Repeal and replace DOL rule on fiduciary conflict of interest

Last April the Department of Labor finalized its massive fiduciary conflict of interest rule, restricting severely the ability of financial institutions to compensate employees who are providing advice to retirement plan and individual retirement account participants. It might be an overstatement to say the rule effectively bans brokers and call center operators from providing specific guidance on investments and rollovers, but not by much.

The rule has been incredibly controversial. A significant part of the financial services industry was strongly opposed to it. Indeed, the U.S. Chamber of Commerce, the Financial Services Institute Inc. and other trade associations have a pending lawsuit challenging the validity of the rule under the Employee Retirement Income Security Act, the Administrative Procedure Act and the Constitution.

It was generally understood that the Obama administration wanted to get this rule in place before a new president, new secretary of labor and new head of the Employee Benefits Security Administration take office in 2017. Although it was finalized last April, the new regulation doesn't take effect until April 10 to give the private sector time to revise current systems and business models.

The Trump administration should repeal and replace the rule.

The precedent for such an action was set by the Obama administration. In a memorandum issued Jan. 20, 2009, President Barack Obama's then-Chief of Staff Rahm Emanuel instructed all agencies, including the Department of Labor, that no proposed or final regulation be sent to the Office of the Federal Register for publication “unless and until it has been reviewed and approved by a department or agency head appointed or designated by the president after noon on Jan. 20, 2009.”

Pursuant to that memorandum, the Obama DOL reopened the Bush administration's final, although not yet printed in the Federal Register, advice regulation interpreting the new Pension Protection Act safe harbor for level fee and model driven advice. The Obama DOL then reproposed in 2010 and refinalized in 2011 that regulation, adding, among other things, a requirement that protected advice “[t]ake into account investment management and other fees and expenses attendant to the recommended investments.”

The incoming Trump administration can, and should, similarly extend the effective date of the conflict of interest rule and reopen the comment period.

More importantly, the piece of this rule that deals with individual retirement accounts should reflect the view of the Securities and Exchange Commission on broker practices generally.

Finally, the DOL should begin work on an infrastructure that will facilitate a money-follows-the-participant regime for the accounts of qualified retirement plan participants changing jobs. If we had such an infrastructure in place today, concern that brokers are inappropriately encouraging participants to roll over their accounts to IRAs — the concern that to a large extent drove this entire regulation project — wouldn't exist. And the lack of such an infrastructure makes the DOL's new rule intensely problematic.

Am I overreacting? I don't think so. The DOL has no business regulating IRAs

None of the basic fiduciary rules the DOL is imposing on IRA advisers are supported by ERISA. That is why the DOL had to get creative and impose an incredibly complicated contract requirement on them, via an again creative application of the IRA prohibited-transaction rules.

For most of us, and for most brokers, there's not a lot of difference between an IRA and a regular brokerage account — the kind regulated by the SEC and securities industry organizations. But the DOL took the position that defined contribution assets that have been rolled over to an IRA are, quoting Assistant Secretary of Labor for the EBSA Phyllis C. Borzi, “sacred assets” because they are tax favored. Thus the DOL's proposal stated: “The distinction between IRAs and other retail accounts ... is a direct result of a statutory structure that draws a sensible distinction between tax-favored IRAs and other retail investment accounts.”

I don't agree with any of that — and I defy you to find anything in ERISA's legislative history supporting the imposition of ERISA's basic fiduciary standards on IRA fiduciaries.

If there's something wrong with the way brokers advise IRA holders, then that same thing is wrong with the way they advise retail accounts. And the SEC should deal with it. And, in fact, the SEC has a project under way to do just that.

The DOL is replacing brokers with magical thinking.

The Employee Benefit Research Institute has found that money leaking out of the retirement savings system when employees change jobs is preventing a significant number of participants from meeting minimum retirement savings goals.

Right now, with few exceptions, the only persons advising terminating retirement plan participants about what to do with their money — the only ones advising them not to cash out of the retirement savings system — are brokers and “conflicted” call-center operators. When challenged about who will advise participants if brokers and call-center operators are kicked out of the system, supporters of the DOL's new rule say, more or less — if we tear it down, they will come. Thus, in written testimony submitted to the DOL, Alicia H. Munnell, director, and Anthony Webb, then senior research economist, of the Center for Retirement Research at Boston College said it was “simply not credible ... that the terms of the (DOL regulation) exemption are so onerous that the industry will choose to walk away from $1.7 trillion of assets and perhaps $17 billion of revenue rather than comply with them.”

Right now, the easiest thing terminating participants in a retirement plan can do with their money is cash it out. The hardest thing to do is to roll it over to a new employer's plan. A plan-to-plan rollover, if it can be done at all, generally requires that the participant hand-carry the rollover check to their new employer.

Financial services companies that offer IRAs have (thank goodness) done a lot of work to make the plan-to-IRA rollover process as easy as possible. It may well be — in fact, I believe — that rolling over to the participant's new plan is a better option. But the infrastructure for doing that is woefully inadequate.

Waving your hands and saying “someone will fix this” is not a plan.

The DOL and IRS should be working to facilitate a money-follows-the-participant policy.

The right solution to this challenge— job-change leakage — is a mandatory money-follows-the-participant regime. Just making it easier for participants to move money from their old employer's plan to their new employer's plan would be a huge step in the right direction. And if that were the default, we wouldn't need brokers and call-center operators coaching participants on IRA rollovers.

In that regard, there's a lot that needs to be fixed. Some of it, maybe most of it, at the IRS.

There's a serious private-sector effort to build a clearinghouse for plan-to-plan transfers. That process works well when a participant affirmatively consents to the transfer. But many participants simply don't respond to authorization requests, leaving negative consent the only option and raising issues, e.g., with respect to the extent to which plan fiduciaries can rely on negative elections, that the DOL, with some thoughtful clarification and guidance, could solve. And in the process give a much-needed boost to a plan-to-plan solution.

That the DOL has spent a vast amount of energy and creativity trashing the brokerage industry while doing nothing to aid in building a plan-to-plan infrastructure says a lot about the way we've been making law in this area. A change in that style of rulemaking from the new Trump administration would be hugely refreshing.

There may be significant pieces of the regulation that can be saved.

Let me be clear: I am not saying this entire effort on the DOL's part has been a waste of time. The DOL does have authority to regulate advice to ERISA plan participants about investments. But investment advice is yesterday's solution to the problem of improved participant asset allocations: while a participant is in a plan, the focus should be on building appropriate and efficient investment defaults. So, for me at least, arguments about the rules for investment advice aren't that critical.

Moreover, as I understand it, the industry is prepared to live with a general “best interests” advice standard of conduct — the core of the DOL rule.

What they, and, frankly, I, find over-the-top is the DOL's decision to, for instance, issue guidance on what kind of vacation bonus programs financial services companies can maintain. And to require that those companies publish comprehensive price and compensation information and (more or less) make their business model and market strategies a public commodity.

So to the Trump administration, please put the DOL conflict of interest regulation on your list of things to repeal and replace.

Michael Barry is president of Plan Advisory Services Ltd., Chicago.