The Consumer Federation of America is not at all happy with goings-on at the Department of Labor or the Securities and Exchange Commission lately.
The Washington, D.C.-based nonprofit association of more than 250 national, state, and local pro-consumer organizations, one of the highest-profile consumer advocacy organizations, has fired off a number of letters and statements in the past 10 days denouncing the negative impacts it sees for consumers resulting from a trio of recent regulatory developments impacting retirement savers:
- Changes resulting from the SEC’s Regulation Best Interest (Reg BI), which was implemented June 30 after the Second Circuit Court of Appeals ruling that denied XYPN’s lawsuit against it on June 26
- The DOL’s controversial policy statement opening the door to private equity in 401k plans
- The new proposed rule the DOL floated this week intended to replace the 2018-vacated fiduciary rule
Let’s start with the last one first. In a recent statement, CFA argues the DOL’s proposed new standard for retirement investment advice would weaken already inadequate protections against conflicted advice and reopen loopholes, exposing retirement savers to new risks.
The proposed new exemption for investment advice fiduciaries would allow them to receive a “wide variety of payments that would otherwise violate the prohibited transaction rules.”
The measure’s best interest standard is intended to align with Reg BI as well as a complementary model regulation for annuity sales adopted earlier this year by the National Association of Insurance Commissioners (NAIC).
CFA Director of Investor Protection Barbara Roper said the SEC made sure that Reg BI was not a fiduciary standard. It allows many more conflicts than ERISA requirements and basing the new DOL rule on the SEC regulation is a “huge watering down of the standard.”
In a June 29 tweet, Roper said the rule “reopens loopholes in the definition of fiduciary investment advice, making the standard easy to evade. It creates a new exemption to allow advisers to get conflicted compensation, subject only to Reg BI’s weak, non-fiduciary standard.”
If such an approach is adopted, CFA says “conflicted advice will continue to drain the nest eggs of retirement savers.”
With the country in the midst of a retirement savings crisis, made worse by the COVID-19 pandemic and associated economic disruptions, the DOL should be looking to enhance protections for workers and retirees seeking to fund a secure and dignified retirement, CFA says. “Instead, it appears likely to strip them of even the inadequate protections that currently apply.”
Reg BI “a sham”
Speaking to just-implemented Reg BI on June 29, Roper is equally critical, as evidenced by this July 1 tweet:
She says the SEC caved to industry pressure in refusing to clarify the meaning of “best interest,” meaning investors are likely to be misled by the new regulation’s “best interest” label into expecting protections the rule does not deliver.
“It would be a major watering down of ERISA’s fiduciary standard to accept this best-interest-standard-in-name-only as a substitute,” Roper said.
The CFA says the broker-dealer business model is “rife with conflicts of interest, and Reg BI does little to rein them in.” While brokerage firms must “mitigate” conflicts of interest that operate at the sales rep level, it’s not clear how extensive that “mitigation” has to be.
When investor advocates urged the SEC to make clear that mitigation has to be sufficient to prevent the conflict from inappropriately influencing the recommendation, CFA says “the industry resisted and the SEC caved,” refusing to prohibit brokerage firms from artificially creating incentives that encourage and reward recommendations that are not in the investor’s best interests.
“ERISA seeks to eliminate conflicts that could taint recommendations. Reg BI doesn’t even come close,” said CFA Financial Services Counsel Micah Hauptman. “There’s no way DOL can reasonably adopt a rule based on Reg BI as satisfying fiduciary obligations under ERISA.
“The Trump administration has been pushing the exact policies that Wall Street has been asking for. In fact, DOL Secretary Eugene Scalia has represented the same Wall Street firms who are the running the show on policy with these rulemakings,” Hauptman continued. “The predictable result is a rule that puts industry interests over investor interests, and vulnerable workers and retirees will pay the price.”
Private equity in 401ks
Nineteen organizations and individuals that advocate on behalf of consumers, workers, investors and retirees, including CFA, recently called on the DOL to withdraw its policy statement opening the door to private equity investments in 401k plans.
In a June 24 letter to Secretary of Labor Eugene Scalia, the groups warn that “these investments are likely to saddle middle-class retirement savers with high costs and lock them into unnecessarily complex investments that underperform publicly available alternatives.”
They call on DOL to withdraw the policy statement “until it can conduct a more careful and balanced analysis of the potential risks and benefits of including a private equity component in retirement plan investments.”
The letter responds to the information letter issued by DOL earlier this month that clears the way for private equity investments to be included within certain diversified funds—including target date funds—made available through workplace retirement plans including 401ks.
In it the groups criticize DOL for basing its policy on a “one-sided consideration of the risks and benefits of private equity investments,” its failure to adopt adequate investor protections, and its over-reliance on plan sponsors, many of whom lack the financial sophistication necessary to determine whether the funds’ use of private equity is appropriate and represents a good value for plan participants.
Problems with the DOL policy, CFA says, derive from its having accepted unchallenged the private equity industry’s unfounded claim that “plan participants with longer investment horizons who invest a portion of their assets in private equities are likely to receive ‘enhance[d] retirement outcomes when compared to investment choices containing only publicly traded securities,’” the letter states. “But there are good reasons to challenge this assumption, starting with the fact that, in the absence of standardized performance calculations, private equity funds can and do manipulate those performance comparisons.”
In fact, CFA says recent research has shown that “Many if not most private equity investors aren’t getting any out-performance to reward them for the high fees, heightened risks and illiquidity associated with these investments. And industry trends suggest that any out-performance private equity has enjoyed in the past is likely to narrow dramatically or disappear entirely in coming years, just as vulnerable retirement savers are gaining ‘access’ to these alternative investments,” the letter states.
MORE REGULATORY COVERAGE:
- Reg BI Challenge Rejected by Federal Appeals Court
- XYPN’s Michael Kitces Responds to SEC Reg BI Ruling
- Department of Labor Proposes ‘New’ Fiduciary Rule
- Senator Slams Department of Labor’s Revamped Fiduciary Rule
- New DOL Guidance on Private Equity Adds Flexibility for DC Plans
- DOL Allowing Private Equity in 401ks Draws Mixed Reaction
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.
