DOL Proposes New Fiduciary Standard

On Tuesday the Department of Labor released its second proposal for new fiduciary standards that would apply to anyone providing investment advice to retirees. We have blogged about the issue of defining a new fiduciary standard before, and in February covered President Obama's foray into the debate. Perhaps unsurprisingly, given the President's strong statement of support, the DOL has put forth a revised proposal less than a month and half after Obama's remarks.

Beyond the wider debate about closing the standards gap between brokers and investment advisors, DOL is specifically concerned with customers that are receiving retirement advice. Under ERISA, activity that is undertaken in a pension plan or 401(k) plan is likely covered by some degree of fiduciary responsibility to protect those who are relying on professional assistance to plan for their future needs. The growing market for IRAs, shown in the chart below, has been a source of concern for DOL, as it is outside of ERISA coverage, and has grown to be the largest vehicle for retirement savings. ERISA was originally created in 1974, when planning for retirement didn't include products like IRAs, and the DOL has voiced especially strong concerns about the advice being given to retirees rolling a protected 401(k) plan into an unprotected IRA plan.

{image_1}

Under the new rule, brokers, registered investment advisers, insurance agents or any other type of advisors providing retirement-related services will be required to sign a contract with each client binding them to act in their "best interests." Firms must also have practices and procedures in place to prevent conflicts of interest from occurring, and any known potential conflicts must be disclosed to each client in the contract up front. There are exemptions offered, and activity related to general investment education services has been carved out to ensure that those platforms are still available to retirees. The DOL’s last proposal prompted many detractors to point out that requiring a fiduciary relationship would prevent retirees from getting basic financial planning information, as providers would no longer be willing to offer those traditionally free programs if it meant a fiduciary relationship had been established. Relationships wherein the advisor is strictly an order-taker (executing client requested transactions with no advice provided) and presentations made to plan fiduciaries (who presumably have the necessary financial expertise) are also excluded from the "best interest" contractor requirements. Under the new contract format, the DOL will have enforcement rights, and harmed clients or plan sponsors will also have the right to bring their own action either in arbitration or class action lawsuits.

The original rule proposal came in 2010 but was withdrawn by the DOL after substantial industry outcry. While there is certainly louder public support from key parties this time around, the new rule will now undergo its own 75-day comment period, culminating in a public event after that time. This will again give stakeholders ample time to consider the new rule and its differences from the previous proposal.

The comment period may not be long enough for some -- the U.S. Chamber of Commerce is already planning to request an extension, stating that they will need more time to review the rule because, "Instead of using a scalpel to make surgical changes to the rules they [DOL] brought out the snowplow."

President Brown of the Financial Services Institute voiced another point of concern, noting his disappointment that the Office of Management and Budget “…only took 50 days to review this highly controversial rule that could negatively impact millions of investors.” The OMB generally takes longer to review proposals before providing their opinion or support.

Counter to the negative reactions of some market participants, Labor Secretary Tom Perez assured reporters that “This rule is intended to provide guardrails but not straitjackets, so we know consumers are getting advice that is in their best interest.” National Economic Council Director Jeff Zients, in a joint article authored with Secretary Perez, stated a willingness to work with dissenters but concluded that "...while we expect plenty of good faith input from all manner of commenters, for some special interests and their allies in Congress, the only good rule would be no rule at all. We want to make very clear that inaction is not an acceptable outcome of this process."

The SEC, which has been considering a wider-reaching convergence of fiduciary standards between brokers and investment advisors, has stated that it will not be influenced by the DOL's rule, and will take its time in crafting its own standard. It may be a long time before the SEC rule even takes shape, as Chair Mary Jo White noted, “It's still a 'whether' question, because it's a five-member commission, I'm one of five votes.”