The Employee Benefits Security Administration is getting an earful of both support and opposition to various aspects of its controversial proposed “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” during an online hearing that started at 9 a.m. EST this morning and will continue on Wednesday.
More than 40 groups registered to testify during the hearing, and the American Retirement Association was one of the first up on Tuesday morning, shortly after EBSA Assistant Secretary of Labor Lisa Gomez kicked off the hearing by outlining the proposed rule’s core goals.
“The chief aim is to make sure that when individual retirement investors turn to investment professionals for sound advice rooted in their best interest, they get just that—advice that is prudent, loyal, candid and free from overcharges.”
Gomez said EBSA takes the comments “very seriously, and we have every expectation that the final rule will benefit from your thoughtful participation.”
The 60-day comment period for the proposed Retirement Security Rule (which many industry organizations have argued is too brief for such a complicated issue) is set to expire on Jan. 2, 2024.
To view the online hearing, registration is required, and individuals need to register separately for each day’s hearing. Register here for the Dec. 12 hearing and here for the Dec. 13 hearing.
Anyone needing technical support may contact zzEBSAITSupport@dol.gov. EBSA will have the meeting transcribed and its transcript published on the hearing webpage once available.
ARA: rule addresses ‘a significant regulatory gap’
During the opening panel session of Tuesday’s hearing, American Retirement Association (ARA) CEO Brian Graff took the opportunity to highlight the “significant regulatory gap” that the DOL’s proposed Retirement Security Rule would close.
Graff emphasized that the SEC’s Regulation Best Interest (Reg BI) and the NAIC’s Model Rule only covers individual investors—not those in retirement plans. The rule would close this gap respecting advice to plan sponsors regarding plan investments.
Graff testified that “selling” a small business retirement plan, including the specific investment options offered to participants, is not “investment advice” under the current 1975 regulation because, as is often the case with smaller plans, there is no ongoing advice relationship and the “regular basis’ prong of the 1975 five-part test is not satisfied.
“Under the current federal and state regulatory framework, most small business owners doing the right thing and trying to offer a retirement plan for their employees are often provided zero—let me repeat zero—regulatory protection with respect to the advice given to them regarding plan investment options.”
ARA’s Brian Graff
“Practically, this means that when most small business retirement plans are ‘sold’ the advice given is NOT subject to ERISA’s fiduciary standard of care,” Graff said during his testimony.
“Investment advice given to small business plan sponsors is also NOT protected by SEC’s Regulation Best Interest because ‘plan-level’ advice is considered ‘institutional advice’ even if we are talking about an unsophisticated small business owner with just two employees,” Graff continued. “In fact, when Reg BI was being developed the ARA asked the SEC Commissioners to consider applying it to advice to small business retirement plans and we were told that they believed such advice properly belonged within DOL’s jurisdiction.”
Similarly, although the NAIC Model Rule has increased protections for individual purchasers of annuities in over half the states so far it again does NOT apply to the purchase of annuity-based retirement plans by small business owners, Graff said. “Under the current federal and state regulatory framework, most small business owners doing the right thing and trying to offer a retirement plan for their employees are often provided zero—let me repeat zero—regulatory protection with respect to the advice given to them regarding plan investment options.”
Graff added that advice given to plan sponsors under the proposed regulation would ensure it is subject to the same fiduciary regulatory standard regardless of whether it’s given once or as part of an ongoing relationship. It would also be retirement plan investment (mutual funds, insurance products, CITs, CDs, commodities, even cryptocurrency) and distribution/compensation model (commission) neutral.
“Since a plan sponsor is making decisions on behalf of participants, ARA believes it is absolutely essential, as provided in the Department’s proposed rule, 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,’” Graff said.
ARA concerned about PTE 2020-02 change
While expressing general support for the Department’s longstanding effort to modernize the 1975 regulatory definition of investment advice, Graff did say ARA has some concerns about proposed changes to PTE 2020-02.
Specifically, he mentioned the substantial changes to the disclosures required, and questioned whether the benefits of some of these changes outweigh the likely costs. He added that ARA will be outlining these concerns in more detail in its written comment letter.
“We would like to highlight one significant proposed change to PTE 2020-02 that appears to be inconsistent with the Department’s stated position of being business model and product neutral. Proposed changes to the policies and procedures required under PTE 2020-02, Section II[c], would now include a proscriptive list of business and compensation models that are presumed to be in violation of a retirement investor’s best interest. These include appraisals, performance and personnel actions, bonuses, and importantly differential compensation,” Graff said. “Given the season, we are referring to this as the ‘naughty list.’”
If this list is included in the final exemption, Graff said it will absolutely interfere with existing business and compensation models by creating a clear negative presumption against all these forms of compensation.
