The text of the DOL’s new fiduciary rule is out, and the reactions from around the retirement industry are streaming in.
First things first: As provided by the Insured Retirement Institute, the actual text of the new proposal can be found at these links:
Proposed Retirement Security Rule
Proposed Amendment to PTE 2020-02
Proposed Amendment to PTE 84-24
Proposed Amendment to PTEs 75-1, 77-4, 80-83, 83-1, and 86-128
Early reactions from around the industry are included further below.
Now to the DOL and Biden Administration’s framing of its new proposal, according to a press release issued this morning.
As expected, the U.S. Department of Labor today announced that its Employee Benefits Security Administration has proposed a retirement security rule updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act.
President Joe Biden will speak about the new retirement security rule from the White House at 3:30 ET today.
Aligned with the Biden-Harris administration’s efforts to protect retirement investors (and also framed as another arrow in the administration’s war on “junk fees”), the proposal would require trusted investment advisors to adhere to high standards of care and loyalty when they make investment recommendations and avoid recommendations that favor their financial and other interests at the expense of retirement savers.
The updated definition of an investment advice fiduciary would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and others. While investment professionals deserve to be paid fairly for helping people meet their savings goals and retire with dignity, there are some financial advisers who put their interests before their clients’ interests. This can result in reduced returns and higher costs which are junk fees that chip away at many Americans’ savings. Analysis of just one investment product—fixed index annuities— suggests that conflicted advice could cost savers up to $5 billion per year for this product alone. The proposed rule would also ensure investment professionals are able to compete for business on a level playing field, instead of an unbalanced system that holds advisers to different standards based on their recommended products.
“America’s workers and their families should not have excess fees and lost investment returns chipping away at their retirement savings due to the cost of conflicted investment advice.”
Acting Secretary of Labor Julie Su
The current definition, adopted in 1975, was written at a time when IRAs were less common and 401(k) plans did not exist, so most Americans relied on traditional defined benefit pensions retirement savings. In today’s marketplace, individual plan participants and IRA owners—rather than professional money managers—are expected to make important, complex financial decisions and seek the help of expert advisers, making the proposed rulemaking necessary.
“For too many workers, the road to lifelong financial security is unnecessarily paved with uncertainty,” said Acting Secretary of Labor Julie Su. “This rule ensures that savers of all income levels can work confidently with investment professionals to grow their nest egg and prepare for the joyful retirement they deserve. America’s workers and their families should not have excess fees and lost investment returns chipping away at their retirement savings due to the cost of conflicted investment advice.”
The department is also proposing amendments to related existing administrative prohibited transaction exemptions (PTEs) that are available to investment advice fiduciaries. The proposed amendments seek to make the exemption conditions more uniform and protective. Under ERISA, investment advice fiduciaries must avoid conflicts of interest or comply with the conditions of a PTE. The proposed amendments to the exemptions would uniformly require investment advice fiduciaries to give advice that meets a professional standard of care or duty of prudence, puts the retirement investor first or duty of loyalty and would prohibit advisers from charging more than reasonable compensation or misleading investors.
“Investment professionals routinely hold themselves out as giving expert advice based on the financial interest of the retirement investor, rather than the investment advice provider’s financial interests,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “This proposed rule would ensure that when investors entrust their retirement security to such investment professionals, their confidence will not be misplaced, regardless of the type of investment recommended. Workers and their families deserve no less.”
The proposals include a 60-day period for public comments and instructions on how to submit comments. The department also intends to hold a public hearing approximately 45 days after the proposals are published. Further information on the hearing will be published in the Federal Register at a later date.
FACT SHEET highlights
Here is a look at some key points taken from the Retirement Security Proposed Rule FACT SHEET released today.
Retirement Security Proposed Rule–Definition of a Fiduciary
The Department is proposing that a financial services provider would be an investment advice fiduciary under federal pension law if:
• the provider provides investment advice or makes an investment recommendation to a retirement investor,
• the advice or recommendation is provided for a fee or other compensation, and
• the financial services provider makes the recommendation in the context of a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in their best interest:
• the provider has discretion over investment decisions for the retirement investor;
• the provider makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or
• the provider states that they are acting as a fiduciary when making investment recommendations.
The Department believes that in each of these contexts, the retirement investor can and should reasonably place trust and confidence in the financial services provider, and it is appropriate for the provider to be held to a fiduciary standard.
This proposed fiduciary definition would apply to recommendations to roll over assets from a workplace retirement plan to an IRA if every element of the proposed fiduciary definition is satisfied. Amounts held in workplace retirement accounts often represent the largest savings an individual has, and financial services providers often have a strong economic incentive to recommend that investors roll money into one of their institutions’ IRAs or annuities. Applying the ERISA fiduciary standard in these transactions will provide significant protections for retirement investors.
