Does the Department of Labor’s (DOL)’s fiduciary rule work as a regulation? Let’s consider some applications of it:
A real estate agent is discussing with clients—a married couple with a baby on the way—how they might be able to finance the purchase of a new home. The wife asks whether they might be able to take a withdrawal from her 401(k) savings plan. The agent—who has some familiarity with the tax rules but none with the Employee Retirement Income Security Act’s (ERISA)’s fiduciary rules—says that, while there are some downsides to taking a withdrawal, it’s a buyer’s market, she thinks a house is a really good investment, and if they don’t have another option for the down payment, this could be a good idea. This “advice” makes the agent an ERISA fiduciary.
The real estate agent can explain, e.g., Tax Code hardship withdrawal rules but cannot say anything about the wisdom of a withdrawal without triggering fiduciary status. This treatment applies to any salesperson who will benefit (e.g., by receiving a commission or simply a salary) from recommending an investment in, e.g., a time share, a boat, or an expensive piece of furniture.
A call center operator suggests that a terminating participant should leave her money “in the system”—either in an IRA or a qualified plan—rather than take it in cash. By giving this (common sense) advice, the operator has triggered fiduciary status.
While the DOL has (after hearing many complaints on the issue) published guidance saying that recommending a plan contribution does not trigger fiduciary status, it has consistently said that any recommendation with respect to a distribution does trigger fiduciary status. It is unclear what ontological distinction DOL sees between contributions and distributions.
A sponsor employee whose job it is to explain the plan and plan investment options to participants is asked whether it’s a good idea to diversify by investing partly in each target-date fund tranche (e.g., 2020, 2030, 2040 and 2050). The sponsor employee says it is not. The sponsor employee is an ERISA fiduciary.
This obviously is investment advice provided by an individual (the sponsor employee) paid for giving such advice.
An individual walks into a brokerage firm and says, “I have $5,000 to save.” The broker suggests that the individual should consider contributing it to an IRA.
Until the most recent round of FAQs, most believed that this advice triggered fiduciary status. Currently, the broker can suggest contributing to an IRA, but she cannot make a recommendation about how the IRA should be invested. If the broker does not mention IRAs, however, she may recommend that the individual open a regular brokerage account and invest the $5,000 in, e.g., Facebook stock (provided SEC “know your customer” rules are complied with).
A plaintiffs’ lawyer tells a plan participant that the plan in which she participates includes mutual funds which are over-priced and therefor “imprudent.” The lawyer is an ERISA fiduciary with respect to his “investment advice.”
This lawyer/participant exchange clearly includes a recommendation with respect to plan investments.
An individual is about to receive a mandatory (post-70 1/2) required minimum distribution of $20,000. If, before she receives this distribution (which she must take), she asks her broker how to invest it, any recommendation by the broker will trigger fiduciary status. If she asks immediately after receipt, it will not.
Even where an investment is mandated (i.e., there is no choice to not take it), advice about how to invest it triggers fiduciary status. Once the distribution is made, recommendations as to investment may be made without any effect under ERISA – the money has lost its “character” as ERISA assets.
Does the DOL Have a Grip on What It Is Doing?
The DOL would, no doubt, dismiss most of these examples as silly. Because all that DOL meant to do with the fiduciary rule was drive brokers (or at least broker compensation culture) out of the retirement savings market.
It would, however, be a massive stretch—and obvious poaching on SEC’s regulatory turf—for the DOL to start explicitly regulating broker compensation. Moreover, rules that target particular professions are suspect—they look a lot like ex post facto witch hunting.
And so, the DOL crafted the more abstract rule we are dealing with. Which, when applied rationally and logically, requires nearly everyone to shut their mouth whenever the words “retirement plan” or “IRA” are mentioned.
The three most extraordinary innovations in the new rule are the extension of ERISA fiduciary coverage to any recommendation (including, e.g., one-off recommendations like that made by the real estate agent); the characterization of advice about distributions as fiduciary “investment” advice; and the application of ERISA’s fiduciary rules to IRAs.
Far from being un-serious, the examples given above illustrate just these points: the application of ERISA rules in situations in which no one would intuit they had an ERISA issue and the making of distinctions that make no intuitive (or indeed, any other sort of) sense.
These innovations are part of the general fiduciary rule—they have nothing to do with any possible tweaks to the related exemptions. That point has to be emphasized because the DOL, in April, characterized the rule as “among the least controversial aspects of the rulemaking project.” One has to wonder (as many at the time did) what they were smoking.
The truth is, the DOL does not have much of a grip on what it is doing. They are regulating in an area in which they have no particular expertise. And they have rejected industry advice that they are working off of bad data and ripping up valuable infrastructure.
DOL has bought into certain viewpoints about investments that remain, for good reason, deeply contested—commissions vs. assets under management fees, active vs. passive management. And they’ve ignored deeper problems that have inhibited the development of more efficient retirement savings investment solutions—reduced employer commitment to 401(k) plans, especially with respect to terminating employees, and the awkwardness of the plan-to-plan rollover process.
They’ve settled for an easy-but-sloppy “good guys vs. bad guys” politics (with brokers as the bad guys) and reasoning-by-talking-points. In this process, the DOL has demonstrated a lack of any deep understanding, wisdom or humility or even the simple ability (and common decency) to take an opponents’ arguments seriously. All of which sounds great, to some people.
None of this is to say that we don’t have problems with 401(k) plan investment fees. I would say, emphatically, that reducing investment fees is the easiest way to improve retirement outcomes over the next 20 years. I seriously doubt we’re going to do it by increasing returns.
But this regulation is, in the end, and at best, a political exercise in looking virtuous while slaying cartoon dragons. The effort we will have to spend straightening it out will result in a massive waste of time and a missed opportunity to fix what needs to be fixed.
Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Asset International or its affiliates.
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