Individual retirement account holders may find themselves brokerless if the Department of Labor (DOL) adopts a recently proposed rule that would subject investment professionals associated with the accounts to a fiduciary standard.
Testifying before the U.S. House Education and Workforce Committee Kenneth Bentsen, a vice president at the Securities Industry and Financial Markets Association (SIFMA), a securities industry lobbying group, warned that brokerages will drop millions of IRA account owners if the proposed rules are finalized.
The Employee Benefits Security Administration (EBSA)—the agency of the U.S. Department of Labor responsible for administering ERISA—released proposed regulations on Oct. 22, 2010, that would expand the reach of the plan fiduciary rules nearly every advisor who touches the plan, advising either an employer or employee participants of the plan.
According the DOL, the new rules only bring the regulations in line with the definition of Employee Retirement Income Security Act of 1974 (ERISA). DOL regulations significantly narrowed the definition of fiduciary to exclude many advisors serving plans—for instance, when they advise a plan on an infrequent basis.
Under the new rules, a fiduciary is anyone who provides individualized advice or recommendations to a plan with a mutual understanding with plan administrators that advice is being given.
What’s the Cost?
In the proposed regulation, the Department of Labor considered the costs of the rule for service providers but failed to touch on the cost of the regulation for “plans, beneficiaries and IRA holders”—who bear the ultimate cost and benefits of any regulations.
There are around 7 million IRA accounts with less than $25,000 (by SIFMA’s estimation). About 1 million of those accounts have balances under $1,000. Most of these accounts are commission-based.