PTE 2020-02
PTE 2020-02 allows investment advice fiduciaries to receive compensation for advice that would otherwise be prohibited by law, as long as the fiduciaries comply with the exemption’s conditions, including providing advice in investors’ best interest. The exemption conditions emphasize mitigating conflicts of interest and ensuring that retirement investors receive advice that is prudent and loyal.
The Department is proposing to maintain the core conditions in PTE 2020-02 that provide fundamental investor protections. The proposed amendment would make clarifying changes that build on the existing exemption conditions to provide more certainty for fiduciary investment advice providers and more protection for retirement investors.
PTE 84-24
Currently, PTE 84-24 allows fiduciaries to receive compensation that would otherwise be prohibited when plans and IRAs enter into certain insurance and mutual fund transactions, as well as certain related transactions. The proposed amendment would limit coverage for advice to independent insurance agents and make minor language changes. The exemption is tailored to the special challenges posed for overseeing investment recommendations by independent insurance agents who recommend annuities issued by more than one insurance company.
Under the proposed amendment, a new section would be added to PTE 84-24 to provide relief for independent insurance agents receiving compensation that would otherwise be prohibited for investment advice transactions, subject to conditions similar to those in PTE 2020-02.
However, unlike PTE 2020-02, the insurance company selling its products through the independent agent would not be required to provide a fiduciary acknowledgment and would not be treated as a fiduciary merely because it exercised oversight responsibilities over independent agents. Instead, the independent insurance agent would be required to acknowledge its fiduciary status, and the insurance company would be required to exercise supervisory authority over the independent agent with regard to an agent’s recommendation of the insurance company’s own products.
Industry reaction
What follows is a range of statements released by retirement industry stakeholders in response to the release of today’s DOL fiduciary rule proposal.
American Retirement Association
“The ARA supports DOL’s proposed retirement security regulation because it will close a regulatory gap that could leave small business owners establishing a retirement plan for their employees without any investor protections. The proposed rule will ensure that advice with respect to investments in small business retirement plans will always be subject to ERISA’s fiduciary standards.”
ARA CEO Brian Graff
The American Retirement Association (ARA) strongly supports a provision included in the proposed Retirement Security Rule that would extend plan-level protection to small business owners and participants in 401(k) plans.
More specifically, the proposed rule would close a major regulatory gap.
The SEC’s Regulation Best Interest (Reg BI) currently does not cover recommendations to plan sponsors, particularly small plan sponsors. Additionally, an advisor who sells a small employer a 401(k) and has no further action (on-time interaction) with the plan or its participants is not, until this point, required to provide investment advice protection under ERISA’s five-part test.
No longer, according to a White House release.
The rule will cover advice to plan sponsors about which investments to make available as options in 401(k)s and other employer-sponsored plans.
“The ARA supports DOL’s proposed retirement security regulation because it will close a regulatory gap that could leave small business owners establishing a retirement plan for their employees without any investor protections,” ARA CEO Brian Graff said. “The proposed rule will ensure that advice with respect to investments in small business retirement plans will always be subject to ERISA’s fiduciary standards.”
The ARA’s Government Affairs Committee will continue to monitor the proposed rule’s progress during the public comment period and implementation process.
Insured Retirement Institute
LinkedIn Post – Wayne Chopus, IRI President and CEO
“The Biden Administration announced a new fiduciary rule proposal from the U.S. Department of Labor (DOL) today, doubling down on a previously failed policy that clearly runs counter to the goals of Bidenomics. Despite labeling the proposal as “retirement security,” however, the rule will only increase retirement insecurity and result in millions of lower- and middle-income workers and retirement savers losing access to needed financial advice. Bidenomics is supposed to be about growing the economy from the bottom up and the middle out, but this proposal will drop the bottom out for millions of Americans struggling to achieve their retirement goals.
IRI will fight this proposal just as we did with DOL’s 2016 poorly concocted fiduciary rule that also masqueraded as consumer protection but instead caused extensive harm. A federal court vacated that rule but not before 10 million smaller retirement account owners, with more than $900 billion in retirement savings, lost the ability to work with their preferred financial professionals.
Investment Company Institute
Investment Company Institute (ICI) President and CEO Eric Pan released the following statement regarding the Department of Labor’s (DOL) proposed rule updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA):
“ICI supports ensuring retirement security for all American workers and urges the Department of Labor to balance crucial investor protections with the preservation of investor choice and access to affordable investment advice.
