The financial services industry thinks that it scored points against the Department of Labor’s proposed rule on conflicts of interest in retirement planning during a four-day marathon of hearings this week. But critics of that industry believe they made a strong case that financial companies are bilking workers out of retirement savings.
The proposed rule, requested by President Obama in February, would vastly broaden the requirements for people offering retirement advice to act in the best interests of their clients, a move that supporters say is necessary to protect people transitioning out of work-sponsored 401k retirement plans and into Individual Retirement Accounts, or IRAs.
Currently, a number of brokers, insurance agents and other planners are not required to be “fiduciaries” for their clients, and the White House believes that many are, on a large scale, steering clients into high-fee investment products in return for kickbacks from the firms offering those investments.
“Inside a 401k account, you’re operating inside of a protected environment,” with fiduciaries choosing options for you, said Barbara Roper, who represented the Consumer Federation of America at the hearings this week.
But when a worker moves out of a 401k, for instance in the case of someone in a mid-career job transition, that’s when “they’re most vulnerable to conflicted advice,” Roper told the Washington Examiner. Savers would then face increased possibilities for an adviser to steer them into a high-cost product that doesn’t suit them.
The financial industry used the hearings to argue that the proposed rule was written far too broadly, and would make it uneconomical for advisers throughout the financial system to offer financial advice, leaving some savers unprotected.
Lisa Bleier, managing director and general counsel for the Securities Industry and Financial Markets Association, called it a “very sweeping rule.”
The rule, she warned, is going to inhibit conversations between advisers and clients that help clients with the human side of investing, such as reassuring them about staying in the market during downturns rather than panicking, and convincing them to set aside savings early. “Those are the conversations that we are afraid are going to be negatively impacted,” she told the Examiner.
Felicia Smith, a vice president for the Financial Services Roundtable and one of the more than 80 people to testify this week, thought the hearings offered some positive hints for financial companies. Based on one of the hearings Thursday morning, she said, “it seems the DOL is trying to think of ways to simplify what they’re trying to achieve.”
“If in fact they are looking for ways of simplifying it to the extent that companies can readily understand what’s required, make the changes and not be burdened with all sorts of extraneous rules and kinds of costs and litigation exposure, then we may be closer than we know,” Smith said. Her own organization has proposed an alternative that would allow for greater disclosures and accountability measures for advisers.
Yet critics of the industry are hoping for the government to stick to its guns.
“It’s interesting to me that the pervasive opposition position that really is totally untrue from stem to stern is still being discussed, but I think that that will maybe abate after this,” said Kathleen McBride, who is an analyst for FiduciaryPath, LLC and chairs the Committee for the Fiduciary Standard.
“I think that they think that there’s nobody supporting the DOL here, and that’s clearly not true,” she said. “And the people not supporting the DOL here are not supporting it because they want to continue high-commission, high-fee, harmful work that they do.”
The next step will be a lengthy period of review of the hearings and comments by the department, likely stretching into next year.
“Make no mistake, their testimony and the multitude of public comments we continue to receive will help shape a rule that protects the retirement savings of workers and families, and gives advisers and firms the flexibility they need to continue to make a good living while offering retirement advice in the best interest of their clients,” Secretary Thomas Perez wrote in a blog post following the end of the hearings.
More immediately, however, members of Congress have indicated that they might try to scale back the proposed rule through legislation, possibly attached to must-pass government funding bills.
Among the lawmakers raising questions about the breadth of the rule are more moderate Democrats, such as Sen. Claire McCaskill of Missouri. Bipartisan scrutiny, along with industry lobbying, will make it one of the more politically fraught rulemakings.
