Despite a recent warning from congressional GOP leaders Sen. Bill Cassidy (R-LA) and Rep. Virginia Foxx (R-NC) to halt work on a new fiduciary rule, the Department of Labor on Friday sent a revised fiduciary rule to the White House Office of Management and Budget, starting what is typically a 60-day clock for its review and triggering immediate criticism from a variety of retirement and insurance industry advocacy groups.
The notice of proposed rulemaking DOL submitted to OMB says it would “more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code.”
The DOL had advised back in its Spring Regulatory Agenda in June that the new fiduciary proposal was coming. That notice also said the amendment would also “take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA [individual retirement account] owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest.”
The DOL said that in conjunction with the rulemaking, the Employee Benefits Security Administration (EBSA) will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plans and IRAs.
While OMB will likely take about 60 days to review it, noted ERISA expert and Faegre Drinker Partner Fred Reish noted on LinkedIn Saturday that the review could take anywhere from 30 to 90 days, and the public won’t get a look at the actual text of the new proposed rule until that review is concluded.
In a recent episode of the 401(k) Specialist Pod(k)ast, Reish said the process will essentially go like this: once the OMB finishes its initial review of the proposed rule and makes it available to the public, there will be about a 60-day comment period; the DOL will then take those comments into consideration and go to work on a final regulation, taking another 60 to 90 days; then it goes back to the OMB for review, and another 30 to 60 days after that it will get published in the Federal Register and become final.
Reish has said it’s inconceivable the DOL wouldn’t do something regarding a fiduciary rule as there is tremendous public policy interest in protecting people as rollovers from a 401(k) plan are a critically important financial moment for participants, and the agency wants to make sure they get the best protections possible.
“I think the most desirable outcome for the Department of Labor would be that a single recommendation of a rollover—in and of itself—is a fiduciary act, and you have to satisfy PTE 2020-02,” Reish said during the podcast. “I really think they’re going to say, no, a rollover recommendation standing in and of itself is a fiduciary act; that this is a substantial change in circumstances from the 1970s and therefore it warrants a rewriting of the regulation.”
“We would expect the rulemaking to continue to take a more expansive view of who is a considered a fiduciary.”
Endeavor Retirement’s Bonnie Treichel
Bonnie Treichel, Chief Solutions Officer at Endeavor Retirement, said without knowing exactly what’s in the rule yet, it’s premature to comment on its impact or even the substance to some extent, but she believes there are a few things that plan advisors and their clients can count on with this rule making.
“This is the fourth major attempt at the ‘fiduciary rule,’ so you can expect that careful consideration has been taken to avoid a replay of what has transpired with prior versions of the fiduciary rule. We would expect the rulemaking to continue to take a more expansive view of who is a considered a fiduciary.”
Treichel added that she would encourage those who have adopted procedures under PTE 2020-02, to maintain those procedures as a best practice. “Keep in mind that the rule making process is a long one—lasting many months sometimes—so continuing with the current PTE 2020-02 procedures remains the best course of action in our view.”
Insurance industry trade groups not happy
Not getting a look yet at the complete language of the proposed new fiduciary rule didn’t stop the Insured Retirement Institute (IRI), the American Council of Life Insurers (ACLI) and Finseca from issuing statements Saturday criticizing the DOL for trying yet again to revise the definition of a fiduciary. This marks fourth major attempt by the DOL since 2010 to revamp the 1975 rule.
“DOL needs to stop pushing rejected, harmful policies and focus on enforcing the enhanced regulatory framework to protect retirement savers.”
IRI CEO Wayne Chopus
“The Department of Labor’s decision to try again to advance a new fiduciary proposal will hurt working families’ ability to save for retirement,” said Wayne Chopus of the Insured Retirement Institute in a statement released on Saturday. “Similar to the DOL’s failed 2016 rule, which was vacated by a federal appeals court in 2018, this latest attempt will limit consumers’ choice of financial advice and access to products that can deliver protected lifetime income during retirement.”
