DOL moving forward on new fiduciary standard

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.

“We will move forward towards issuing a final rule that balances the input we have received,” Labor Secretary Thomas Perez said in an Aug. 7 letter to several members of Congress. “This high level of interest and contribution to the process is indicative of a shift in attitude over the past few years — a recognition of the growing problem of conflicted advice, a desire to create a level playing field, agreement on the simple premise of putting the client's best interest first, and a "get to yes' attitude that will lead to a meaningful and workable rule.”

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.

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.

“We believe that participants who have had the fiduciary standard within the plan should maintain the same standards outside the plan,” said Charles Van Vleet, chief investment officer of Textron Inc., testifying on behalf of the Committee on Investment of Employee Benefit Assets at the DOL hearing on Aug. 10.

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.

“The one overarching point we are hearing from plan sponsors is that it (the proposal) seems to be at odds with efforts to facilitate employee engagement. It may make it more difficult, more expensive and may result in their having to pull back on those tools. They feel it is exceptionally easy to trigger” a fiduciary liability, she said.

Instead of the DOL's proposed exemption for education, which would not “provide sufficient context to be useful to plan participants in many cases,” Ms. Dudley suggested safe-harbor provisions if employers create and follow a written policy.

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 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.

“It's clear that the industry and the Department of Labor are working toward the same thing: a rule that best serves those who are saving for retirement. The means by which we get there is critically important,” said Mr. Murphy, who sees DOL officials as open to making changes, including those recommended by industry representatives. “We're looking forward to further discussion,” Mr. Murphy said.

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.

“Right now there's too much of a sales culture in the DC world. People tend to have not enough information,” said Jonathan Grabel, chief investment officer of the $14.5 billion New Mexico Public Employees Retirement Association, Santa Fe, in an interview. “Retirement savings and preparedness is too important. A new fiduciary standard is in the best interest of the nation as we prepare for a huge cohort of the nation moving into retirement.”

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. “The cost of inaction is too high.”

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.