan to allocate 10%+ of clients’ portfolios to private markets this year.

Virginia Leads in Personal income, West Virginia is Last: WalletHub

A new WalletHub report lets you see how your state ranks in personal income for the top 5%, bottom 20%, and total population.

FPA: Financial Planners Still Prefer ETFs in Client Portfolios

The FPA and Journal of Financial Planning's annual trends survey also finds advisors are bullish on the economy, but only in the short term.