A group of Republican senators, led by Chairman Lamar Alexander (R-Tennessee), from the Committee on Health, Education, Labor and Pensions (HELP) outlined their concerns about a fiduciary re-definition—concerns based mostly on the 2010 proposal—in a letter to Shaun Donovan, director of the Office of Management and Budget (OMB).
Earlier this month, President Barack Obama expressed strong support for the Department of Labor’s (DOL) effort to issue a new definition of fiduciary.
The senators cited a seeming lack of coordination between the Securities and Exchange Commission (SEC) and the DOL and expressed concern that a re-definition of fiduciary would result in a number of unintended consequences for consumers. “[The] individuals who provide investment advice should be trained, transparent, ethical, and represent the financial best interests of their clients,” they wrote. “However, we are concerned that the proposed rule may harm consumer access to crucial retirement education or services, ultimately disserving the very people it seeks to aid—working and middle class Americans.”
Remarks by Senator Elizabeth Warren (D-Massachusetts) at Thursday’s hearing of the Special Committee on Aging spell out an opposing view to the Republican’s objection to the proposed standard. Robert Hiltonsmith, a senior policy analyst at Demos, a public policy organization, says it’s likely the proposed standard will be similar to the last one, and the impact will be the same: requiring anyone who gives advice to act in the best interests of the investor.
People would need training in finance to sort through the morass of investment advice providers, Hiltonsmith says. “Sorting through this is more than the average person should have to be able to sort through,” he tells PLANSPONSOR.
Hiltonsmith contends that the Republicans’ arguments are nonsense. “They say low account balances aren’t going to get serviced,” he says, “but [providers] are already serving people with small balances.” The market has changed greatly in the past 40 years, he points out, yet no regulation has changed since that time. “Savers are bearing all the risk,” Hiltonsmith contends, and an expanded definition of the fiduciary standard could turn the 401(k) into a better savings vehicle.
Norbert Michel, a research fellow in financial regulations at The Heritage Foundation, believes the concern is warranted. “Without having the actual rule it’s difficult to say exactly what I think,” he told PLANSPONSOR. “But in general, they’re right to be concerned. It seems the administration is trying to come up with a uniform rule that would cover everyone—but there are so many different types of adviser.”
The crux of Michel’s concern is that the cost of operating under a stringent fiduciary standard would motivate some advisers to stop offering their services to small investors. “I think it’s a real possibility that there are certain types who certainly would consider it not worth their time,” he says.
The senators expressed concern about the percentage of workers who might choose to cash out from retirement plans when switching jobs or retiring because of a lack of retirement planning assistance and whether IRA investors would no longer qualify for an advisory account.
The senators believe that investors who use a buy-and-hold strategy could actually see increased costs from a rising number of advisers using a fee-based model, compared with basing commissions on a percentage of assets.
In their letter, the senators made a number of recommendations to Donovan: that he work with the SEC and other federal agencies to avoid redundant or inconsistent regulation, and that he take into account the SEC’s oversight and rulemaking authority in this area, especially in light of its authority pursuant to the Dodd-Frank Act.
Small businesses that sponsor a workplace retirement plan might make a number of changes to the detriment of American workers, the letter said: reduce their contribution match, offer fewer investment options, increase the fees charged to plan participants or drop the retirement plan altogether.
Donovan was asked to consider a range of factors, including:
- The impact of the rule on the cost of guidance, education and advice;
- The impact of the rule on retirement savings and how it might affect access by plan sponsors and plan participants to guidance, education and advice;
- The possibility of advisers withdrawing services for employee retirement plans and individual retirement accounts (IRAs); and
- The potential for more regulatory or paperwork burdens on small plan sponsors and others.
“The bigger problem here is making everything a federal issue,” Michel said, noting the absence of any systematic problem that would require the expanded definition. “I see no evidence, and I think they should have to demonstrate that before they do this.”
But much will depend on how the actual proposal is written, he pointed out. “It could be fine.”
The letter’s signers are Senators Mike Enzi (R-Wyoming), Richard Burr (R-North Carolina), Johnny Isakson (R-Georgia), Mark Kirk (R-Illinois), Tim Scott (R-South Carolina), Orrin Hatch (R-Utah), Pat Roberts (R-Kansas), and Bill Cassidy (R-Louisiana). The text of the letter is here.
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