Labor Department officials are determined to produce a new
standard of fiduciary duty for anyone giving retirement investment advice, once
they process concerns raised in thousands of comment letters and four days of
hearings on their proposal. DOL officials say they are going to great lengths
to gather all perspectives, to avoid the pitfalls they encountered in a 2010
attempt to update the fiduciary standard established by the Employee Retirement
Income Security Act of 1974. That earlier proposal went back to the drawing
board after critics questioned a lack of economic analysis that justified the
potential compliance costs on plans sponsors and service providers, among other
issues. The current proposal, Mr. Perez said, has “robust economic analysis.”
The proposed new “conflict of interest” rule has drawn
comments from all corners of the retirement world covered by ERISA, from plan
executives, service providers, insurers, brokers and money managers to retiree
groups and the CFA Institute. The 330,000 comments that Mr. Perez said the
department has received so far range from visions of lower-cost options for
retirement savers, to predictions of fewer options if retirement service
providers and money managers are scared away.
Range of concerns
Groups representing retirement plan sponsors also have
presented a range of support and concerns. For many executives, a key issue is
regulating the advice given to defined contribution plan participants
considering lump-sum distributions or rollovers to individual retirement
accounts.
But plan sponsors also are concerned about how an expanded
definition of fiduciary duty would affect their efforts to help employees make
the right investment choices. Current benefits education programs that include
call centers, on-site briefings, human resources personnel, investment
education and external investment advisory programs might have to be
reconsidered, Lynn Dudley, American Benefits Council senior vice president for
global retirement and compensation policy, said in testimony Aug. 13.
Groups representing retirement plan money managers and other
service providers support the proposal's overriding theme of putting a client's
interests first, but worry it will be unworkable in too many situations. During
the hearings and in comment letters, representatives of these groups said an
expanded fiduciary definition could make their lines of business too
complicated or unprofitable, thereby limiting investors' options or increasing
costs.
Those concerns were offset by other investment
professionals, including a coalition of certified financial planners, who said
the DOL's proposal to require investment advisers to disclose potential
conflicts of interest to their clients could be made workable with some
refinements. A package of new exemptions in the proposed rule, including a
best-interest contract between a client and an adviser, would address that,
“while preserving substantial flexibility for institutions,” Maria Freese,
senior policy adviser for the Pension Rights Center in Washington, testified
during the hearings
Timing challenge
Timing is another concern. “As currently written, the rule's
proposed eight-month transition period is unrealistic and we are hopeful that a
three-year time frame will be adopted,” Empower Retirement President Edmund F.
Murphy III said in an e-mail.
The DOL proposal “has struck a nice balance,” Anthony Webb,
senior research economist with the Center for Retirement Research at Boston
College, testified at the hearing, dismissing warnings of a shrinking
retirement service provider market as “simply not credible.”
The White House's Council of Economic Advisers estimated
that conflicted retirement investment advice costs investors $17 billion each
year, which makes the need for an updated fiduciary standard “urgent,” David
Certner, AARP legislative counsel and legislative policy director, told the DOL
hearing panel. Along with high fees and expenses, investors are at risk of
being steered into higher-risk or lower-performing investments or paying
excessive transaction costs, said Mr. Certner.
Public pension plan officials also support an updated
fiduciary standard, even though they would not be covered by it.
Letters of support
Officials at several other public pension plans, including
the $300.3 billion California Public Employees' Retirement System,
Sacramento; the Colorado Public Employees' Retirement Association, Denver,
which manages $47.7 billion in defined benefit and defined contribution assets;
and the $183.5 billion New York State Common Retirement Fund, Albany, have
written letters of support to the DOL.
Mr. Perez would agree. In his Aug. 7 letter to the members
of Congress, he encouraged them to have their constituents, “both financial
services companies and retirement savers,” weigh in with the Department of
Labor, “so that when we publish a final rule, we can all be sure that it is
reflective of relevant input and achieves its desired goals.” Giving up on
producing a final rule is not an option, he said.
Transcripts of the hearings should be available in the
Federal Register by the end of August. The public comment period will remain
open, before next steps are decided. While there is no hard deadline for a
final rule, the practical reality is that it should be in place well before the
2016 presidential elections, which in turn could bring a different regulatory
philosophy at the Labor Department.
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