“As recently as 2020, the Department gave a class exemption that successfully struck this balance. The 2020 exemption conditions, together with the Securities and Exchange Commission’s Regulation Best Interest and Advisers Act fiduciary standards, provide robust protections to investors whether they are saving in an employer-sponsored retirement plan, rolling assets over to an IRA, or saving in other investment accounts.
“Given this existing class exemption, ICI will be analyzing the Department’s proposal to understand the justification and evidence for why further regulatory changes are now necessary.”
CFP Board
The Certified Financial Planner Board of Standards’ statement:
“CFP Board welcomes the U.S. Department of Labor’s proposed retirement security rule intended to protect Americans from the harmful effects of conflicts of interest when financial professionals provide retirement investment advice.
It’s time to update the nearly 50-year-old regulatory framework under the Employee Retirement Income Security Act of 1974 (ERISA) to prevent advisors from avoiding a fiduciary responsibility even when they are functioning as, and clients are relying on them as, trusted advisors. We celebrate the work of the advisors who seek to do what is best for their customers. However, the outdated law does not prevent advisors from taking advantage of gaps in the regulations to steer their clients into high-cost, substandard investments that pay the advisor well but eat away at retirement investors’ nest eggs over time.
This proposed rule is an important step forward toward improving the retirement security of all Americans. CFP Board will carefully review the details of the proposed rule and assess its effectiveness so that all financial professionals who provide retirement investment advice are required to put the best interests of their clients first. Americans investing their hard-earned money for a financially secure retirement deserve no less.”
Institute for the Fiduciary Standard
Statement of Knut Rostad on the need for the DOL Retirement Security Rule:
“The Rule is essential to fill the gap in federal regulation—‘The Grand Canyon’ gap—in investor protection left by the SEC’s Regulation BI…
In summary:
- Fiduciary advocates foresaw in June 2019 when it was released the holes in investor protection in the SEC’s Reg BI.
- The first SEC Reg BI enforcement case enforced the suitability standard.
- NASAA affirms BDs still “rely heavily of suitability policies.”
- The Massachusetts highest court affirmed Reg BI is only a regulatory floor.
“There’s no question additional protections in the DOL Retirement Security Rule are needed to fill ‘The Grand Canyon’ gap in federal regulation. So when the industry screams in vehement opposition to any DOL rulemaking, their voice will be muted.”
National Association of Insurance and Financial Advisors
NAIFA CEO Kevin Mayeux, CAE, issued the following statement on the proposed Department of Labor fiduciary rule:
“NAIFA is disappointed that the Department of Labor and OMB have decided to move forward with the misleadingly named Retirement Security rule. DOL’s attempt to rebrand its proposal does not hide the fact that it is the offspring of the department’s failed fiduciary-only model for advisory services that would limit consumers’ choices and curtail the access of many middle- and lower-income investors to individualized advice and services. This is the fourth time since 2010 the federal government has tried to expand fiduciary requirements for advisors. This DOL proposal is particularly unfortunate, coming at a time when many Americans are concerned about their economic security and ability to prepare for retirement. NAIFA is particularly disappointed that DOL is trying to saddle advisors and consumers with an additional layer of regulations when the stated goals of the proposed rule are already being achieved by the Securities and Exchange Commission’s Regulation Best Interest and state measures based on the National Association of Insurance Commissioners’ model best interest regulation for annuity transactions, both of which provide robust consumer protections and require financial professionals to work in clients’ best interests.
“NAIFA previously raised our concerns about the proposal with the Office of Information and Regulatory Affairs (OIRA) of the White House’s Office of Management and Budget (OMB) on October 6. Unfortunately, the administration did not take our concerns to heart. The White House’s new Fact Sheet on the rule unfairly characterizes the insurance and financial services industry and misrepresents the vital role agents and advisors play in helping clients prepare for retirement. Referring to legitimate compensation many advisors receive for their work as “junk fees” is insulting and unfair. It disregards the fact that many consumers are best served by models that include products delivered on a commission basis.
“NAIFA will analyze the proposed rule and submit official comments, continue to have discussions with the administration throughout the regulatory process, and work with members of Congress to achieve the best possible outcome for American families who depend on the products, services, and advice of NAIFA members offering a variety of service models to ensure a financially secure retirement.”
AARP
AARP Chief Executive Officer Jo Ann Jenkins released the following statement in response the Department of Labor’s proposed rule to protect Americans from conflicts of interest when financial professionals give retirement investment advice:
“This is an important step to ensure that financial advisors act in the best interest of retirement investors. People should be able to count on their financial advisors to provide sound advice that protects and grows their retirement assets, free of conflicts of interest. A strong rule that closes loopholes in current law will help safeguard their hard-earned retirement funds.”