The Department of Labor’s proposed Retirement Security Rule would increase financial firms’ costs by well over $2 billion and require them to produce a Mount Everest-sized pile of paperwork, according to the Financial Services Institute.
Those and other claims are laid out in a study the FSI commissioned from the analytics firm Oxford Economics to support its opposition to the DOL proposal.
The department’s 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 not required under the Employee Retirement Income Security Act of 1974 (Erisa). Under the proposed regulation, advisors could sell such products only when it is in the client’s best interest.
Proponents say the proposal would close loopholes that allow conflicted retirement savings advice and the sale of sub-par and overpriced plans.
But FSI and other industry opponents warn of significant costs and undue burdens and say the rule is redundant with regulations and industry standards that already provide enough protection for consumers.
“The proposed rule would impose unnecessary and expensive requirements on top of the existing requirements of current regulations like the SEC’s Reg BI and the DOL’s PTE 2020-02,” FSI President and CEO Dale Brown says in a press release. “Given the findings of this study along with the concerns outlined in our recent comment letter, we urge the Department to withdraw the proposal.”
The Oxford Economics study was based on survey responses from 15 FSI member firms that represent approximately 26,000 financial advisors.
$2.7B in costs and a 7-mile paper stack
The study says costs to the industry would be $2.7 billion in the first year, 11 times higher than the DOL’s estimate. After that, the cost would be $2.5 billion per year, FSI says.
In addition to electronic disclosures, advisors would have to print an estimated 120 million pieces of paper annually to comply with the regulation, according to the study.
During a DOL hearing on the proposal on Dec. 12 and 13, attorney Mark Smith, testifying for FSI, presented a stack of hundreds of pages of forms that transactions already require. The proposal would add 15 or more documents exceeding 500 pages, according to Smith.
The FSI study’s estimate of a total of 120 million more pieces of paper would create a stack more than seven miles high.
Reg BI is good enough, FSI says
The FSI study also makes other claims about DOL’s rule.
The Department of Labor relied solely on data collected before Reg BI and PTE 2020-02 went into effect, it says.
The DOL’s analysis underestimates the proposal’s impacts on small investors, according to FSI. The study faults the DOL’s assertion that there will be alternative options for small investors, saying those options have limitations in terms of costs, conflicts, personalization and other aspects.
The study concludes the costs of the proposal outweigh the qualitative benefits claimed by the DOL.
Fiduciary advocate decries FSI ‘wild assertions’
But a supporter of the Retirement Security Rule says the FSI analysis is faulty, not the proposal.
“FSI has no clue of the costs to firms because FSI has no clue what the fiduciary standard means,” says Knut Rostad, co-founder and president of the Institute for the Fiduciary Standard, in response to the FSI report.
“They express no concern with the corrosive nature of conflicts on fiduciary advice or the harms to retirement investors. Fiduciary Institute review of eight anti fiduciary groups testimony testifying Dec 12 reveals there is no sentence, remark, or phrase from these firms or FSI suggesting they understand, agree with, or, critically, support fiduciary advice.”
Rostad dismisses FSI warnings of vast increases in costs and paperwork as “wild assertions.”
Reg BI has failed, Rostad says
He scoffs at claims that current regulations sufficiently protect the consumer.
“FSI knows full well that Reg BI leaves wide gaps. FSI also knows that the only independent research evaluating Reg BI, research from NASAA, shows that broker-dealers generally have not changed their practices and continue to apply the suitability standard,” Rostad says, referring to the North American Securities Administrators Association.
“Rule opponents appear to support conflicts of interest,” Rostad writes in a comment letter he submitted following his testimony at the DOL hearing.
Rostad notes in the letter that NASAA has monitored Reg BI in states and finds that it has failed to raise the broker-dealer sales “suitability” standard.
“Firms are still relying heavily on suitability policies,” Rostad quotes NASAA as saying. “Efforts to address the standard of care concepts established by Reg BI remain perfunctory.”
Some fiduciaries fret about costs, reporting burdens
Despite Rostad’s claim that FSI’s cost and paperwork estimates are wildly overblown, other speakers who praised the proposal at the DOL hearing did express concerns about the reporting burdens and added costs it would bring.
Dan Danford, CFP, whose small firm, Family Investment Center, serves mostly blue collar and middle-income clients, said the DOL proposal would close regulatory loopholes that could result in big losses for retirement savers.
But he worried about the 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 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.”
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.