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Resurrecting 2016 DOL Fiduciary Rule Would Hurt Low-Income Savers: Study

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What You Need to Know

  • Labor is expected to propose updating the definition of fiduciary under ERISA, which could happen in December.
  • It is widely expected that Labor will move closer to the vacated 2016 fiduciary rule, Mason and Lopez state.
  • Millions of workers lost access to brokerage advice while the rule was in effect, according to the study.

As the Biden Labor Department is expected to propose a change to its fiduciary rule soon, a lawyer and a center-right advocacy group for Latinos warn that resurrecting the rejected 2016 rule would hurt low- and moderate-income savers.

A new study, released by Kent Mason, an attorney with Davis & Harman, a Washington-based law firm that represents big financial companies, and the Hispanic Leadership Fund — which sponsored the study — notes that “it is widely expected that DOL will be moving closer to the 2016 fiduciary rule that the Fifth Circuit Court of Appeals invalidated” in 2018.

Mason and the Hispanic Leadership Fund also question whether Labor can legally resurrect aspects of the rule that the court vacated.

Labor Secretary Marty Walsh said in mid-June that Labor plans to issue a new proposed rulemaking to update the definition of “fiduciary” under the Employee Retirement Income Security Act. That proposal could come by December.

Mario Lopez, president of the Hispanic Leadership Fund, said in a statement that “as working families across the country struggle to recover from the personal and financial toll of the COVID-19 pandemic, the Department of Labor is sending strong signals that it intends to reinstate many aspects of its 2016 fiduciary regulation. However well-intentioned, this was the wrong approach in 2016, and the consequences of repeating this mistake will be even graver this time for low and middle-income families.”

According to the research, reinstating the 2016 Labor fiduciary rule would reduce the accumulated retirement savings of 2.7 million individuals with incomes below $100,000 by approximately $140 billion over 10 years.

Lopez said reinstating the 2016 rule would have “the most adverse effects on Blacks and Hispanics — reducing their projected accumulated IRA savings by approximately 20% over 10 years — contributing to an approximately 20% increase in the wealth gap attributable to IRAs for these individuals.”

The just-released study maintains that it uses data and information “on the actual effects” of the 2016 rule as well as analysis of what is likely to happen if DOL resurrects significant portions of the 2016 rule.

For instance, Harmon and Lopez state that Deloitte studied institutions representing 43% of U.S. financial advisors and 27% of the retirement savings assets in the market.

The study found that, as of the Labor rule’s first applicability date, “53% of study participants reported limiting or eliminating access to brokerage advice for smaller retirement accounts, impacting an estimated 10.2 million accounts and $900 billion in savings.”

Mason and Lopez further state that under the 2016 rule, “any individualized suggestion by a financial professional regarding retirement plan or IRA investments or distributions would trigger fiduciary status.”

The widespread expectation that a new Labor Department rule “will be largely resurrected is based both on informal discussions by DOL officials and on language in the preamble to Prohibited Transaction Exemption 2020-02,” they state. “The preamble set out DOL’s view — not the law — that in the vast majority of cases an individualized suggestion should trigger fiduciary status.”

If Labor “again requires the application of a fiduciary duty standard to virtually all investment assistance, low and middle-income investors will lose significant access to brokerage services — generally, the only source of personalized assistance for them and a model that historically has helped many savers achieve their financial goals, especially those with more modest savings,” Mason and Lopez said.

Lisa Gomez, President Joe Biden’s pick to head the Labor Department’s Employee Benefits Security Administration, told senators on Oct. 7 that “there’s nothing that is more central to ERISA than defining who is a fiduciary.”

During her confirmation hearing before the Senate Health, Education, Labor and Pensions Committee, Gomez — who will be central in helping Labor craft a new fiduciary rule — said that if confirmed, she looks forward to working with the Securities and Exchange Commission as well as with Labor “to be briefed on the efforts of looking at the definition of a fiduciary in different contexts, and taking another look at the conflict of interest rule and how it would apply in different situations.”