Should brokers be required to put clients’ interests first? Labor Secretary Thomas Perez told lawmakers Tuesday that the question is “shifting” from whether they should to how to best implement that requirement.
In testimony Tuesday before the Senate HELP Committee’s Employment and Workplace Safety subgroup, the same day the official comment period closed on DOL’s rule to amend the definition of fiduciary on retirement advice, Perez told lawmakers that while DOL has yet to make any “final decisions” on how to amend its fiduciary redraft, any final rule will incorporate changes.
“We are very flexible in how to get this [rulemaking] done,” Perez told members of the subcommittee. “We haven’t made any decisions yet on what to do [regarding amending the redraft] because the comment period is still open. But we’ve gotten some great advice.”
DOL’s 90-day comment period expired Tuesday and will be followed by a series of public hearings the week of Aug. 10. The comment period will reopen on the day of the hearing and remain open until 14 days after the hearing transcript is published — a process DOL anticipates will provide an additional 30 to 45 days of public comment.
Part of what best interest standard means is that companies “have those internal policies” in place, Perez said. “Sometimes sales incentives become perverse. What a best interest standard doesn’t mean is that you have to buy the lowest-cost product; the North Star is the best interest of the customer.”
There’s a “misalignment between the person giving advice and the best interest of the client,” Perez said. “The suitability standard is facilitating this misalignment.”
There has been an “undeniable shift toward the need for a best interest standard,” Perez added.
Comments continued to flood into Labor on Tuesday, both for and against the plan.
The Financial Planning Coalition, comprising the Certified Financial Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors, sent a 35-page comment letter “strongly supporting” DOL’s proposed rule to amend the definition of fiduciary under the Employee Retirement Income Security Act.
“With ever-increasing responsibility for their own retirements and the need to choose from an increasingly complex set of financial products and services, retirement investors more than ever need competent financial advice that is in their best interest,” the Coalition stated. “Yet the current regulatory framework allows advisors’ interests to be misaligned with the interests of retirement investors; it does not require advisors to clearly and openly disclose the standard of conduct under which they operate or their actual or potential conflicts of interest; and it permits market practices under which retirement investors are simply unable to distinguish advisors who provide fiduciary-level services from those who do not.”
The Consumer Federation of America praised DOL’s redraft, stating in its comment letter that “because of loopholes in the definition of fiduciary investment advice under ERISA, broker-dealers, insurance agents and other sales-based ‘advisors’ are able to evade their fiduciary responsibilities to put the interests of their customer first. When they recommend high-cost, risky or otherwise inferior investments because they happen to be highly profitable for the seller, the retirement saver can end up paying a heavy price in the form of tens of thousands of dollars of lost retirement income.” The DOL rule proposal, the consumer group said, “addresses this problem by closing loopholes in the definition of fiduciary investment advice while simultaneously providing relief that enables sales-based advisers to comply with their fiduciary obligations.”
The Insured Retirement Institute, an annuity trade group, criticized DOL’s plan, stating that its “overly broad definition of a fiduciary would deprive retirement savers of access to retirement information and inappropriately limit the availability of advice sources.”
IRI is concerned that the amendments to a prohibited transaction exemption as currently proposed will limit the availability of lifetime income options for retirement savers. In the context of the IRA market, IRI states that “the exemption currently would only apply to fixed annuities. Variable annuities, like fixed annuities, offer guaranteed lifetime income features, which are a primary driver of their use by consumers. To ensure a continued robust market of lifetime income options for consumers, IRI has requested the proposal be revised to make relief under the exemption available to all annuities.”
IRI also complained that the rule’s best interest contract exemption is currently “unworkable” and must be revised to avoid disruption to the availability of annuities. “The BIC exemption as proposed fails to recognize that different products use different fee structures to account for the benefits the product delivers to consumers,” IRI said. BICE “must be revised to account for the benefits products offer consumers, or the rule will skew the market by favoring some products regardless of their overall benefit to consumers.”
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