Bloomberg Law (September 28, 2023) - 

  • Groups prepare for renewed fight over conflicted advice
  • Proposal likely to address five-part fiduciary test loopholes

Consumer advocates are readying themselves for a renewed battle with Wall Street over conflicted retiree financial advice as the US Labor Department prepares its latest fiduciary rulemaking project.

Advocacy organizations that shuttered or laid low after a federal appeals court axed the first Obama administration fiduciary regulation in 2018 are reemerging, fueled once more by a friendly administration intent on trying again.

Special interest groups representing investors are set to play an outsized role supporting a tiny federal benefits agency taking on some of Wall Street’s giants. Stricter fiduciary standards from the Labor Department would challenge how securities advisers and insurance brokers charge for service, threatening to upend a multitrillion dollar industry with deep pockets and an experienced lobby.

“We have a group of people who are investor advocates who never gave up on this and will never give up,” said Joseph C. Peiffer, executive vice-president and president-elect of the Public Investors Advocate Bar Association. “It will happen—this time or next time. We know what we’re up against.”

Stage is Set

Regulators set the stage for a public brawl over conflicts of interest in the financial advice market earlier this month. DOL’s Employee Benefits Security Administration sent a regulatory package (RIN No. 1210-AC02) to the White House for review Sept. 11, suggesting a proposed rule is imminent.

The department is expected to take aim at retirement plan rollovers, the process by which newly retired savers transfer their 401(k) or pension savings to an individual retirement account or annuity. Investors lose protections under the Employee Retirement Income Security Act (Pub. L. No. 93-406) when their savings exit a workplace plan, and regulators are concerned a financial services industry designed to sell risky and expensive products may take advantage of them.

That’s exactly the kind of regulatory project that’s needed, investor advocates say.

“Retirement savers continue to suffer harm as a result of conflicted advice,” said Micah Hauptman, director of investor protection at the Consumer Federation of America. “The harm is that financial professionals are incentivized; they are encouraged and rewarded for steering retirement savers to products that make them and their firm a lot of money.”

Save Our Retirement

CFA, PIABA, and the AARP are reactivating the Save Our Retirement Coalition in the wake of EBSA’s new rulemaking. The group opposed a financial services industry narrative in the lead-up to the 2016 final rule that claimed the Obama-administration rule was too broad and would inflate consumer costs.

Nearly a decade later, the US Securities and Exchange Commission has established a best-interest standard for stock sales and more than two-thirds of US states have adopted similar best-interest model language for annuity sales.

Critics of the department’s rulemaking effort say the potential for consumer harm no longer exists in the new legal landscape.

“Look, we’re good now,” said Chantel Sheaks, vice president of retirement policy at the US Chamber of Commerce. “We have Regulation Best Interest that’s being implemented for rollovers, we have these state models; the landscape is so different than it once was.”

The Chamber was the lead plaintiff in the lawsuit against the undermined the Obama-era fiduciary rule and has lobbied against other iterations of the regulation. Other groups, such as the Insured Retirement Institute and National Association of Plan Advisors, have staked out positions against the rule.

Industry groups say legal woes that EBSA has faced trying to proffer earlier versions of the fiduciary rule prove that the agency is exceeding its regulatory authority, and is severely limited by ERISA’s confines.

Three Types of Advice

But that’s all smoke and mirrors, said Benjamin Edwards, a business and securities law professor at the University of Las Vegas William S. Boyd School of Law who has signed onto the Save Our Retirement campaign.

Standards for retirement advice can generally be funneled into three different camps. The strictest fiduciary standard requires advisers to put an investor’s interests above anything and everyone else, whereas the lowest suitability standard just requires an adviser to ensure their recommendations are suitable for the consumer.

In the middle is the best-interest standard that ensures advisers can consider what they’ll make in commission as long as they’re equally serving an investor’s best interests.

The SEC’s 2019 Reg BI standard (84 Fed. Reg. 33318) excludes advice levied directly to retirement plans and only applies to corporate securities. This means some of the riskiest alternative assets, such as real estate and cryptocurrency, aren’t subject to the stricter standards.

State best-interest models are best-interest in name only, Edwards said. Most exempt cash contributions from any question of whether advice was conflicted.

“I hear horror stories again and again about people who had all their money inside a 401(k) and they met with an insurance broker or stock broker who made all these promises to them,” Edwards said. “They end up rolling all of their assets into these illiquid, expensive investments. You often see situations where they get locked inside variable annuities and non-traded assets and they can’t even access their money for 10 years.”

Middle Ground Approach

Advocacy organizations such as Save Our Retirement want EBSA to close the loopholes that allow financial advisers to wriggle out of fiduciary status. They want to ensure that all forms and venues apply, including alternative assets and advice that takes place inside a 401(k).

Regulators won’t comment on the rule that’s under White House review, but signs are pointing in the direction of favoring consumer advocates.

The Obama administration’s rule fell victim to a decision from the US Court of Appeals for the Fifth Circuit that EBSA took too broad of an approach by throwing out the 1975 five-part test for determining who qualifies as a retirement plan fiduciary. More recent efforts to reinterpret that test have earned the disapproval of federal district courts in Florida and Texas for using subregulatory means to reshape the market.

DOL watchers expect the department will issue a proposed rule that cuts right down the middle, modifying individual parts of the five-part fiduciary test to ensure any amount of advice used in any way qualifies.

“There is so much abuse in this industry that the DOL has to do something about it,” said Peiffer. “These relationships are billed as relationships of trust, but what we see over and over again is that you can’t always trust the advice you receive.”