Financial Planning (May 31, 2022) – All investors need and expect financial advice that’s in their best interest. That’s especially true of retirement savers who depend on their investments to live a safe and secure retirement.

But the sad truth is that many advisors are recommending investments that line their own pockets with huge fees and commissions but saddle their clients with low returns and high risks. Those recommendations, heavily influenced by incentives that promote the advisor’s self-interest, are siphoning away billions of dollars in Americans’ hard-earned savings every year. The Department of Labor (DOL) can solve this problem, and last year it announced its intention to do just that with another round of rulemaking. It should move ahead without any further delay, and here’s why.

The fact is that when conflicts are permitted to influence an advisor’s recommendations, investors suffer real harm. Consider just two real world examples.

One retirement investor lost 90% of her retirement funds when her advisor concentrated her account in the stock of one of his firm’s investment banking clients. A group of retirees in Mississippi lost substantial amounts of their hard-earned retirement savings after rolling over their pensions to an advisor who first purchased variable annuities and then replaced the annuities with penny stocks. Conflicted advice impacts retirement investors every day, and the cumulative harm is enormous.

Why does this happen? In 1974, Congress laid down a crystal-clear mandate in the Employee Retirement Income Security Act (ERISA): When it comes to investment advice for retirement accounts, advisors must act as fiduciaries, avoid conflicts and always put their clients’ interests ahead of their own. But for almost half a century, retirement investors have not received the protections Congress intended because of a rule adopted by the DOL in 1975. Unless an advisor was giving advice on a regular basis, and unless there was a mutual understanding that the advice would serve as the primary basis for any investment decision, the advisor was carved out of ERISA.

Long ago, securities brokers figured out that by using fine-print account agreements that disclaimed these two prongs, they would be exempted from the ERISA fiduciary obligations. For their part, insurance brokers understood that giving advice to roll over retirement savings into an annuity would not be advice given on a regular basis, and they, too, would avoid the ERISA fiduciary obligations.

It did not matter that securities and insurance brokers are providing some of the most important investment advice that retirement investors ever receive; by carving themselves out of the five-pronged test, those brokers have been able to evade the high fiduciary obligations Congress intended.

In 2016, the DOL attempted to solve this problem. It replaced the five-part test with a rule that would capture those advisors that Congress clearly intended to under ERISA — anyone giving investment advice in connection with a retirement account for a fee. While the rule permitted certain conflicts, it established protections for investors to ensure their retirement savings would not be drained away because of those conflicts. Unfortunately, following a court challenge and then a change in administration, the rulemaking was overturned.

The DOL issued a new rule late in 2020, but it left huge gaps in the protections that retirement investors sorely need. When the DOL acknowledged as much last year, that sounded alarms among many in the financial services industry. The reason is clear: Advisors make more money when they can give conflicted advice.

While many in the industry argue that the DOL should take a back seat to other regulators, such arguments are unpersuasive. The SEC’s “Regulation Best Interest” and the NAIC’s “Suitability in Annuity Transactions Model Regulation” are not the same as ERISA’s fiduciary standards.

The ERISA fiduciary obligations start from a clear principle: conflicts are prohibited unless they can be managed so that they do not harm investors. When it adopted Reg BI, the SEC was clear that it was not adopting a fiduciary obligation for brokers. As long as the advisor’s interests are at least on a par with the investor’s interests, conflicts are allowed. The NAIC Model Rule is even weaker, allowing conflicts to flourish when a broker gives advice about investing in insurance products.

Perhaps even more importantly, non-ERISA regulations do not capture all retirement advice. The SEC’s Reg BI only applies when a broker is recommending securities. The NAIC Model Rule only applies to insurance brokers, and only in the states where it has been adopted. Neither of these rules apply to those giving advice about commodities, real estate or cryptocurrencies that are not securities, just to name a few of the other types of investments recommended to retirement savers.

The industry often resorts to scare tactics, warning that retirement investors will be unable to get any investment advice if the industry has to adhere to true fiduciary standards. However, the threat that investors will be left in the cold is simply not true. There are many advisors who are willing to do the right thing and place their clients’ interests first. They still manage to earn an excellent living, and the investors get trustworthy advice. And their clients include those in the low and middle-income brackets, those who can least afford to see their hard-earned retirement savings siphoned away. Those most vulnerable investors should not be left to fend for themselves, and they won’t have to under a rule that finally does what Congress intended.

Retirement investors are entitled to the protections of ERISA. When it adopted that law, Congress determined that retirement funds deserved special protections. When workers set aside money to provide for themselves in retirement, they should not have to worry about getting fleeced by those whom they seek out for advice and guidance. It is time for the DOL to regulate those it was always intended to regulate, to close the loopholes and to beef up the protections that retirement investors expect and deserve under the law.