WASHINGTON BUREAU — Members of a House subcommittee today called for the U.S. Labor Department to withdraw a proposed update of the pension plan fiduciary definition.
Lawmakers grilled Phyllis Borzi, head of the Employee Benefits Security Administration (EBSA), at a hearing organized by the Subcommittee on Health, Employment, Labor and Pensions, part of the House Committee on Education and the Workforce.
EBSA and the Labor Department have been trying to draft a new, broader definition of the term “retirement plan fiduciary.”
A fiduciary is an individual or company with a legal obligation to put the customer’s interests first. The Labor Department now uses a multi-part test to decide whether an individual or company has fiduciary responsibility.Critics of the current definition, which has been in place since 1975, say it is too narrow.
Life insurers and retirement services have traded groups say the draft definition released by EBSA in October 2010 is so broad and so vague that plan advisors and service providers could end up assuming fiduciary responsibility without realizing it. In some cases, the difficulty of reconciling automatic fiduciary status with performing plan support activities, such as serving as a broker for a plan, would make performing those activities legally difficult or impossible, the trade groups say
Borzi defended the proposed regulation, arguing that the old definition is outdated.
“Too frequently [it] allows advisors to avoid responsibility for ill-considered recommendations and those involving financial conflicts of interest and self-dealing,” Borzi said. “Current business practices have focused on building a trust relationship with the client. However, under the current rule, advisors are not fiduciaries if they claim that they did not understand that their advice would serve as a primary basis for the investment decision. Likewise, an advisor is not a fiduciary if the advice was given just once instead of on a ‘regular basis.’”
Borzi said many service providers, such as brokers, try to avoid fiduciary status simply by including disclaimers in written agreements with IRA holders explaining that they are not acting as registered investment advisors and that their advice will not constitute a primary basis for the IRA holders’ decisions.
The Labor Department believes the economic assessments it performed provided an economic basis for the proposal, Borzi said.
“I agree, however, that a fuller analysis is called for at this point, and we are undertaking such an analysis now,” Borzi said.
Earlier this month, a 3-judge panel at the U.S. Court of Appeals for the D.C. Circuit struck down a U.S. Securities and Exchange Commission (SEC) rule granting outside investors proxy access rights. The court ruled that the agency had failed to take adequate steps to quantify and analyze the economic impact of the rule.
The appellate court’s emphasis on the importance of impact analysis reverberated at the fiduciary definition hearing. Many lawmakers and witnesses at the hearing suggested that EBSA had done a poor job of analyzing the impact of the proposed fiduciary definition change.
“While we support looking at ways to enhance this important definition, the current proposal is an ill-conceived expansion of the fiduciary standard,” Rep. Phil Roe, R-Tenn., chairman of the subcommittee, said in his opening statement. “Regrettably, the proposal may deny investment opportunities and drive up costs for the individuals it is intended to protect.”
The Labor Department overlooked the possible effects the proposal might have on the fees small business plan sponsors pay and the services those sponsors get, Roe said.
“The department failed to explore how its proposal could affect the IRA market,” Roe added. “One study suggests that some IRA-related fees may increase as much as 195%. That’s an unacceptable amount of money that will never make it into a retirement account.”
When Rep. Rush Holt, D-N.J., was questioning Borzi, he said EBSA had repeatedly failed to provide data to back up allegations that advisor conflicts were causing problems for consumers.
“What is the cost of this perceived problem?” Holt asked. “We must– you must, I think – characterize, describe and quantify the problem that you’re trying to solve.”
It seems to be easy for Borzi to imagine that people will be misled by conflicted advice, but she has not supported that view, Holt said.
For years, the effort to reduce conflicts of interest has seemed to be more about restraining investment corporations than about empowering the plan participants, Holt said.
If Congress is going to upset the business model that has been in place for more than 30 years, it should know why, Holt said.
Kenneth Bentsen Jr., an executive vice president at the Securities Industry and Financial Markets Association, Washington, also talked about what he argued was a lack of economic impact analysis.
SIFMA is demanding that the Labor Department withdraw and rewrite the proposed fiduciary definition.
He testified that the Labor Department had failed to fully consider the effects of the fiduciary definition proposal on small plans and individual retirement accounts (IRAs), the investment choices that small plans and IRAs offer, and large plans’ ability to use swaps, futures contracts and investments in alternative asset classes.
Rep. Robert Andrews, D-N.J., the highest-ranking Democrat on the committee, said members of Congress should support the purpose of the proposed EBSA definition. He talked about the importance of helping 70 million Americans know they are getting conflict-free advice when they are managing their defined contribution retirement plan assets. “They really need to know the advice that the advisor is giving them is based upon their interest and what will be best for their fund,” Andrews said.
But “we all know that there are practical issues here that need to be addressed and resolved,” Andrews said.
The 5-Part Test
Today, the Labor Department classifies a provider of investment advice to a plan as a fiduciary only if they meet all of the following conditions: