The DOL’s Retirement Security Rule: A Flawed Approach to Protecting Savers

The U.S. Department of Labor’s new fiduciary rule may have major consequences – both intended and unintended.

By John Grady, co-chair, ADISA Legislative & Regulatory Committee

As co-chair of ADISA’s Legislative & Regulatory Committee, I have closely followed the Department of Labor’s efforts to finalize its “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” RIN 1210-AC02, or as its more simply known – the DOL fiduciary rule. The final rule was released on April 23 and will become effective on Sept. 23.

The stated aim of this rule is to revise the definition of an “investment advice fiduciary” under the Employee Retirement Income Security Act, to capture and subject to the statute’s duties, etc., a larger swath of advice providers who serve retirement accounts. In particular, the amended definition would, as acknowledged by the DOL, subject many broker-dealers that are making or presenting investment options and programs to retirement account clients to the full panoply of duties and obligations placed by ERISA on fiduciaries. While the stated goal of protecting retirement savers is commendable, the final rule raises significant concerns that go far beyond the initial concerns expressed during the rulemaking process, and in our view may have major unintended consequences.

Firstly, in revising the definition of investment advice fiduciary to include broker-dealers providing advice and guidance regarding investment options to their retirement saver clients, the rule will impact low- and middle-income Americans, particularly those struggling to close the wealth gap. Subjecting broker-dealers to onerous duties under ERISA when serving retirement saver clients will require some firms to increase their minimum account size while it will push others to raise their fees or simply stop serving the small saver market. Studies carried out following the implementation of the 2016 fiduciary rule, such as the one conducted by the national accounting firm Deloitte, paint a concerning picture. That study revealed that 53% of financial institutions limited or eliminated access to brokerage guidance for retirement accounts, impacting more than 10 million accounts and $900 billion in assets under management. Similar consequences are anticipated with the current rule, potentially exacerbating existing financial inequalities.

The Hispanic Leadership Fund’s research underscores this concern. Its findings demonstrate that the rule will disproportionately harm Black and Hispanic retirement savings, potentially reducing their accumulated IRA savings by 20% over a decade and further widening the wealth gap. This outcome directly contradicts the intended purpose of protecting vulnerable populations. Studies show that results are improved when savers, particularly small balance savers, get help with their retirement account investments. The new rule threatens to push things in the wrong direction for this important and historically underserved community.

Furthermore, the DOL’s rushed process surrounding the rule raised serious questions about its commitment to a thorough and transparent regulatory process. The comment period of only 60 days, compared to 119 days for the 2010 version of the rule and 105 days for the 2015 proposal, was historically short. Additionally, the DOL made the unprecedented move of holding a hearing in the middle of that period, further limiting stakeholder input and the ability to address concerns raised in comments.

Overall, the rulemaking process appears to have been captive to political deadlines and considerations, rather than a desire to craft sound policy. The tight timeframe seems solely focused on ensuring that the rule is not subject to a Congressional Review Act vote in 2025. This raises concerns about prioritizing political expediency over the well-being of millions of retirement savers. This hasty approach translates into a lack of adequate research on the rule’s potential consequences. Both the DOL and the Office of Information and Regulatory Affairs have dismissed public input about the potential “advice gap” that we believe will arise under the revised rule. They have failed to conduct comprehensive studies to understand the rule’s impact on various demographics, including small balance savers, older savers, and new savers.

To our thinking, this approach exemplifies a seeming politicization of the regulatory environment, reminiscent of the practices that the Supreme Court recently curtailed in decisions such as SEC v. Jarkesy and in bringing so-called “Chevron deference” to an end in Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc. (1984). These decisions highlight the court’s concerns over what appears to be a trend for regulatory agencies to be overly influenced by shifting political tides. The Supreme Court’s prioritization of the rule of law over partisan agendas suggests potential vulnerabilities in the fiduciary rule.

Again, we think that it is important to recognize the positive intention behind the new investment advice fiduciary rule, such as emphasizing the client’s best interest when financial advisers recommend rollovers. However, this positive intent is overshadowed by what we think are significant flaws in the rulemaking process and, more significantly, anticipated negative consequences for millions of Americans saving for retirement. Moving forward, there are steps that I believe could be taken in order to help avoid these detrimental outcomes, including:

• Halt the finalization of the rule. Further public input and constructive dialogue are essential before implementing a rule with such far-reaching and potentially devastating consequences.
• Conduct a comprehensive and independent study. A thorough analysis of the rule’s impact on various demographics, including its potential to exacerbate wealth gaps and limit access to essential financial products, is paramount.
• Prioritize a transparent and inclusive process. Meaningful stakeholder engagement throughout the rulemaking process is crucial to ensure the final outcome truly serves the best interests of retirement savers.

The DOL’s approach to defining who is a fiduciary under ERISA falls short in our view of its intended goal of protecting retirement savers. By neglecting thorough research and public input, the rule risks inflicting significant harm on the very individuals it aims to protect. We demand a more responsible and transparent process that truly prioritizes the long-term financial security of all Americans and not just political expediency.

John Grady is co-chair of the Alternative & Direct Investment Securities Association, or ADISA, Legislative & Regulatory Committee. He is president-elect of ADISA and the chief operating officer and general counsel at ABR Dynamic Funds. He joined ABR in February 2021 with over 35 years of investment management experience, both as a lawyer and an executive. Grady was previously partner at Practus LLP, and before that was a partner in DLA Piper LLP’s New York and Philadelphia offices. Prior to joining DLA Piper, Grady held legal and executive positions with RCS Capital Corporation, Steben & Company and the Nationwide Funds Group, as well as with the Constellation Funds Group and Turner Investment Partners. He began his career as an attorney first with Ropes & Gray LLP and then Morgan Lewis LLP, where he was named partner.

The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.

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