DOL Abandons Its Statutory Mission to Protect Retirement Savers

Labor Department headquarters in Washington. (Photo: Mike Scarcella/ALM)

When the Labor Department unveiled its draft retirement investment advice rule recently, I was saddened but not surprised to see that it meekly capitulates to the financial services industry demand that their conflicted business models continue to be protected from transparency and accountability to the individuals and retirement plans that are their customers.

The department announced that it had designed its proposed rule based on the Securities and Exchange Commission’s Regulation Best Interest (Reg BI).

But in deferring to the weak and ineffective SEC standard, the DOL has abandoned its more than 40-year commitment to retirement savers by setting aside its much stronger statutory mandate of requiring those providing investment advice to plans and individuals for a fee to be held to a strict fiduciary duty of loyalty and prudence.

Only in the topsy-turvy world of alternative facts that currently grips Washington’s policy leadership would a proposed advice rule that substantially weakens the current protections for retirement savers under the Employee Retirement Income Security Act of 1974 be touted as one that puts workers first, as Deputy Labor Secretary Patrick Pizzella argued in a recent ThinkAdvisor column.

When SEC Chairman Jay Clayton announced his intent to tackle the problems associated with investment advice, he defined the problem as “investor confusion” based on the nearly total blurring of the lines between advice given by registered investment advisors who are subject to a fiduciary standard and broker-dealers who were subject to a sales-oriented suitability standard.

What Chairman Clayton failed to recognize is the far larger, deeper and more pernicious problem that is posed by conflicts of interest in organizational compensation structures for investment professionals.

Ironically, the final product that emerged from the SEC not only did not address this endemic problem of conflicted compensation, but also exacerbated investor confusion by allowing brokers to market themselves as working in their clients’ best interest without actually holding them to a clear, fiduciary best-interest standard or ending the harmful incentives that conflict with that standard.

Enter the Labor Department. After nearly a decade making a strong case that the current five-part test for determining fiduciary status was fatally flawed, the department reversed itself and decided that it would simply reinstate that flawed test, much to the satisfaction of the financial services industry that had long ago easily figured out how to avoid fiduciary responsibility under that regulatory regime.

It did so through a final rulemaking that precluded any public notice and comment.

On the same day, Labor proposed an exemption to ERISA’s prohibited transaction provisions, that, among other things, deferred to the SEC’s weak non-fiduciary regulatory structure and broadened ERISA’s exemption from fiduciary status to pension investments and advisors that traffic in investments that are not securities and therefore not subject to the SEC’s rules.