Fiduciary Focus

By Patty Kujawa

Oct. 20, 2015

The U.S. Labor Department has been working for years to overhaul a decades-old standard of providing advice for the defined contribution industry. But even after receiving more than 900 letters and conducting a weeklong hearing with 75 panelists this summer, the agency may not be any closer to something everyone can live with.
At issue is the fiduciary rule, which had a revised version released in April. It aims to broaden the definition of who is and isn’t a fiduciary — essentially someone who is responsible for acting in the best interest of another person, party or group — when providing investment advice. The Labor Department is trying to better protect plan participants from getting conflicted investment advice from a provider selling a product or service that would benefit them more than the end user. 
Financial advisers registered with the U.S. Securities and Exchange Commission must abide by a best interest or fiduciary standard for their clients, but sales-based advisers — often called broker-dealers — need only give suitable advice for a person’s situation; that advice can skip the fiduciary standard and include a fee that benefits the broker-dealer more than a similar investment with a lower fee.   
The problem occurs frequently. The White House Council of Economic Advisers estimates that conflicted advice costs retirement savers about $17 billion a year and could snatch $210 billion out of individual retirement accounts over 10 years. 
“It is hard enough to save for retirement. Conflicted investment advice should not be one of the barriers that millions of Americans face as they work to save for retirement,” David Certner, legislative counsel for the AARP told the Labor Department.
To open the week of testimony in August, Phyllis Borzi, the assistant secretary of labor for the Employee Benefits Security Administration, or EBSA, explained that the first fiduciary rule was created before 401(k)s and other participant-directed retirement accounts existed. Workers had no need to worry about investing because it was handled by a plan sponsor. Now that providers help workers figure out how to invest retirement dollars, the Labor Department wants to make sure they are acting in the participant’s best interest and not their own.
“There is no GPS that an individual can rely on to reach their retirement goal,” Borzi said. “We want to create an enforceable best interest standard that requires advisers to put their customers’ best interests first. That is our North Star.” 
Numerous industry experts testified that the proposed definition swipes too wide a path and would wind up limiting provider choices, restricting access to information and ultimately increasing costs. Several argued the changes would discourage lower-income workers from participating in plans. 
“I believe this proposal will result in fewer employer plans, fewer participants in retirement savings accounts and lower savings overall,” said Juli McNeely, president of the National Association of Insurance and Financial Advisors. “I know that is not what the department has intended.”
Several letters and panelists concluded that the rule would extend to service providers like call centers (which take retirement questions from plan participants), company human resources executives who typically provide general retirement education and other wide-ranging retirement information sessions geared to help participants with basic understanding of how their plan works and what is available.
Greg Burrows, senior vice president for retirement and investor services with Principal Financial Group later told Workforce that call centers get all kinds of questions, like what to do with accounts when retiring, investment options and more. The proposal would require a contract to be signed saying the call center is acting in the client’s best interest before answering such questions, he said.
“Today we are able to have a good conversation to educate a person,” Burrows said. “In the new world, that would trigger a very complex contract between worker and financial institution before we could have a conversation.”
Retirement law expert Kent Mason told agency officials that even carve-outs like the best interest contract to allow advice would be unworkable.
Providers “are already telling plan sponsors that the call centers are not going to answer questions on distributions,” because that kind of information would trigger fiduciary status, said Mason, a partner at the law firm Davis & Harman. 
Tim Hauser, deputy assistant secretary of operations for the EBSA pushed back, saying that it’s natural for the financial services industry to resist changes that would affect them. The department would be open to clearing up ambiguities in the proposal.
“We ultimately are very interested in trying to fix operational problems,” Hauser said. 
Patty Kujawa is a freelance writer based in Milwaukee.

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