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Retirement Planning > Saving for Retirement

New bill would shift DOL fiduciary oversight

By Elizabeth D. Festa, Arthur D. Postal

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Oversight of the fiduciary standard dealing with the sale of retirement products would be shifted to the Treasury Department under a provision of a law, the Secure Annuities for Employee (SAFE) Retirement Act of 2013, being introduced today in the Senate.

The primary purpose of the bill being introduced by Sen. Orrin Hatch (R-Utah) would create a new public retirement plan for state and local government that would allow insurance companies to provide pension benefits through fixed annuity contracts. It was introduced in advance of a hearing next week on “Pooled Retirement Plans: Closing the Retirement Plan Coverage Gap for Small Businesses” by the U.S. Senate Committe on Health, Education, Labor and Pensions, headed by Sen. Tom Harkin, D-Iowa.

Harkin, chair of the Senate Help Committee, has been working toward the introduction of a bipartisan USA Retirement Funds bill this summer. As for the plan introduced today by Hatch, Harkin’s office stated that it “appreciates the efforts of Sen. Hatch and other members of the Senate to increase the public dialogue around our pension systems, and he plans to look closely at the proposal.”

See also: SEC gets an earful from advisors on fiduciary standard

However, while the proposed legislation is prompting strong support from insurance carriers and agents, consumer advocates are voicing deep concerns. The American Council of Life Insurers and MetLife urged prompt action because the bill would create something insurers have been advocating for more than 10 years: use of annuities to deliver lifetime retirement income to employees through tax-advantaged vehicles.

And the National Association of Insurance and Financial Advisors (NAIFA) were also supportive since it deals with an issue of deep concern to agents: the potential that the Department of Labor (DOL) would come out with a rule imposing a strong fiduciary standard on the sale of investment accounts that its members could not live with.

But Title III of the bill would shift oversight of rules on government sales of investment products under ERISA from the DOL to the Treasury Department. It would also require Treasury to consult with the Securities and Exchange Commission (SEC), which is also considering revisions in its fiduciary standard, in writing its rules.

In a statement on the Senate floor Hatch said his bill “takes action to stop the Department of Labor from unilaterally over-regulating 401(k) plans and IRAs.” He said the bill restores jurisdiction over the fiduciary rules in the Tax Code to the Treasury Department

In addition, the Treasury would be required to consult with the SEC in prescribing rules relating to the professional standard of care owed by brokers and investment advisors to IRA investors. 

“This legislation is consistent with the bipartisan and bicameral effort to convince the Labor Secretary to preserve access to professional investment advice for middle class investors,” Hatch said.

Rob Smith, president of NAIFA, reacted to the bill by saying that, “NAIFA has long urged federal regulators, including both the SEC and DOL, to carefully consider the potential impact on middle-market investors of any fiduciary requirements they may impose on financial advisors,” adding that, “Main Street Americans cannot rely solely on the government or employers to provide for their retirement years or protect their families’ financial security. More than ever, they need advisors, like NAIFA members, to help them plan and implement long-term investment and savings strategies.”

NAIFA is encouraged that the SEC requested information to help conduct a comprehensive cost-benefit analysis to determine whether a fiduciary duty rule is needed and what it might look like.

“We submitted comments to the SEC earlier this month, and urged the Commission to opt against taking any action that would attempt to cure a problem that has not been demonstrated to exist and which could have the unintended effect of reducing the access of middle and lower income market investors to needed financial products, services and advice,“ Smith said.

But Barbara Roper, director of investor protection for the Consumer Federation of America (CFA), opposes putting barriers in the way of DOL imposing a tougher standard.

Related story: How to prepare for a possible fiduciary standard

“The CFA strongly supports allowing the DOL to move forward with strengthened fiduciary rules, and we believe the application of those rules to IRAs is essential to protect the millions of middle income workers who need to make every penny count in their efforts to fund a modest retirement,” she said. “Requiring Treasury to start from scratch on a rule proposal would delay—and could derail entirely—final completion of these badly needed protections for workers and retirees,” she said. 

Hatch is primarily introducing the bill as a means of allowing the private market to help state and local governments deal with the huge funding gap they now face in paying for retirement plans for state and local employees. (These retirement plans are woefully underfunded; the Pew Center on the States estimates they are short more than $850 billion in total for future retirees’ benefits.)

Besides curbing the DOL, the bill aims to streamline current pension programs through a two-pronged approach. This would create state-regulated, market-based, fixed-annuity solutions to the retirement income crisis in the states, with a consumer safety net, along with only minimal involvement by the federal government and no federal taxes.

The bill also creates the so-called Starter 401(k), a retirement savings plan that allows employees to save up to $8,000 per year—more than in an IRA—but does not involve the administrative burden or expense of a traditional 401(k) plan. “The Starter 401(k) is perfect for a small or start-up business that is not in a position to contribute to a plan but wants to help its employees save,” Hatch said

“We applaud Hatch for his leadership on retirement security issues,” Brostoff said. “The ACLI supports enhancements to the current employer sponsored system with the goal of increasing simplification, coverage and facilitating lifetime income options.”

In a letter to Hatch, Peter R. Pastre, a vice president at MetLife, said the bill “highlights the importance of guaranteed income through retirement for millions of Americans.” He said the bill “serves to increase attention to a number of key challenges, including the importance of stable pension benefit funding and the importance of regulatory simplification for plan sponsors, all of which strengthen the foundation of our overall retirement system.” 

However, Birny Birnbaum, executive director of the Center for Economic Justice and an NAIC consumer advocate, demurred.

“Given insurers’ problems with variable annuities, regulators rush to give insurers capital relief. Insurers’ history of misjudging long-term products, turning public pensions over to private insurers looks like fee-harvesting time for insurers.,” Birnbaum said. “Given the wide variation in regulatory resources and capabilities by state, this proposal is even more worrisome.” 

And Neil Nell Minow, corporate governance analyst, shareholder activist and co-founder of the Corporate Library, said that the headline for the Hatch bill introduction should read, “Orrin Hatch Proposal Aims to Give Insurance Companies a Record-Breaking Windfall at the Expense of Public Employees.”

The DOL proposal is expected to be republished for comment this fall.

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