IRI, which bills itself as the leading trade association for the insured retirement industry, said the DOL is “plowing ahead with its latest damaging proposal despite the fact that federal courts have repeatedly rejected their efforts to expand the fiduciary rule in recent years, as well as the extensive body of research showing that this type of proposal will significantly harm lower and middle-income workers and exacerbate the wealth gap for Black and Latino families.”
IRI’s Chopus said the DOL proposal ignores the existing enhanced federal and state consumer protection regulations enacted since the earlier failed fiduciary rule. “Those new protections require financial professionals to act in clients’ best interests, and there is no evidence to suggest they are not working.”
By pushing forward with this proposal, Chopus said the DOL is choosing a path that will harm the consumers they seek to help when they can and should instead allow the current rules to work without depriving millions of retirement savers of access to their choice of financial professionals and products. “DOL needs to stop pushing rejected, harmful policies and focus on enforcing the enhanced regulatory framework to protect retirement savers,” Chopus said.
Finseca CEO Marc Cadin said in a statement Saturday that the DOL’s proposed rule, though likely well-intentioned, is a solution in search of a problem that has already been addressed with 40 states (representing more than 70% of U.S. consumers) having adopted the best interest enhancements to the NAIC Suitability in Annuity Transactions Model Regulation, and the SEC’s adoption of Reg BI, which greatly enhanced the standards financial professionals must follow.
“…if DOL is successful in moving this misguided rule forward again, it would unquestionably harm consumers and monumentally set back our efforts.”
Finseca CEO Marc Cadin
“We took enormous strides forward earlier this year when we got SECURE 2.0 signed into law with overwhelming bipartisan support. But if DOL is successful in moving this misguided rule forward again, it would unquestionably harm consumers and monumentally set back our efforts,” Cadin said. “DOL’s initiative, put simply, would enhance the regulatory burden on the very men and women working to help people find peace of mind. Fewer Americans will have access to the very advice and products they need to achieve financial security.”
Cadin added that policy should help to connect more Americans with financial security professionals and encourage more Americans to pursue holistic financial plans.
“We look forward to working with the DOL, OMB, and President Biden and his team to make sure we get this right by expanding access and choice—not limiting it,” Cadin concluded.
The American Council of Life Insurers released a statement Saturday saying a fiduciary-only regulation would deny low and middle-income Americans access to retirement security.
“The Labor Department must not adopt a fiduciary-only regulation like it did in 2016. First, most Americans cannot afford to engage a fiduciary investment adviser, who typically charge high, ongoing fees for their services,” ACLI CEO Susan Neely said.
“Second, the SEC and the states are positioned to address conflicts of interest, the Labor Department’s main focus,” she added, referring to the 40 states implementing the best interest enhancements to the NAIC Suitability in Annuity Transactions Model Regulation.
“When it vacated the 2016 fiduciary-only regulation, the 5th Circuit made clear that federal law does not support the Labor Department limiting consumer access to products and information.”
ACLI CEO Susan Neely
“These bipartisan measures also align with the SEC’s Regulation Best Interest to provide consumers with strong state and federal protections. Combined, these actions have greatly enhanced the standards financial professionals must follow,” Neely said.
She said they also speak to the potential conflicts of interest the Labor Department attempted to address in 2016 without limiting access to annuities. “When it vacated the 2016 fiduciary-only regulation, the 5th Circuit made clear that federal law does not support the Labor Department limiting consumer access to products and information.”
At a time when low- and middle-income retirement savers need access to financial guidance and options for lifetime income, the ACLI statement said it would be a mistake to resurrect a fiduciary-only regulation that denied them both.
“We plan to conduct a thorough review of the proposal when it is released and assess the impact it would have on communities struggling to secure their retirements,” Neely said.
Richter-Gordon weighs in
Michelle Richter-Gordon of MRG Advisors, LLC and co-founder of fee-only RIA Annuity Research & Consulting, said the proposed rule could be the first step towards creating equality for the insurance industry—if the industry chooses to embrace it.
“I feel that the negative view that lobbying organizations representing the liability-minimization (this is what insurance means) industry have taken towards the potential for substantial extension of fiduciary precepts to its distribution is a near-sighted one,” Richter-Gordon said.
