The Department of Labor is working hard to finalize its fiduciary rule-making initiative and has incorporated changes based on public comments, a key administration official said March 11 at Pensions & Investments' Defined Contribution East Conference in Orlando .
"The question that is at the core of this project is what happens if you provide a financial incentive to someone to behave a certain way or act in a certain manner," said Ali Khawar, principal deputy assistant secretary of the Labor Department's Employee Benefits Security Administration. "Humans have not evolved over the lifespan of this project to like this higher-level being that no longer acts in the same way in response to financial incentives. So we know actually a lot about what the impact of that kind of conflict is, and we continue to think it's important for us to deal with it."
Under the proposed Retirement Security Rule, which was unveiled Oct. 31 and includes prohibited transaction amendments, the department calls for changing its fiduciary definition by removing three prongs in the five-part test, which was established in 1975 and is used to determine when a financial professional is considered an investment advice fiduciary under the Employee Retirement Income Security Act.
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 ERISA 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 lead one-time advice, such as rollovers to individual retirement accounts or annuity purchases, to fall under the fiduciary definition if the other parts of the test are met.
Khawar said the proposal is more narrowly tailored than a 2016 fiduciary rule that was struck down in federal court in 2018, but will still better protect Americans making crucial retirement decisions with help from a financial professional.
A final version of the rule was submitted for review on March 8 to the White House's Office of Management and Budget for review. The OMB now has up to 90 days to finish its review — though could extend that time frame if it sees fit — and then the department will release it soon after.
In a public comment period that closed Jan. 2, the department received about 425 substantive comment letters and almost 20,000 petitions on its proposal.
"We have taken the comments very seriously and that's reflected in the current version but also in what will come out of OMB, but I can't really share the details," Khawar told P&I in a separate interview March 11.
He added, "We're, I think it's fair to say, closer to the finish line than the starting line, but there's still a pretty significant amount of work involved in getting it to the finish line."
During the public comment period and at a public hearing in December, industry firms, trade groups and lawmakers called on the department to withdraw the proposal. Among their concerns, opponents say the proposed fiduciary definition is too broad, the proposal is a rehash of a 2016 rule that was vacated in court and that there are already sufficient regulations covering the marketplace, like 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.
In a March 11 statement, one of those opponents, Kenneth E. Bentsen Jr., president and CEO at the Securities Industry and Financial Markets Association, said the department is rushing the rule-making process.
"In this instance, it is obvious the outcome of this rule-making was pre-baked and politically driven," Bentsen said. "Unfortunately, such a hasty approach will result in policy that does not ensure consistent investor protection and will limit investors' access to advice and education and their ability to choose how they receive that advice and education."
Khawar said the pace of the department's work on this topic signifies how important the issue is. "To read, analyze and respond on this time frame is Herculean and it reflects a huge, huge amount of work by the team," Khawar said in the interview. "They've really gone above and beyond to get this to this stage."
