DOL Fiduciary Plan Could Hurt Workers Changing Jobs: Study

The DOL proposal could lead more workers, particularly lower earners, to cash out their retirement plans by barring them from advice, Quantria Strategies says

The report was commissioned by Davis & Harman on behalf of a coalition of financial services organizations. The report was commissioned by Davis & Harman on behalf of a coalition of financial services organizations.

A regulation the U.S. Department of Labor is considering to expand fiduciary status could reduce retirement savings of some American workers by 20% to 40%, according to a study released Wednesday.

The study's author, policy group Quantria Strategies, came to this conclusion on the basis that workers who leave their jobs would be more likely to cash out their retirement plans if financial professionals are barred from advising them on what to do with the accounts.

DOL is expected to issue reproposed regulations later this year that address the issue of fiduciary liability with respect to retirement savings plans.

These rules may limit the ability of financial services firms to assist workers leaving their jobs with distribution options for their retirement savings assets, according to the Quantas study.

This limitation would arise, the study said, because DOL’s prohibited transaction rules would generally preclude any advice from a financial services firm, even if the advice were in the best interest of the individual, unless the DOL provided comprehensive exemptions from such rules.

The report was commissioned by Davis & Harman LLP on behalf of a coalition of financial services organizations, including banks, insurance companies, brokerage firms and mutual funds, that provide retirement services to American workers.

Quantria said the proposed fiduciary regulation would effectively prohibit many financial professionals from providing workers with education and guidance on the options available to them when they leave their jobs.

Without this guidance, it said, many workers may jeopardize their retirement security by cashing out their retirement savings at this critical point.

“The difference between what Americans are saving for retirement and what they will need to retire comfortably is in the trillions of dollars,” Sen. Jon Tester, D-Mont., the former investment subcommittee chairman, said in a statement. “We need to ensure that all sorts of folks have access to investment advice so they can make informed decisions about their retirement.  Any regulations that could cause employees to cash out their retirement savings early are not in the best interest of American workers.”

Kent Mason, a partner at Davis & Harman in Washington, told ThinkAdvisor that if broker-dealers and call center representatives are fiduciaries, "the DOL rules would prohibit them from giving advice to workers regarding their distribution options. It is not a business decision by the BDs or the reps; it is a legal prohibition."

The legal prohibition, Mason continues, arises under the DOL’s prohibited transaction rules. "Under those rules, a fiduciary is prohibited from giving any advice that could affect how much compensation he or his employer receives."

For example, Mason — whose firm represents the companies that participated in the Oliver Wyman study on IRAs released to the DOL and the SEC last April — adds that "if a BD or rep is associated with a financial institution, which is almost always the case, the financial institution may benefit if the participant rolls the money into an IRA that is maintained by the financial institution or into investments provided by the financial institution. Because of this potential benefit, the BD or rep would be precluded from providing any assistance regarding distribution options."

Most Likely to Be Hurt

Quantria’s report cited a 2011 survey that found that 42% of employees took a cash distribution from their retirement savings at job termination, 29% rolled their retirement savings to another plan or an IRA and 29% left their assets in the employer’s plan.

The cash-out rate varied by account size, the survey found: a 75% cash-out rate for participants with less than $1,000 in their account, and a 10% for participants with at least $100,000 in their account.

Employees cashed out approximately 7% of their total retirement assets when leaving their jobs.

Quantria’s study found that those most likely to cash out their retirement savings were low-wage workers, those with low account balances and workers under 30. High cash-out rates are also an issue for African-Americans and Hispanics, it said.

“Financial illiteracy increases Americans’ risk of bad decisions at what we know to be key ‘choke points’ in the retirement savings process,” Quantria said. “A critical choke point is job-change time.

“The evidence reveals that when individuals — particularly those with lower financial literacy — have a financial professional’s help at job-change time, they are much more likely to do what benefits their long-term financial health: keep their money invested in a retirement savings vehicle rather than cash out and leave nothing for retirement.”  

Quantria said any regulation that limited an individual’s access to investment information when leaving a job could reduce retirement savings by as much as 40% for affected individuals.

The report cited one company that said speaking with a financial representative could make departing employees 3.2 times less likely to cash out their retirement savings.

DOL’s Goal

The proposed rule change would expand the categories of persons who would be deemed to be fiduciaries subject to the Employee Retirement Income Security Act of 1974, according to an analysis by the law firm Paul Hastings.

It said the rule would rewrite and expand the scope of the current 35-year-old regulation that delineates when a person becomes a fiduciary by reason of providing “investment advice” for a fee or other compensation with respect to plan assets.

In proposing the new regulation, DOL noted that the retirement plan industry had changed significantly in the 35 years since the current rule was adopted. The agency said the most significant trend had been the growth of participant-directed defined contribution plans, along with the expectations of plan officials, participants and beneficiaries to receive investment advice that was free from conflicts of interest.

The broadened definition is also intended to improve DOL’s ability to enforce ERISA violations against investment advisors by reducing the amount of time and resources required to establish that an investment advisor was a fiduciary under the current rule.

During the Financial Services Institute’s financial advisor summit last September, Assistant Labor Secretary Phyllis Borzi said that DOL’s goal in proposing the rule change was to hold financial advisors accountable for the guidance they give to customers saving for retirement.

“What I'm talking about is making sure the advice you give is primarily, overwhelmingly and unassailably the best plan for the client,” Borzi said.

In a letter to Secretary of Labor Thomas Perez earlier this year, 30 members of the House of Representatives wrote: “We certainly want to protect plan participants, IRA owners and plan sponsors from unfair and deceptive practices.

“But this should be done in a way that does not restrict access to critical investment assistance.”

---

Check out Did March Mark a Tipping Point in Fiduciary Rulemaking? on ThinkAdvisor.

Page 1 of 3
Single page view Reprints Discuss this story
We welcome your thoughts. Please allow time for your contribution to be approved and posted. Thank you.

Most Recent Videos

Video Library ››