Critics of DOL fiduciary proposal pulling every lever to block rule

At times, supporters and opponents of the Labor Department's proposed retirement advice regulation sound like they're living on different planets.

To the critics of the "retirement security rule," the Biden administration's plan to extend the fiduciary duty to 401(k) rollover recommendations, certain insurance product sales and other areas of retirement advice will lock millions of Americans out of professional guidance by imposing costly new burdens on the industry. For advocates, the potential guideline would save retirement investors billions of dollars in junk fees tied to conflicts of interest that aren't in clients' best interest. One of the main premises justifying the new possible rule revolves around the idea that the Securities and Exchange Commission's Regulation Best Interest displays loopholes enabling those conflicts to keep hurting investors' nest eggs.

Now that the public comment period on the proposal has closed, Labor could issue the final rule in the next several months. A Jan. 10 hearing on the proposal held by the House Financial Services Committee's Subcommittee on Capital Markets vividly showed the divergent views.

The agency is using "a clever trick that I like to call the DOL two-step," Bradford Campbell, a partner with the Faegre Drinker Biddle & Reath law firm who was the assistant secretary of labor for employee benefits under George W. Bush's administration between 2006 and 2009, said at the hearing. He led Labor's Employee Benefits Security Administration, which issued the proposal and enforces the Employee Retirement Income Security Act.

"The first step of that is they dramatically expand the definition of what is considered fiduciary advice, for purposes of the prohibited transaction rules in the Tax Code," Campbell said. "Through a quirk of the law, DOL regulates those prohibited transaction rules, both for ERISA plans and for tax purposes. The effect of that is that ordinary perfectly legal and appropriate transactions in which, for example, there is a commission paid to an insurance producer or a broker-dealer, now become illegal prohibited compensation by virtue of calling that a fiduciary relationship. That brings up step two of the two-step. In step two, the department says, 'All right, well, we will create an exemption that allows you to still be able to get paid for providing that advice, but only if you comply with an extensive series of new conditions, one of which is the imposition of a standard of care that is almost identical to the standard fiduciary standard of care applicable to employer provided benefit plans."

On the other side, financial advisor Kamila Elliott spoke in defense of the proposal while representing the CFP Board as a past chair of the organization in 2022 and the CEO of Atlanta-based Collective Wealth Partners. More than 98,000 advisors across the country who are certified financial planners with registered investment advisory firms and dually registered brokerages are already abiding by the fiduciary duty in every area of advice, she pointed out.

"CFP professionals work for broker-dealers, investment advisors and insurance companies," Elliott said. "They have shown that any financial professional who wants to act in their client's best interests can do so. I am here because moderate-income Americans saving for retirement should have the same access to best-interest financial advice that wealthy Americans enjoy. I am here because moderate-income individuals are the people who most need to make every dollar count. I am here because I believe that, if the rule is adopted, moderate-income Americans will gain rather than lose access to retirement advice that is in their best interest. The rule does not prohibit financial professionals from earning commissions. Actually, most CFP professionals earn commissions. And my firm, headquartered in Atlanta, Georgia, provides financial planning with a focus on middle- to high-income clients. And we are all fiduciaries. We provide advice that our clients need at a price they can afford and in their best interests. We primarily support communities of color, offering various fee models and no minimum account balances. We are not the only firm that does this. Advisors all over America serve moderate income retirement savers with best interest advice. Retirement savers want to work with someone that they can trust, but that trust is too often misplaced."

READ MORE: 31 changes to prohibited transaction exemptions under DOL proposal

A cascade of form letters

President Joe Biden rolled out the proposal at a White House event in October, and Labor received 19,410 public comments during a 60-day feedback period that ended last week. The administration is likely to issue the final rule later this year. However, most experts expect a lawsuit to challenge the rule in court, in an identical move out of the playbook of the industry trade groups that successfully got Labor's last attempt at a similar rule vacated in 2018. In another echo of earlier rulemakings or legislative efforts, opponents such as the Financial Services Institute, Ameriprise and LPL Financial helped advisors flood the agency with thousands of form letters.

"During the public comment period, EBSA received over 19,000 submissions on our retirement security proposal," spokesman Grant Vaught told Financial Planning in an email. "Many of these submissions were unique, while the vast majority were petitions that were submitted in common by numerous people. EBSA will now carefully review and analyze these submissions, and use the feedback as it proceeds with its work on this rulemaking with the goal of best protecting the retirement funds of America's workers when they receive investment advice."

Vaught didn't reply to questions about the role of form letters in the public comment process. During the period for the Obama administration's 2016 fiduciary rule — the one nullified by the Fifth Circuit Court of Appeals five years ago — an estimated 40% of the messages objecting to the rule were fake ones that weren't written or sent by the people listed as the commenter, The Wall Street Journal reported the following year. At the same time, the agency must consider all of the public comments as part of the rulemaking or face its own legal questions.

