While most people in the retirement industry agree that the Department of Labor has its heart in the right place in wanting to protect individuals from conflicts of interest, many don’t believe the agency has gone about its rule-making in the right way and think the rules, as proposed, will actually do more harm than good to the individuals and small businesses the DOL claims it wants to help.
The DOL re-proposed its fiduciary rule mid-April. Under the proposal, brokers and advisers to individual retirement plans would have to follow the same stringent rules as registered investment advisers. That means that those giving advice to people about their retirement plans would have to put their clients’ best interests ahead of their own.
Those who want to receive payments from companies selling products they recommend and forms of compensation that create conflicts of interest will need to rely on one of several prohibited transaction exemptions, according to the DOL.
July 21 was the last day to submit a comment on the proposal.
Also see:DOL fiduciary rule falls flatThe U.S. Chamber of Commerce said in its letter to the DOL that the current proposal is “unduly complicated and wrought with serious defects for this regulatory initiative. Indeed, the result is an unworkable rule that ultimately harms American investors and retirees.”
It recommends that the DOL engage in a negotiated rulemaking process so that all affected voices are heard.
In its comment letter to the Employee Benefit Security Administration, FINRA applauded the DOL for “raising public awareness about the need to ensure that retirement investors can obtain financial advice without being subject to abusive or predatory sales practices.”
But, it also urged that the federal securities laws that already are in place “serve as the foundation of the best interest standard that will apply to broker-dealers. To be successful, the standard must build upon existing principles under the federal securities laws rather than introducing precepts without precedent that will impede the good faith efforts of financial institutions and advisers to comply.”
FINRA and the Securities and Exchange Commission already require broker-dealers to deal fairly with customers, adhere to just and equitable principles of trade and ensure that recommendations are suitable for customers, the FINRA letter said.
Aliya Wong, executive director of retirement policy for the U.S. Chamber of Commerce, said that the new rule would “no longer allow education that points to a specific investment. You can only do asset allocation. They are taking away a vital piece of information that can help them allocate their retirement savings. This does more harm to retirement savings than good for the small business market.”
Studies have shown that businesses with 10 to 49 employees are 50% more likely to offer a retirement plan if they are doing so with the help of a financial adviser, said Brad Campbell, counsel with Drinker Biddle & Reith LLP. Businesses with between two and nine employees are two times more likely to offer a plan if they have the advice of an adviser.
“The effects of this rule make it harder for those businesses to get advice,” he said.
He added that “it is ironic that this rule can prevent an adviser from acting in your best interest even though the rule is to make them act in your best interest.”
The rule would force advisers away from transaction-based accounts to fee-based transaction accounts.
“The problem with that is for many users, fee-based accounts are more expensive,” Campbell said.
The fiduciary rule would also make it “unlikely” individuals would get advice about consolidating their accounts, he said. The way the rules are written, advice about account consolidation would be considered fiduciary advice.
As far as the best-interest contract exemption goes, it wouldn’t apply to most assets. Large plans would still be able to do what they have always done, but individuals and small plans will find it more difficult to get good advice. Without advice, businesses are less likely to offer a plan, he said.
The American Retirement Association weighed in on the proposal, stating that it supports aligning the interests of retirement plan advisers to individual retirement investors through a best-interest standard but believes that some of the restrictions surrounding investment education should be loosened up because they “make participant education harder to translate into practice and thus less helpful to participants.”
The ARA also believes that plan advisers should be “encouraged to help plan participants with rollovers, not penalized for providing advice to the plan.”
Any best-interest standard that is adopted should not “discourage advisers from wanting to work with small businesses,” the letter said.
The ARA proposed a separate exemption for advisers that provides leveled compensation advice so that retirement plan advisers are not at a competitive disadvantage in helping participants make critical rollover decisions vis-à-vis advisers who had no previous relationship with the participant in the plan. It also argued that the current investment education parameters be maintained, including the ability to reference specific fund names in any general communication to plan participants without turning such education into fiduciary advice.
Paula Aven Gladych is a freelance writer based in Denver.
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