Rep. Ann Wagner
While the Department of Labor wades through more than 19,000 comments on its proposal to amend the definition of the term "fiduciary" and require rollover advice be in the best interest of the saver, lawmakers in Washington and retirement industry stakeholders dissected it further.
Four of the five witnesses who testified before the House Financial Services Capital Markets Subcommittee in a Jan. 10 hearing were against the proposal, as well as most of the committee members posing questions.
Rep. Ann Wagner, R-Mo., the subcommittee's chair, said the proposal would do more harm than good. "Financial professionals are sounding the alarm about increased compliance burdens, limitations in product offerings and restricted access for consumers," she said. "Should this proposal be enacted, many would have no other option but to increase or impose minimum asset thresholds for clients, closing the door on financial advice for many."
Wagner was one of 50 bipartisan House members who sent a letter Jan. 8 to the department urging the proposal's withdrawal.
On Oct. 31, the department unveiled its proposed Retirement Security Rule that calls for changing its fiduciary definition by removing three prongs in the five-part test used to determine when a financial professional is considered an investment advice fiduciary. The three prongs at issue require that the person providing the advice does so on a regular basis; the advice is pursuant to a mutual understanding; and that the advice will serve as a primary basis for decision making.
Instead, the department proposes that a person should be considered an investment advice fiduciary under the Employee Retirement Income Security Act if they provide investment advice or make an investment recommendation to a retirement investor, such as to a plan participant or the plan itself; the advice or recommendation is provided "for a fee or other compensation, direct or indirect"; and if the recommendation is made in at least one of several contexts.
The changes would put one-time advice, such as rollovers to individual retirement accounts or annuity purchases, under the fiduciary definition if the other parts of the test are met.
But witnesses on Jan. 10, including Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute, and Susan K. Neely, president and CEO of the American Council of Life Insurers, said current regulations sufficiently protect investors.
In addition to the five-part test, they argued that other regulations, including the Securities and Exchange Commission's Regulation Best Interest and the National Association of Insurance Commissioners' conduct standards for insurance agents and insurance companies recommending annuities that has been adopted in more than 40 states — already cover the marketplace well.
"With these rules in place and being actively enforced, the DOL's proposal is a solution in search of a problem," Berkowitz said.
Neely later said that the proposal is so expansive that it cannot be fixed and should be withdrawn.
Though Kamila Elliott, former chair of the Certified Financial Planner Board of Standards and president, founder and CEO of the financial planning firm, Collective Wealth Partners, had a different viewpoint. She was the lone witness who supported the proposal and said it would help protect investors.
Financial professionals and their firms "should not be allowed to make recommendations that compensate them well but burden the client with excessively high fees, unnecessary risk or harmful illiquidity," she testified.
Rep. Bill Huizenga, R-Mich., asked the witnesses how the Labor Department can issue the proposal after 5th U.S. Circuit Court of Appeals in New Orleans vacated a similar rule in 2018, ruling that the department exceeded its legal authority.
Bradford P. Campbell, a partner at law firm Faegre Drinker Biddle & Reath and former assistant secretary of labor for the Employee Benefits Security Administration during President George W. Bush's administration, agreed with Huizenga's point.
"I think the 5th Circuit decision was clear, unambiguous and not particularly vague as to 'you don't have the authority, Department of Labor, to do this.'"
In issuing the proposal, department officials said it was more narrowly tailored than the 2016 rule that was struck down in court.