LPL called its effort "lobbying-in-a-box," with at least 1,395 advisors sending, in some cases, six letters each as part of a total of 9,689 messages to Labor, the White House, congressional offices and state insurance regulators, according to the firm. The company didn't respond to requests for more information about the messages and its goals for them. 

Representatives for Ameriprise didn't respond to an email seeking further information about its campaign encouraging advisors to write to the agency, while representatives for the Financial Services Institute — a trade and networking group for independent advisors and brokerages — declined a request for an on-the-record interview about the letter-writing program.

"I am an independent financial advisor who provides financial planning and other services to help Main Street Americans plan for a secure financial future," FSI's letter said. "As a member of the Financial Services Institute, I am writing to express my concern with the Department of Labor's recently proposed 'retirement security rule.' If adopted, the proposed rule will harm the very retirement savers it seeks to help by limiting their access to the affordable financial advice, products and services on which they rely to secure a dignified retirement."

Labor received more than 3,000 of those "petition" letters from FSI members, over 9,200 boilerplate messages through constituents who are part of a group that didn't identify itself and another 1,700 similarly worded ones from Ameriprise advisors. The agency is posting the comments on its website.

"I am an Ameriprise Financial advisor, and I am writing to express my concern about the Department of Labor proposal to redefine an investment fiduciary under ERISA," Ameriprise's letter said. "This proposed regulation is unnecessary, does not increase consumer protection and should be withdrawn. The Department has offered no justification for the newly proposed regulation. As with previous proposals that would deter the use of brokerage accounts, the cost and burden of this proposal is significant and would be harmful to retirement investors."

READ MORE: 12 standout comments on the DOL retirement advice proposal

Not speaking the same language

The letters represent "part of an effort to try to bolster some of their claims" among opponents about retirement savers no longer being able to work with financial professionals, according to Stephen Hall, the legal director and securities specialist for Better Markets, a nonprofit Wall Street reform organization that endorses the proposal. The argument that smaller investors will no longer be able to hire advisors, insurance agents or other retirement professionals is "a major talking point of the industry, and it is absolutely bogus," Hall said in an interview.

"In many respects, it's a charade, and it's up to the DOL to give a very thoughtful review to all of the comment letters and to assess whatever weight they deserve or don't deserve," he said. Small, everyday savers "can least afford bad advice from financial advisors," he added. "These are the people who need the rule the most, and the notion that they're not going to get any advice if the rule is in place is demonstrably false."

That argument took center stage at the congressional hearing. At least 28% of non-retirees have no retirement savings, according to a survey by the Fed last year cited by Subcommittee Chair Ann Wagner, a Republican from Missouri. The "increased compliance burdens, limitations in product offerings and restricted access for consumers" will leave many financial professionals with "no other option but to increase or impose minimum-asset thresholds for clients, closing the door on financial advice for many," Wagner said.

"Disguised as an attempt to eliminate so-called junk fees, the Biden administration's proposal would push retail investors out of transaction-based investment accounts and into fee-based investment accounts," she said. "Millions of Americans prefer the low cost of transaction-based accounts because they want one-time, affordable, high-quality financial advice. Should this proposal be finalized, it would leave millions of Americans who are just starting their retirement savings journey without access to sound financial advice, resulting in higher costs, lower choices and reduced service."

Rep. Brad Sherman of California, the ranking Democratic member of the committee, counted himself as somewhere "in between" those who love or hate the proposal. While noting that there is "an incredible balkanization of regulation designed to protect investors" across the SEC, Labor, Treasury, state regulators and congressional committees, Sherman called for adapting parts of the proposal's introduction preamble stating that it isn't intended to affect general or proxy conversations, charitable advice or "choose-me discussions" to the rule itself.

"The Chair is correct, we do have a problem where people have not saved or are not able to save for their retirement. And keep in mind that's before this new rule becomes effective. It's not this new proposal that is the reason people have not saved for their retirement. Wages are too damn low," Sherman said. "Ultimately, we need a regulation in this space."

READ MORE: Labor gets an earful: 25 key moments from retirement advice hearings

The path forward

With thousands of comments up for review and a potential court challenge — not to mention the presidential election this fall — the proposal's fate remains uncertain. Supporters and opponents will continue to press their cases across the three branches of government, with distrust for the legitimacy of either view. For example, the rule's supporters buy the Biden administration's claims that conflicted advice costs retirement savers billions of dollars annually — including the hotly disputed calculation that fixed index annuity sales alone cause $5 billion a year in losses.

"That has to stop, and the sooner the better. The DOL is adhering to all of the requirements both in letter and in spirit when it comes to the rulemaking process, and of course the industry is overrepresented in all of the stakeholder input," said Hall of Better Markets. "It's a very thoughtful set of rule proposals. It's going to do an enormous amount of good, and there's no credible reason not to get these protections into place. They're long overdue, in fact."