Benefits experts debate long-term impact of fiduciary rules on employers

The much-anticipated rule that provides a new definition of who is a fiduciary was released by the Department of Labor this week to much fanfare. And while most people agree there won’t be much impact on plan sponsors, there are passionate groups on both sides of the aisle fighting for or against this new proposal.

The goal of the proposal is to protect individuals from conflicts of interest in the retirement investment marketplace. Under the proposal, retirement advisers will be required to put a client’s best interests before their own profits. Those who wish to receive payments from companies selling products they recommend and forms of compensation that create conflicts of interest will need to rely on one of several prohibited transaction exemptions, according to the DOL.

Also see: Proposed DOL fiduciary rules positive for plan sponsors

"This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest," said Secretary of Labor Thomas Perez. "As commonsense as this may be, laws to protect consumers and ensure that financial advisers are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisers can be paid in various ways, as long as they are willing to put their customers' best interest first."

A White House Council of Economic Advisers analysis found that these conflicts of interest cause annual losses for investors of about $17 billion per year.

A similar fiduciary proposal was submitted by the DOL in 2010. It eventually was withdrawn for additional consideration in 2012. This year, the Obama administration made it a top priority, submitting its proposal to the Office of Management and Budget for approval.

“When the president announces that a proposed regulation has gone to the OMB it is clearly a priority for the administration,” said Eric Droblyen, president and COO of Employee Fiduciary, LLC in St. Petersburg, Fla. “I have to believe the DOL has learned a lesson in listening to the industry. The sky is falling. The sky is falling.”

He pointed out that the DOL listened to industry when it finalized its fee disclosure rules as well “and gave providers all kinds of discretion and they didn’t do the job. Fool me once shame on you, fool me twice shame on me.”

Also see: DOL fiduciary rule falls flat

Organizations like the Financial Services Institute, The National Association of Plan Advisors and the Securities Industry and Financial Markets Association rail against the proposal because they feel it will make it harder for many people to save for retirement, while others are glad the DOL is working toward making a more even playing field for registered investment advisers and brokers.

“IRA owners are already protected by robust federal and state rules governing the retirement market,” said Dale Brown, president and CEO of the Financial Services Institute. “We are currently studying the rule and will comment about the specifics once we have given it a thorough review and fully understand the impact on our members and small and mid-size investors.”

Droblyen believes what was released this week was “a bit watered down. They are still permitting commissions as long as certain disclosure rules are met and I’m just not a fan of that model. I like having that regulatory baseline versus letting them disclose any conflicts of interest.”

Also see: Tougher rules face retirement advisers under long-awaited fiduciary standard

Droblyen used the Department of Labor’s 403(b)2 fee disclosure rules as an example of how the industry can get by with a lot when given free rein to make the disclosures in any manner they see fit.

“What consumers ended up with was disclosures that were 50 pages long with dense language. So they will comply with the regulations but they won’t comply with the spirit, which is designed to give consumers the information,” he said.

“We feel like this is the right thing to do,” Droblyen said. “I think regardless of the outcome of this it is highlighting an important issue: There are differences. Not all financial advisers are created equal.”

The National Association of Plan Advisors believes there will be a high cost to compliance with the new fiduciary rules.

“While initial concerns about preserving the ability for 401(k) participants to work with the advisor of their choice on rollovers appear to be addressed in the new proposal, the new compliance regimen looks to be significant, adding cost and complexity to the process,” the organization said in a press release.

“Requiring so many layers of duplicative disclosures could be counter-productive—and cost-prohibitive to offering this critical level of support to 401(k) participants at a crucial point in their retirement planning,” said Brian Graff, executive director of NAPA.

He added that he believes the Department of Labor worked diligently to try and balance concerns about protecting the interests of consumers and the ability for those consumers to work with advisers of their choosing, but he remains concerned that the “compliance costs may outweigh the benefits.”

Also see: Watering down the fiduciary standard?

Joe Urwitz, a partner in the Boston office of McDermott Will & Emergy LLP, said he isn’t really sure how much of a difference this proposal will have on plan sponsors but said he thought it was interesting that appraisers who do valuations on Employee Stock Ownership Plans would be exempt from the fiduciary rules.

He added that another possible impact on plan sponsors would be if their retirement plan has a provision in it that says employees can have an individual adviser through the plan.

“In that situation, if you are an individual plan participant getting advice from an adviser, the way the regulation is structured, the adviser will be a fiduciary with respect to you,” Urwitz said. “That is interesting because normally for a plan sponsor you think about fiduciary duties running to the plan and doing what is in the best interest of the plan and plan participants but the idea of having fiduciary duties running to individual plan participants is somewhat new.”

The DOL also followed recommendations that it not automatically assign fiduciary status to investment advisers under the Advisers Act, but instead follow an entirely functional approach to fiduciary status.

“It seems to us that all retirement savers, whether 401(k) or IRA should be subject to the same protections,” said Craig Howell, vice president for business development at Ubiquity Retirement & Savings in San Francisco. “This seems to set the wheels in motion in the right direction. From that standpoint it is a good thing. Secondly, just conceptually it is hard to argue that advice in a client’s best interest is a bad thing.”

Also see: Following fiduciary rule, more adviser disclosure regs to come

To the naysayers who believe adjusting compensation models wouldn’t allow brokers to serve lower balanced accounts, Howell responds that the proposal still allows brokers to receive commissions and other fees, they just have to be very honest about those things upfront.

Others claim the cost of changing their business model will be exorbitant.

“I recognize there will be some unintended consequences, but we’ll find them and the market will respond,” Howell said. “This is definitely a step in the right direction from my point of view.”

The U.S. Chamber of Commerce expressed concern over the re-proposal.

“We are concerned that this rule will ultimately limit investors’ ability to seek financial planning services while also restricting access and choice,” said David Hirschmann, president and CEO of the Chamber’s Center for Capital Markets Competitiveness. “Investors want and need advice and if this rule makes it harder for them to seek guidance then that is a problem.”