Financial industry opponents of a Department of Labor proposal to protect retirement savers from conflicted financial advice called on the agency to withdraw the measure at an online hearing Wednesday.
Trade associations representing the brokerage and insurance sectors asserted that the proposed rule would impose an expensive new regulatory burden that would force financial advisors and insurance sales professionals to stop serving low- and middle-income customers – arguments the groups have made when they resisted previous iterations of a DOL investment-advice rule.
In the first of two days of public hearings on the proposal, the groups also asserted that the DOL proposal is unneeded given new rules that have been implemented by other regulators over the last few years, including the Securities and Exchange Commission’s Regulation Best Interest for brokers and a revised annuity suitability model rule issued by the National Association of Insurance Commissioners.
“The department should withdraw this proposal, which is overbroad, unnecessary and inconsistent with the existing federal regulations, such as the SEC’s Regulation Best Interest,” said Lisa Bleier, head of wealth management, retirement and state government relations, at the Securities Industry and Financial Markets Association.
The DOL proposal, which it calls the retirement security rule, would hold to a fiduciary standard under federal retirement law most financial advisors and insurance agents who make recommendations to retirement savers. The agency’s goal is to fill regulatory gaps that expose investors to conflicts that encourage advisors to charge what it calls “junk fees” as they pursue their revenue interests ahead of their customers’ and clients’ interests in building a nest egg.
The proposal represents the agency’s latest attempt to promulgate an advice rule for retirement savings after an Obama administration rule was vacated by a federal appeals court in 2018. The public comment deadline is Jan. 2. The agency could release a final rule as soon as the first quarter of next year.
A particular focus of the DOL proposal is to address sales of insurance products, such as fixed indexed annuities, which are not covered by Reg BI. But insurance trade associations said the DOL proposal would curb annuity sales, hurting many retirement savers.
“This rule package undervalues the essential role annuities play in providing certainty for middle-income retirees… and will create a scenario in which there are winners and losers in retirement,” said Susan Neely, CEO of the American Council of Life Insurers. “Our ask is clear: remove this proposal in its entirety and focus instead on increasing access and certainty for American workers saving retirement.”
A DOL official asked Neely whether there were any modifications that could be made to the proposal that would gain ACLI’s support for the measure.
“No,” Neely responded. “We do think the proposal needs to be withdrawn.”
The DOL proposal would update a 1975 regulation that established a five-part test to determine whether a financial advisor is a fiduciary to a retirement saver. Critics say the current rule too easily allows advisors to dodge a fiduciary standard. The DOL proposal would define as fiduciary advice a one-time recommendation to rollover funds from a company retirement plan to an individual retirement account or an annuity.
Assistant Labor Secretary Lisa Gomez said the proposed rule would establish a consistent regulatory framework across investment professionals and products.
“Surely whether one is recommending annuity or a stock, working on a commission-basis or for a fee, the recommendation can and should reflect the best interest of the customer, that is it can be prudent, loyal, candid and free from overcharges,” said Gomez, the head of the Employee Benefits Security Administration. “While there are many advice providers out there who are delivering on these promises and expectations, we need to address any gaps so that retirement investors can know what to expect from all trusted advisors.”
Bryon Holz, president of an eponymous dually registered advisory firm, views himself as a trusted advisor. But he said he opposes the DOL proposal in testimony on behalf of the National Association of Insurance and Financial Advisors.
“Nearly all NAIFA members would be considered fiduciaries” under the DOL proposal, Holz said. “This is a dramatic change for NAIFA members and their clients and will require significant changes in relationships with clients and impose new cost burdens without any additional benefits for consumers. By moving forward with this proposed rule, the department is ignoring the negative impact this rule will have on lower- and middle-income savers.”
Industry critics say the rule would catalyze a movement from brokerage accounts to advisory accounts, which come with asset minimums that would exclude investors with modest assets.
Micah Hauptman, director of investor protection at the Consumer Federation of America, countered that many fiduciary advisors serve “clients of all means” and dismissed as a “scare tactic” industry assertions that the DOL reforms would hurt people with limited investible assets.
“The reality is small savers have the most to gain from the DOL proposed rule,” Hauptman said. “They can least afford to lose any of their retirement savings to bad advice, yet they are particularly vulnerable to the detrimental effects of conflicted advice.”
Hauptman said the DOL proposal augments Reg BI, which doesn’t apply to insurance products that aren’t securities. He said the NAIC annuity rule is a “best interest in name only standard” because, for instance, it excludes compensation as a material conflict of interest.
“The only interests the NAIC model rule serves is the insurance industry’s, which helps explain the strong endorsement by ACLI,” Hauptman said.
Neely said Reg BI and the NAIC annuity model rule, which has been adopted by 41 states, provide strong investor protection.
“There is serious regulation in place, but it’s regulation that doesn’t prevent access to consumer choice,” Neely told reporters before the DOL hearing.
The insurance industry is dug in, which makes it likely that opponents will file a lawsuit against a final DOL rule, if the agency issues one.
“There’s been so little engagement [between DOL and industry], it’s impossible for us to see a scenario in which this would be fixed,” said Marc Cadin, CEO of Finseca, a trade association, told reporters.
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