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DOL Unveils New Fiduciary Rule, Vows to “Close Loopholes”

DOL Unveils New Fiduciary Rule, Vows to Close Loopholes. Broker-dealers, Department of Labor, DOL, Financial Services Institute, FSI, independent contractor, registered investment advisors, RIAs
DOL Unveils New Fiduciary Rule, Vows to Close Loopholes. Broker-dealers, Department of Labor, DOL, Financial Services Institute, FSI, independent contractor, registered investment advisors, RIAs

The Department of Labor released its new retirement security rule amending the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) on Tuesday. Additionally, related proposed amendments to prohibited transaction exemptions (PTEs) were also announced. These new proposals seek to crack down on “junk fees” that, the White House claims, cost middle-class retirement savers a significant portion of their savings.

The DOL says the proposal is “aligned with the Biden-Harris administration’s efforts to protect retirement investors,” and would require investment advisers to “adhere to high standards of care and loyalty when they make investment recommendations and avoid recommendations that favor their financial and other interests at the expense of retirement savers.”

At the White House yesterday afternoon, President Joe Biden spoke regarding the amendments to the amended fiduciary rule. “We’re taking additional action to eliminate junk fees in retirement savings,” said Biden. “Some advisors and brokers steer their clients toward certain investments, not because they’re in the best interest of the client, but because it means the best payout for the broker.”

The DOL’s new proposals aim to minimize these junk fees, promote competition between advisors, and provide greater protection for workers’ retirement savings. They aim to do this by:

  • Closing loopholes to help ensure that investment product recommendations are in a saver’s best interest. Currently, certain commodities and insurance products, like fixed index annuities, are governed by state law, which may vary from state to state.
  • Covering advice to roll assets out of a 401(k) or other employer-sponsored plan. Currently, one-time advice, such as advice to rollover assets from a 401(k) to an IRA, are not required to be in a saver’s best interest.
  • Covering advice to plan sponsors regarding which investments to make available for 401(k)s and other employer-sponsored plans. Currently, this advice is not subject to the SEC’s Regulation Best Interest nor is it required to be in the customer’s best interest.

The updated definition of an investment advice fiduciary would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and others. The DOL says that while investment professionals deserve to be paid fairly for helping people meet their savings goals and retire with dignity, there are some financial advisers who put their interests before their clients’ interests. This can result in reduced returns and higher costs which are junk fees that chip away at many Americans’ savings. Analysis of just one investment product—fixed index annuities— suggests that conflicted advice could cost savers up to $5 billion per year for this product alone. The proposed rule would also ensure investment professionals are able to compete for business on a level playing field, instead of an unbalanced system that holds advisers to different standards based on their recommended products.

According to the White House, “America’s families spend a lifetime saving so they can retire with dignity. But junk fees are chipping away at their savings, going to financial advisers with conflicts of interests instead of to American families, and making retirements less secure.”

The current definition, adopted in 1975, was written at a time when IRAs were less common and 401(k) plans did not exist, so most Americans relied on traditional defined benefit pensions retirement savings. In today’s marketplace, individual plan participants and IRA owners — rather than professional money managers — are expected to make important, complex financial decisions and seek the help of expert advisers, making the proposed rulemaking necessary.

“For too many workers, the road to lifelong financial security is unnecessarily paved with uncertainty,” said Acting Secretary of Labor Julie Su. “This rule ensures that savers of all income levels can work confidently with investment professionals to grow their nest egg and prepare for the joyful retirement they deserve. America’s workers and their families should not have excess fees and lost investment returns chipping away at their retirement savings due to the cost of conflicted investment advice.”

The department is also proposing amendments to related existing administrative prohibited transaction exemptions that are available to investment advice fiduciaries. The proposed amendments seek to make the exemption conditions more uniform and protective. Under ERISA, investment advice fiduciaries must avoid conflicts of interest or comply with the conditions of a PTE. The proposed amendments to the exemptions would uniformly require investment advice fiduciaries to give advice that meets a professional standard of care or duty of prudence, puts the retirement investor first or duty of loyalty and would prohibit advisers from charging more than reasonable compensation or misleading investors.

“Investment professionals routinely hold themselves out as giving expert advice based on the financial interest of the retirement investor, rather than the investment advice provider’s financial interests,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “This proposed rule would ensure that when investors entrust their retirement security to such investment professionals, their confidence will not be misplaced, regardless of the type of investment recommended. Workers and their families deserve no less.”

The proposals include a 60-day period for public comments and instructions on how to submit comments. The department also intends to hold a public hearing approximately 45 days after the proposals are published. Further information on the hearing will be published in the Federal Register at a later date.

“We will be more fully reviewing the DOL proposal with investors in mind. We will be urging the DOL to avoid once again heading down a path that would lead to less encouragement for Americans to save, less investor choice, less access to diversifying investments, and ultimately less retirement security,” said Anya Coverman, president and chief executive officer of the Institute for Portfolio Alternatives. “What’s also important to watch are proposals from NASAA and the SEC that risk creating an even more complicated, fragmented, and duplicative regulatory environment. The SEC’s 2019 uniform national standard for investment professionals working with retail clients was designed to create clarity for both investors and the RIAs and broker-dealers who serve them. But both NASAA’s proposed changes to its business practices rule and the SEC’s data analytics proposal would generate even more confusion and uncertainty, which is the last thing investors need right now.”

The new rule has already faced significant opposition. In September, prior to the submission of the new proposal to the White House’s Office of Management and Budget, several members of Congress sent a letter to Su in which they urged the agency to cease any further action to amend the definition of investment advice fiduciary.

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