Financial Advisor (July 17, 2020) - Loopholes in the U.S. Department of Labor’s package of fiduciary rules and proposal would expose vulnerable retirement savers to harmful advice, critics of the plan told the House Committee on Education and Labor during a virtual briefing for lawmakers yesterday.
Barbara Roper, director of investor protection at the Consumer Federation of America, told members of the committee that the DOL is engaged in a “multi-prong attack on Americans' retirement security. First the department is making the advice that workers and retirees receive on their retirement investments more conflicted and less trustworthy by weakening the fiduciary standard."
Last month, the DOL issued a final rule reinstating the 1975 fiduciary advice, which “includes gaping loopholes and hasn’t been updated to reflect the changing rolls of financial professionals. This one action ensures that the advice that workers and retirees rely on regarding their retirement investments will not be held to a fiduciary standard."
Of greatest concern, said Roper, is that “many rollover recommendations won’t be held to a fiduciary standard, including the vast majority of recommendations to roll money out of a plan to purchase non-securities investments such as annuities, bitcoin, real estate, gold or other commodities. So precisely where the risks are greatest and the compensation related conflicts are greatest and the sales practice standards are weakest, the ERISA fiduciary standard will not apply."
At the same time, the DOL proposed a broad new prohibited transaction exemption to allow investment advice fiduciaries to escape “extensive [and] potentially toxic conflicts of interest where the fiduciary standard does apply,” Roper said.
The Public Investors Advocate Bar Association (PIABA), whose attorney members represent investors in disputes with the securities industry, said in a factsheet they delivered to the committee that the DOL proposal will allow “pushers of high-risk financial products ... to siphon billions of dollars from the retirement accounts of financially vulnerable workers and retirees.”
The DOL said it issued the revised fiduciary rule to harmonize its policies with the Securities and Exchange Commission’s Regulation Best Interest (Reg BI), which took effect June 30. Like Reg BI, the DOL’s rule requires disclosures of conflicts of interest, but does not require advisors to avoid them altogether or seek the lowest-cost investment options for their clients.
The revised rule will allow financial advisors to receive many payments that would have been restricted or forbidden by the previous DOL rule, including commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue-sharing payments from investment providers or third parties, even within qualified plans and IRAs.
With trillions of dollars locked away in retirement plans, investors who invest in their workplace plans are heavily targeted by advisors for rollovers.
“The proposal does little to protect retirement savers from advice tainted by conflicts. Specifically, the exemption would allow all forms of conflict-laden, transaction-based compensation subject only to conditions modeled on the vague and weak requirements in the Securities and Exchange Commission’s “Regulation Best Interest.” PIABA said.
The fact that the proposal makes the fiduciary standard unenforceable for IRA investors is particularly troubling, the trade group maintained.
“The proposal is explicit in stating that it provides IRA investors with no remedies when they are the victims of harmful advice. Since the DOL has no authority to enforce the fiduciary standard as it applies to IRAs, this would render the standard a mere mirage for millions of retirement savers who will be misled into relying on its supposed protections. When these vulnerable workers and retirees suffer financial harm as a result of conflicted advice unleashed by the rule, the rule would provide them with no recourse to redress that harm,” PIABA said.
The group also faulted the DOL for excluding rollovers to non-securities from a fiduciary rule. Non-securities “are typically sold subject to some of the most toxic compensation conflicts and the weakest sales standards. Instead of looking for ways to protect retirement savers from harm, the DOL gives these transactions a regulatory free pass,” PIABA said.