Art by Joseph CiardielloIIn these columns and elsewhere I have harshly criticized the Department of Labor’s (DOL’s) Conflict of Interest regulation project—suggesting that it overreached and that DOL was turning a deaf ear to valid industry criticism.
I was wrong. IMHO, the recently released final rule—and accompanying exemptions—reflect a rulemaking process that is—in my professional lifetime—as good as it gets. I think that DOL Secretary Thomas Perez and, especially, Employee Benefits Security Administration (EBSA) head Phyllis Borzi should be proud: they and the EBSA staff have done a very good job with a very tough issue.
Nine years ago, then-Securities and Exchange Commission (SEC) Chairman Christopher Cox, in a speech to the Mutual Fund Directors Forum Seventh Annual Policy Conference, said: “To far too great a degree, and in substantial part because of a regulatory cumbersomeness that obscures the real numbers, our financial services industries are able to skim off much more of the assets they handle than would be the case in a well-functioning market.” Those are the words of a Republican and a conservative.
Doing something about the problems of conflicts of interest and excessive fees in (parts) of the retirement savings business has been an ideal and goal of regulators and policymakers since, at least, the Clinton Administration. Accomplishing that goal has often seemed like a utopian death march, with proposals made and then withdrawn amidst repeated storms of criticism—most famously when DOL was forced in 2011 to withdraw its 2010 proposal.
The criticism of DOL’s 2015 proposal was broad and vigorous. Most believed that its design was simply unworkable.NEXT: Making the world a better place
DOL clearly listened to those criticisms and crafted a final rule that, while still flawed, accomplishes its key goal without, in effect, doing more harm than good.
Here’s my best shot at describing what DOL is targeting in this new regulation: Think about two investment “products”—A and B—say two different mutual funds offered by the same provider. The two products are more or less identical, or are identical after you account for what DOL calls “neutral factors” (like the complexity of the product). On product A the firm makes $1 profit. On product B it makes $2 profit. Under the new rule, the firm can’t pay a broker/adviser more (e.g., as a commission or, even, in the form of a nice bonus vacation) with respect to sales of product B. This is what Secretary Perez has called the regulation project’s “North Star.”
In the excellent Silicon Valley there’s a running joke, that every entrepreneurial nerd with some fleeting, nerdy idea wants to think, and wants everyone else to think, that he is “making the world a better place”—as in, “We’re making the world a better place … through Paxos algorithms for consensus protocols.” Or, “We’re making the world a better place … through software-defined data centers for cloud computing.”
It’s just possible that, in our own nerdy little world of retirement benefit regulation, Secretary Perez and EBSA chief Borzi have made the world a better place—by reducing/eliminating conflicted advice to retirement savers and bringing greater transparency to the retirement investment market.
I believe that, at a deep level, the key values of the 21st century—and not just in business—are transparency, accountability and responsiveness to feedback. Transparency—like software (with apologies to Marc Andreessen for stealing his line)—is eating the world. In that respect, this regulation is simply introducing transparency to retirement savings—or at least radically increasing it. Welcome to the 21st century.
The most obvious result of the new regulation will be more explicit (and hopefully more rational) pricing of services—call centers, advice, participant education—that in many cases are currently (and more in the retail world than the institutional world) paid for with asset-based fees. We’ll find out if participants and sponsors actually want to pay for these services and what they think they are worth.NEXT: Misgivings do not detract from impressive rulemaking
I continue to have a couple of basic misgivings about this project. First, I don’t understand why reinventing the retail retirement investment business should not have involved, primarily, the SEC. But perhaps the answer is that SEC has a different “North Star”—disclosure—and that disclosure is inadequate to this task. Certainly DOL thought that and said so in so many words.
Second, I am disturbed that the regulatory infrastructure that applies at termination of employment makes it awkward and difficult for a participant to leave her assets in her current employer’s plan or roll them over to the plan of her new employer. Yes, conflicted brokers pitching high-priced IRAs is a problem. But will one result of subtracting those brokers from the current system be that participants—particularly younger participants with small accounts—simply take out cash? Could we not install a clearinghouse or a money-follows-the-participant regime? And shouldn’t the task of creating such a regime at least have been started before we tore down the current broker-dominated process?
I don’t, however, want those misgivings to detract from my overall point: this was rulemaking at its best. Congratulations to DOL. And thank you.
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.