What would happen if the Department of Labor resurrects significant portions of its since-vacated 2016 fiduciary rule where financial professionals were treated as fiduciaries with respect to retirement plans?
According to a study published Monday by the Hispanic Leadership Fund, doing so would reduce the accumulated retirement savings of 2.7 million individuals with incomes below $100,000 by approximately $140 billion over 10 years. The impact of reinstatement would be even more dire for Black and Hispanic Americans, contributing to a roughly 20% increase in the wealth gap when looking at accumulated IRA savings alone.
The new research studied the actual effects of the regulation, which was in place for only a short period of time before the U.S. Court of Appeals for the Fifth Circuit vacated the regulation in 2018.
“This in-depth analysis confirms that the 2016 fiduciary regulation hurt the very people it was intended to help, especially the working families that our organization seeks to protect,” said Mario Lopez, President of the Hispanic Leadership Fund (HLF), a non-partisan advocacy organization dedicated to strengthening working families by promoting common-sense public policy solutions.
“The fiduciary rule was meant to help financial services consumers by seeking to legally ensure that advisors were acting in their customers’ best interest. But good intentions do not guarantee positive results, and in fact, a multitude of negative consequences began to materialize,” Lopez said in a statement.
As an example of those actual effects, HLF points out that Deloitte studied institutions representing 43% of U.S. financial advisors and 27% of the retirement savings assets in the market. That study found that, as of the DOL rule’s first applicability date, 53% of study participants reported limiting or eliminating access to brokerage advice for smaller retirement accounts, impacting an estimated 10.2 million accounts and $900 billion in savings.
DOL considering reboot of rule
The 2016 rule significantly expanded the definition of “investment advice” as it applies to retirement plans and IRAs, extending fiduciary status to a much wider range of advisors.
If DOL again requires the application of a fiduciary duty standard to virtually all investment assistance, low- and middle-income investors will lose significant access to brokerage services, the HLF paper states—generally, the only source of personalized assistance for them and a model that historically has helped many savers achieve their financial goals, especially those with more modest savings.
With the Biden Administration’s Department of Labor signaling it plans to propose a new fiduciary rule that could reinstate some of circumstances under which financial professionals would be treated as fiduciaries by reason of providing investment advice with respect to retirement plans and IRAs, the Hispanic Leadership Fund (HLF) is proactively lobbying against such a move.
“However well-intentioned, this was the wrong approach in 2016, and the consequences of repeating this mistake will be even graver this time for low and middle-income families,” Lopez said. “Reinstatement of this overregulation in any form similar to the 2016 regulation will once again prevent hard-working Americans from receiving information that is highly relevant for their financial well-being.”
The widespread expectation that this rule will be largely resurrected is based both on informal discussions by DOL officials and on language in the preamble to Prohibited Transaction Exemption 2020-02. The preamble set out DOL’s view [and not the law, HLF emphasized in its report] that in the vast majority of cases an individualized suggestion should trigger fiduciary status.
Not so fast, HLF says.
“Any regulation that in effect cuts off less affluent individuals and families from receiving all possible advice and information is clearly the wrong answer,” Lopez stated. “This study serves a critical role in demonstrating just how wrong that answer is.”
Additional findings
A few more issues HLF has with the fiduciary rule?
• The HLF research noted that the DOL’s 2016 regulatory impact analysis vastly understated the actual compliance costs of rule, pointing to an analysis finding the actual cost was nearly three times what was estimated in 2016.
• The effect of the 2016 DOL rule on lifetime income and protection against longevity risk was particularly adverse because the rule discouraged transaction-based advice, which is how most savers have access to annuities.
• The SEC’s adoption of Regulation Best Interest has meaningfully raised the bar for financial professionals, underscoring that any possible benefit from the regulation would be far less than DOL anticipated prior to 2016 because most of the desired changes have been achieved without the rule.
SEE ALSO:
• EBSA Hits ‘Pause’ Button on Dec. 20 Enforcement of PTE 2020-02
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.