The delivery date for a new definition of “fiduciary” is slipping into 2012, as officials at the Department of Labor prepare more detailed economic analysis to address industry concerns.
Earlier this year, Phyllis C. Borzi, assistant secretary of labor for the EBSA, predicted the proposed rule would be ready for executive review in September, with a proposed rule out before the end of 2011. But on July 20, Ms. Borzi told the agency's ERISA Advisory Council that those dates “might slip a month or more,” as the agency prepares the economic impact data and continues to review the comments.
DOL officials say broadening the definition to include anyone providing investment advice to pension funds for a fee or other compensation gets back to the original intent of ERISA.
Critics — who are not giving up their fight — counter that painting all advisers as fiduciaries will put onerous record-keeping and fact-checking burdens on plan sponsors and service providers, which in turn will drive up costs and reduce educational services for investors and plan sponsors.
In spite of ongoing controversy and a massive amount of public comments, the Employee Benefits Security Administration had expected to deliver the proposed rules to the Office of Management and Budget for executive review by September, with a final form appearing by December.
In the meantime, opponents are enlisting bipartisan support on Capitol Hill for questioning EBSA's regulatory methods, and for convincing the agency to show more sensitivity to the financial impact on the affected businesses.
On July 26, Ms. Borzi was scheduled to be the star witness at a hearing on the rule held by the pension subcommittee of the House Education and Workforce Committee. “Our concerns stem from both the process of the rulemaking and the potential impact it could have on workers and retirees,” said a spokesman for committee Chairman Jon Kline, R-Minn. “Republicans support efforts to modernize ERISA enforcement; unfortunately, we have significant concerns about” this proposal.
The absence of economic impact data is a key criticism of opponents, who argue that they should have an opportunity to review and comment further, once analysis is done and before the rule advances.
“If it gets finalized without comment on such analysis, that's not the way it's supposed to work. They treated it as a small regulation and it's actually a huge regulation,” Kent Mason, an attorney with Davis & Harman LLC, said in an interview. Mr. Mason, whose Washington firm represents retirement-related financial institutions and the American Benefits Council, is encouraged by the “bipartisan outcry to slow it down” and optimistic that some common ground can be reached. “Nobody is saying, "don't do it.' Our message is, "do it right.'”
What's at stake
To pension rights advocates, the controversy highlights just how much is at stake for firms that could get caught in the fiduciary net by the new rules. “The fact that there is so much opposition against it suggests that it's needed,” Drexel University law professor Norman Stein said in an interview. Mr. Stein, a senior policy adviser to the Pension Rights Center, sees the proposal as “a fairly modest rule” that gets back to Congress' original intent, a belief shared by Ms. Borzi.
“It may not appear modest because it will affect the way some people do business, but over the long term it will be very good for participants. DOL has a right to say that if there are serious conflicts of interest, you probably shouldn't be giving investment advice,” said Mr. Stein.
EBSA officials say they have years of enforcement and regulatory data showing the need to prevent such conflicts of interest, and they point to a June 2007 Government Accounting Office report on the enforcement challenges of terminated defined benefit plans. The GAO found that, particularly in recent years, “non-fiduciary service providers — such as consultants, appraisers, and other advisers — have abused their relationships with plans by recommending investments in exchange for undisclosed kickbacks from investment providers, engaging in bid-rigging, misleading plan fiduciaries about the nature and risks associated with plans investments, and by giving biased, incompetent, and unreliable valuation opinions.”
“Yet, no matter how egregious the abuse, plan consultants and advisers have no fiduciary liability under ERISA,” said the GAO report, thanks to a 1975 DOL rule that restricted the fiduciary definition to those who met a five-part test. The proposed rule — if finalized as originally proposed — would eliminate that test.
Ms. Borzi remains determined to accomplish her mission. “This rule is designed to ensure that the important investment advice relied upon by millions of plan sponsors, plan participants and IRA holders is free of conflicts of interest and rendered solely in their best interest,” she said in an e-mail.