WASHINGTON -- Later this year, advisors who work with retirement plans can expect the Department of Labor to produce the long-awaited redraft of its proposed rules to extend fiduciary responsibilities to what it sees as an unevenly regulated segment of the market, the official who has been spearheading the initiative said on Wednesday.
Assistant Secretary of Labor Phyllis Borzi said that the department is as committed as ever to a establishing a fiduciary standard for retirement-plan advisors that would require that they provide advice in the best interest of their clients. Too often, she argued, consumers receive conflicted advice about how to handle the rollover of their employer's 401(k) and where to invest their retirement savings, commonly from financial professionals who advertise themselves as advisors but are not acting as an RIA.
"This is an important project. It's our number one priority within the Department of Labor because we think it's a critically important consumer protection," Borzi said at an event hosted by the Financial Services Roundtable.
'CONFUSION IN THE MARKETPLACE'
"We need to focus, all of us, like a laser beam on our clients. And I know most advisors do. However, there is a lot of confusion in the marketplace, as you know -- confusion about the legal standard that governs people who give advice," said Borzi, who heads the Employee Benefits Security Administration at the DoL.
Borzi said that Labor is hoping to roll out the rule proposal by August, though she acknowledged that that date -- which was set through an OMB regulatory update -- could slip.
"It's much more important for us to get it right than it is for us to meet some arbitrary deadline," she said. "August is our goal. Maybe we'll be ready then, maybe we won't."
NEW WORLD ORDER
Borzi has been crusading for years to update the 1974 Employee Retirement Income Security Act to extend a fiduciary responsibility to advisors who work with IRAs and 401(k)s. That statute, which dates to an era when defined-benefit pension plans were the primary vehicle for retirement planning, has fallen out of step with the way that modern workers are saving, what Borzi called the "new world order" that has been marked by "the explosion in the 401(k) and particularly the IA marketplace."
After all, when ERISA was enacted, the first 401(k) plan was still several years away. And it was that statute that laid the legal groundwork for the first IRA. "Our regulatory structure hasn't evolved," Borzi said.
The Labor Department rolled out its initial proposal for a fiduciary standard in 2010, drawing sharp criticism from many lawmakers and industry players who warned that the rules could drive advisors away from serving small businesses and individuals, drying up access to advice in the segments that need it most. Much of the opposition grew out of fears that plan advisors could be exposed to new legal liabilities under a fiduciary standard even if they weren't providing specific investment advice. Critics also warned that the focus of the Labor Department on conflicts of interest could effectively end the commission-based model for retirement advisors. Unlike the SEC, which permits advisors to mitigate conflicts through disclosures and other means, the Labor Department imposes a more absolute ban on conflicts under its ERISA authority.
Borzi, who has been a very public advocate for the fiduciary rules, readily acknowledges the controversy Labor's proposal has stoked, though she insists that the revamped fiduciary rules her agency is finalizing will be substantively different from the original framework, offering greater detail about how advisors could operate under the rules and a rigorous analysis of the economic impact they would entail.
EDUCATING VS. ADVISING
For instance, the authors of the forthcoming rule proposal have taken pains to clarify the distinction between when an advisor is offering education or advice -- a gray area to be sure, but also a line of demarcation that could trigger fiduciary responsibilities. For instance, an investment advisor who conducts a retirement seminar to provide an overview of fairly generic topics such as the importance of saving or the incentives for moving away from risky, volatile investments throughout retirement, would likely be considered to be providing an educational service, and would be exempted from the fiduciary duty.
"Where you cross the line is a harder question, but what we've tried to do is answer it," Borzi said. "At some moment in a conversation, assuming you have this relationship of trust with your client, the client's going to say to you, 'So what should I do?' And how you answer that question can easily mean that you've crossed the line between education and advice. We want you to help people understand what they should do. We want to draw on the expertise that you have, the experience that you have. People need that kind of advice. But there's a difference in the legal standard that ought to be applicable."
Critics of the DoL's initial proposal had looked ahead to a scenario where advisors would be spooked by the liabilities associated with acting as a fiduciary and would shy away from any activities that could be remotely construed advisory, including the clearly educational work Borzi described. Some had suggested that human resources workers would even be afraid to distribute literature about their company's retirement plan out of the fiduciary concern.
Borzi said that her staff has worked to take a more "clear, direct and nuanced" approach to the education vs. advising question.
She also took issue with the contention that in its sharp focus on conflicts of interest, the Labor Department would essentially bar advisors from promoting commission-based retirement products.
"One of the bits of misinformation that has been circulating since our original proposal was that somehow our goal was to prohibit commissions. That was never the case. We are not going to prohibit commissions in this rule," Borzi said. "There will certainly be some kinds of things that are currently considered commissions that you will be able to go forward with. We don't regulate business models. We regulate advice, and what we are trying to do is minimize the kinds of conflicts of interest that are present in a wide variety of business models."
Under ERISA, the Secretary of Labor has broad authority to designate "prohibited transaction exemptions" -- business practices that might involve a technical conflict of interest but are still permitted because they don't inherently pose a threat to consumers.
Borzi said that the fiduciary reproposal will include an update of existing exemptions to provide a safe harbor for some of the benign practices of modern plan advisors, and will also add at least one new exemption for the ways advisors collect fees from third parties that are backing a specific fund or other instrument.
She also emphasized that the new proposal will be just that -- the start of a process through which DoL officials will collect reams of public comments, hold workshops with stakeholders and take meetings with concerned parties.
At the same time, given the steadfast opposition to the fiduciary proposal from some quarters of the industry, and the criticism that has come from disparate blocks of lawmakers, the return of the rules is likely to reignite an old controversy.
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