But she added that she can hardly blame them for having this view because “fiduciaries sell verbs,” and the “insurance industry does not have available to it a verb sale (advisory) framework.”
“How could anyone possibly blame my people for being skeptical of a framework (where FINRA believes that investment advisement is a synonym of “financial advisement”) that defines the rules of the game so as to invalidate its value proposition?” she told 401(k) Specialist Monday.
As the regulatory landscape stands today, Richter-Gordon said the insurance industry she grew up loving is “disadvantaged by non-codification of verb sales for those advisors who see the consumer imperative through the lens that I do, which is that of the maximization of the number at the bottom of the statement of net worth (this is what true ‘wealth management’ means) subject to meeting cash flow needs in the meantime.”
“There’s no reason why insurance experts should not be SCALABLY enabled to receive equal treatment for our expertise with that of investment advisors.”
Michelle Richter-Gordon
She said people who think like her—which includes but may not be limited to “financial planners”—believe that one can accomplish this objective EITHER by maximizing assets subject to a consumer’s risk constraints (this is the role of an investment advisor) OR by minimizing liabilities (introducing an annuity to defease what is usually the retirement income liability that would be recorded on the consumer’s balance sheet).”
Insurance people, Richter-Gordon said, “get called charlatan everywhere we go.” Prior to the ’40 Act (verb sales framework) for investment advisors, brokers too were perceived as charlatans, and bad behavior did occur, she added. “We deserve parity with financial professionals. We deserve insurance advisement as an additional regulatory frame that could be used just as financial professionals may hold both a brokerage and advisement affiliation, why would the march towards fiduciary and consumer preference towards paying for verb sales not inspire my industry to coalesce behind fighting for this frame?”
To maximize assets-liabilities, Richter-Gordon said insurance is a critical element, “and there’s no reason why insurance experts should not be SCALABLY enabled to receive equal treatment for our expertise with that of investment advisors. Just as financial professionals get to sell both nouns (brokers) and verbs (RIAs), we insurance people should also get to sell both products and services. We are not a subclass. I am not a charlatan.”
Cassidy, Foxx warning goes unheeded
In an Aug. 31 letter addressed to Acting DOL Secretary Julie Su, Senate HELP Committee Ranking Member Bill Cassidy (R-LA) and Rep. Virginia Foxx (R-N.C.), chair of the House Committee on Education and the Workforce, told the DOL to cease further action on revising the definition of fiduciary in section 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA).
While that occurred before the DOL submitted the new fiduciary rule to OMB, it did not stop it from happening.
In the letter, Cassidy and Foxx argue that the DOL had supported three separate definitions on what it means to be an investment advice fiduciary over the past two years and had thus “created unnecessary instability for retirement plans, retirees, and savers.”
“The Department’s misguided efforts to revise the definition of investment advice fiduciary have created confusion in the marketplace and unwarranted compliance expenses,” wrote Cassidy and Foxx.
They specifically point to the recent opinion by the U.S. District Court for the Southern District of New York, in which the court had criticized the DOL for its “shifting interpretations on fiduciary investment advice” and added “there is no DOL interpretations binding on this court.”
Cassidy and Foxx further contended that the last time the DOL had attempted to renew the fiduciary rule in 2016, it was vacated by the U.S. Court of Appeals for the Fifth Circuit two years later in 2018.
“As Biden’s DOL continues to change its stance in this area, we remind the Department of its attempt to promulgate a definition of fiduciary under ERISA section 3(21) in 2016 (the “2016 Fiduciary Rule”),” the two added. “This ill-conceived and overreaching rule was decisively vacated by the U.S. Court of Appeals for the Fifth Circuit, and it should serve as a cautionary example.”
Neither Cassidy or Foxx had issued a comment as of Monday on DOL’s submitting the new proposal to OMB.
SEE ALSO:
• Republican Lawmakers Push DOL to Halt Work on Fiduciary Rule
• DOL Fiduciary Rule Update with Fred Reish
• Incoming DOL Fiduciary Rule Slated for August
• DOL Abandons Appeal in Florida 401(k) Rollover Ruling