An investment advice proposal recently released by the Department of Labor picks up where Regulation Best Interest leaves off — a point criticized by opponents and celebrated by supporters.
Under the DOL’s retirement security rule proposal, most financial advice to retirement savers – including one-time recommendations on rolling assets from a company plan over to an individual retirement account — would be held to a fiduciary standard if the investor is working with a “trusted advisor,” regardless of whether it’s an investment advisor, broker or insurance professional.
The proposal is designed to curb advisor conflicts of interest that lead to “junk fees” that are eroding Americans’ nest eggs, the Biden administration asserts.
If the DOL promulgates a final rule sometime next year, it would join Reg BI — the Securities and Exchange Commission’s broker standard that went into force in June 2020 — in the regulatory landscape.
Reg BI prohibits brokers from putting their revenue interests ahead of their customers’ interests for strong investment returns. But it is not legally a fiduciary standard. Investment advisors continue to have fiduciary status under SEC regulation.
The DOL rule would hold brokers advising retirement accounts to the fiduciary standard imposed by federal retirement law, the Employee Retirement Income Security Act. Brokers would have to give advice that is in the investor’s best interests, avoid misleading statements and charge reasonable fees, among other requirements.
That prospect is raising concerns among opponents of the DOL rule.
“Essentially, any broker-dealer [adhering to] Reg BI will find themselves ensnared in ERISA fiduciary status,” Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute, told reporters.
As they did when fighting the Obama administration’s DOL fiduciary rule, financial industry opponents argue the Biden proposal will sharply increase brokers’ regulatory costs and legal exposure.
In a Nov. 7 appearance at a Securities Industry and Financial Markets Association conference in Washington, Sen. Bill Hagerty, R-Tenn., said he is “very concerned…[about] the litigation bonanza it might create.
The Biden proposal would also extend fiduciary status to independent insurance agents and could cause a similar outcome, said Michelle Richter-Gordon, co-founder of Annuity Research & Consulting.
“Members of the independent agent community should be deeply concerned,” Richter-Gordon said. “It seems quite scary for an individual agent, who could become the pocket for ERISA litigation.”
Brokers will find that serving retirement savers with modest assets is not worth the regulatory costs imposed by fiduciary status, DOL opponents say.
“That is going to have a negative impact on advisors’ willingness to work with middle- and lower-income Americans,” Berkowitz said.
Proponents counter that the DOL proposal augments Reg BI to provide wider investor protection against conflicted advice.
Micah Hauptman, director of investor protection at the Consumer Federation of America, said the proposal closes loopholes that allowed too many advisors to sidestep fiduciary status when recommending rollovers. It also covers advice to retirement plan providers and, unlike Reg BI, applies to advice regarding non-securities investments, such as fixed index annuities and other insurance products.
The current DOL proposal accomplishes those objectives and yet is more narrowly tailored than the Obama rule, Hauptman said. The Obama measure was vacated in 2018 by a federal appeals court that ruled the DOL exceeded its authority.
“They put out a really strong rule while still addressing the concerns that the 5th Circuit [Court of Appeals] laid out,” Hauptman said.
President Biden highlighted annuities as a source of investor harm that the measure targets. Although they can provide an income stream in retirement that many workers seek, annuities also can be opaque, expensive and risky.
In particular, the Biden administration has cited fixed indexed annuities as a source of “junk fees.” The insurance industry has taken umbrage at that characterization. But what is not debatable is that a recommendation to buy the product is not covered by Reg BI because Reg BI applies only to securities.
A fixed index annuity is not a security. But it is becoming a popular investment in the high-interest-rate environment, said Kristin Prieur, compliance consultant at My RIA Lawyer.
“A lot of advisors are moving into fixed annuities,” Prieur said. She added that the products come with hidden fees and surrender charges that can take investors by surprise.
“These costs they don’t often see can be catastrophic,” Prieur said. The DOL proposal “is going to cover an area that has been missed in previous regulations. As this evolves, [brokers] might have to look closer at their retirement investors and the products they are investing in.”
The proposal addresses the need for stricter advice rules around insurance products in retirement plans, said Chris Tobe, an investment consultant at Hackett Robertson Tobe Group.
“It’s the first step in trying to fill a really wide regulatory gap,” Tobe said. “I think it will lower fees in the entire retirement industry that it covers.”
President Biden introduced the Department of Labor’s retirement security rule proposal at a White House event on Oct. 31. The text was published in the Federal Register on Nov. 3, which opened a 60-day public comment period that ends on Jan. 2. The comment timeline has drawn strong pushback from 18 financial industry trade groups, who are calling for an extension of the deadline. But the Labor Department likely needs to promulgate a final rule sometime over the summer to avoid having it scuttled by a new Congress in 2025 if Republicans hold the House and win the Senate and White House.
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