“For example, there are numerous examples of when differential compensation may be entirely appropriate and in the best interests of plan sponsors and participants because such differential compensation relates to specialized investment options offering different levels of services or features,” he said. “Such common options to plan sponsors and participants would now be chilled as a consequence of this negative presumption. We strenuously recommend that the final exemption return to the previous language in the current exemption which relies on a principles-based approach to policies and procedures.”
Graff’s full testimony is available here.
IRI voices displeasure with proposed rule
Insured Retirement Institute President and CEO Wayne Chopus and IRI Chief Legal and Regulatory Affairs Officer Jason Berkowitz plan to share a laundry list of issues with the DOL’s proposed “Retirement Security” rule during Tuesday’s first of two days of hearings with the Employee Benefits Security Administration.
Beyond being dismayed by the Labor Department’s rejection of “a reasonable request for additional time to comment…especially given the complexity of this proposal and the comment period occurring during a time that includes federal, religious, and cultural holidays,” IRI says it is most discouraged by President Biden’s Oct. 31 remarks announcing the rule, where the IRI says he “completely mischaracterized the entire insured retirement industry and our products to justify a misguided rule imposing unnecessary and redundant regulatory burdens on investment advice.”
Making matters worse, IRI says the President “disparaged our industry and its workers by inventing a link to his efforts to fight ‘junk fees.’ But there is no mention of that term in the 495 pages of the new regulation he announced.”
Biden focused his remarks more on the need to target advisors selling what he called “bad annuities” with high commissions than talking about the 401(k) market specifically.
“Junk fees take real money out of the pockets of Americans, and they add up to hundreds of dollars and weigh down family budgets, making it harder to pay the bills,” Biden said during his Oct. 31 remarks, before later adding: “When a person pays for trusted advice and it comes with a hidden cost, that’s what I call a junk fee. And I think it’s wrong.”
During scheduled testimony Tuesday, IRI will emphasize that millions of workers and their families have chosen to purchase annuities to protect their retirement assets and provide a stream of guaranteed lifetime income… similar to the defined benefit pension plans available to many union and government workers.
The proposed rule, IRI argues, “is completely contrary to the President’s inclusive economic principles and will harm the very consumers he and the DOL have said they wish to help. This rule will deepen the nation’s retirement crisis by limiting access to sound financial advice.”
IRI will also argue that the proposal is nearly identical to the now-vacated 2016 rule, which it says caused significant consumer harm. Further, IRI argues the proposal is a solution in search of a problem, and that Reg BI, the NAIC’s best interest model (now in place in 40 states) and PTE 2020-02 collectively hold all financial professionals to a best interest standard already.
For these reasons and “so many others,” IRI will urge the Department to “withdraw this dangerous and misguided proposal and redirect its resources to efforts that will actually benefit retirement savers, including robust enforcement of existing rules and rulemaking to implement the many positive reforms in Secure and Secure 2.0.”
ACLI’s Neely expresses “grave concerns”
In testimony this morning, American Council of Life Insurers (ACLI) President and CEO Susan Neely raised “grave concerns” about the department’s proposed fiduciary regulation and its adverse impact on consumers’ retirement security.
“We all recognize there is a retirement savings gap in this country, and we want to make sure consumers are supported with options and protections—to help our policy leaders close this gap and to help consumers live with certainty in retirement,” Neely said. “It is in the spirit of that shared mission that we must express our grave concerns about the imprudent nature of this proposal.”
Neely stressed that the proposal:
- Is predicated on out-of-date data and a misfocused, incomplete regulatory impact analysis;
- Ignores the robust regulatory system implemented by the states and SEC;
- Seems at odds with actions taken by Congress to close the retirement savings gap in part through expanded access to annuities; and
- Will leave millions of retirees in an untenable financial situation in their most fragile years.
Moreover, the proposal “undervalues the essential role annuities play in providing certainty for middle-income retirees,” Neely said. “With an option for protected lifetime income and a strong regulatory framework of consumer protections in place, it is no surprise that annuities are a product sought and used by middle-income Americans.”
She noted that the median household income among annuity owners is $76,000. The median household income in the U.S. is $63,000.
“Annuities provide protection, security, and peace of mind. It’s not surprising that people want this product. What IS surprising is a proposal so out of sync with this reality,” Neely said. “Our ask is clear: remove this proposal in its entirety and focus instead on increasing access and certainty for American workers saving retirement.”
Her full testimony is available here.
SEE ALSO:
• ‘A’ List Industry Lineup Set to Testify in Dec. 12-13 Fiduciary Rule Hearing
• DOL Fiduciary Rule Released; Industry Reaction Pours In
• Financial Groups Request Comment Period Extension for DOL Retirement Security Rule Proposal
• Biden: DOL Fiduciary Rule is a Further Crackdown on ‘Junk Fees’