Retirement Pros Sound Off on DOL’s New Fiduciary Rule

Retirement Pros Sound Off on DOL’s New Fiduciary Rule

November 07, 2023

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Retirement Pros Sound Off on DOL’s New Fiduciary Rule
by Christopher Carosa November 07, 2023

Well, they’ve gone and finally done it. The DOL has finally released the language on its newest fiduciary rule. Now that the dust has settled, industry professionals have had a chance to digest the headlines and offer some immediate analysis on this latest attempt by the DOL to rewrite the Fiduciary Rule.

Harold Evensky, founder of Evensky & Katz in Miami, Florida, and Lubbock, Texas, sees it as “a major step forward in protecting the interest of investors (especially small investors) by expanding fiduciary responsibility to anyone providing investment advice to plan participants.”

Remember, this is now at least the third swing of the fiduciary bat for the DOL in the last seven years. The first, offered late in the Obama administration, was not supported by the Trump administration and was eventually vacated by the courts. Next came the Trump DOL’s volley, but it was dismantled by the Biden administration. And, now, it is Biden’s DOL turn at the plate.

“As an ERISA Attorney and investment adviser, I am deeply appreciative of the DOL’s thoughtful approach to updating the level of protections participants should receive when receiving distribution, rollover, and investment recommendations,” says Matthew Eickman, National Retirement Practice Leader for Qualified Plan Advisors in Omaha, Nebraska. “The preamble and text of the proposed rule reflects careful consideration of the need, recognition of the applicable statutory authority, and the development of a standard that should be reasonable for any investment professional an employer should desire to work with its plan and participants.”

Despite the effort, that doesn’t mean there aren’t any questions.

“Best interest standards should clarify whose best interests,” says Ron Surz, co-host of the Baby Boomer Investing Show and president of Target Date Solutions in San Clemente, California. “In practice, it’s the best interest of plan fiduciaries because they are the clients, but I believe the intent of the standards is to operate in participants’ best interests because it’s their money and their risk. If target date funds were selected in the best interests of participants, they would not be 90% risky at their target date, but that is the common practice. We’ll feel the consequences in the next stock market crash.”

Initial concerns have centered on the proposed change in the traditional fiduciary test.

“It certainly has been difficult to revise the definition of an investment advice fiduciary with respect to retirement plans and IRAs over the last 13 years, as evidenced by prior attempts to revise the rules and court cases,” says Michelle Capezza, Of Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “The newly proposed fiduciary rule released on October 31, 2023 (and proposed amendments to several prohibited transaction exemptions) is another effort to revise these rules, which is intended for the benefit of retirement investors which are akin to a protected investor class. Given the importance of protecting retirement savings, the proposed rule will consider fiduciary investment advice to include rollover advice from 401k plans and recommendations to buy fixed-indexed annuities. In essence, under these rules, the ‘regular basis’ concept of providing advice is from the perspective of the advisor’s regular business of providing investment advice for a fee to employee benefit plans and IRAs as opposed to its relationship with the particular retirement investor. Thus, these rules appear to hold advisors in the retirement industry to high fiduciary standards whenever and wherever they interact with retirement investors and their retirement savings. The debate over these rules will be interesting over the 60-day comment period, and the DOL intends to hold a public hearing in December.”

Specifically, the reframing of the term “regular part” regarding the definition of fiduciary may expose this new rule to vulnerabilities similar to those faced by the Obama Fiduciary Rule.

“I find the proposed definition of ‘fiduciary’ to be curious, particularly in that it does not address the criticism levied by the Fifth Circuit Court of Appeals in the Chamber of Commerce case vacating the 2016 fiduciary rule,” says Eric Gregory, member at Dickinson Wright PLLC in Troy, Michigan. “That court reasoned that the definition of ‘fiduciary’ in ERISA section 3(21) was not ambiguous because Congress intended to codify the ‘common law’ definition of fiduciary status: the parties’ underlying relationship of trust and confidence based on an ongoing relationship. The new proposed rule does not presuppose a regular relationship between an advisor recommending an investment strategy and a plan or participant but instead premises it upon an advisor making recommendations to investors as a ‘regular part’ of the advisor’s business. It is not clear why it is relevant whether a professional engages in advice to others in light of the common law understanding of fiduciary. Therefore, I think the new proposed rule is vulnerable to the same criticisms that ultimately led to the previous rule being vacated. That is, based on the statute, it is unclear that the Department of Labor has the authority to impose this broader fiduciary test.”

This broader definition of fiduciary may impose a potential hardship on a segment of the retirement industry that has been trying hard to gain a foothold in plan infrastructure.

“The biggest impact will be upon independent insurance agents, who will go from having little legal liability when acting in their professional authority to becoming ERISA investment advice fiduciaries upon qualified sales, which holds a substantial level of legal liability,” says Michelle Richter-Gordon, co-founder of Annuity Research & Consulting in New York City. “While an insurance company will perform suitability oversight over a specific transaction, insurers will not be responsible for serving as a co-fiduciary with independent agents, and independent agents will not receive broad support in understanding their new legal responsibilities/standing as the first line in a lawsuit. All other forms of financial professionals will operate under a financial institution’s oversight and deep pockets for litigation. I expect that if this rule stands unchecked, the new price of E&O coverage for independent agents will price many of them out of the profession.”

Ironically, at the same time, the new rule may reduce the number of annuity providers, if Richter-Gordon is correct, it also seems to want to increase the availability of annuities within plans. Is there a hidden agenda behind this latter effort?

“Cynically speaking, this looks more like just another ruse to cover for more government control/overreach,” says Richard Bavetz, investment advisor and federal retirement consultant at Carington Financial in Westlake Village, California. “It’s no secret that almost half of public employees are eligible to retire. The government is clearly trying to slow the flow of retirement money moving away from employer plans and retirement accounts by making it more difficult to transact. This is an attempt to keep pensions and 401k plans from hemorrhaging as baby boomers seek to move their hard-earned retirement dollars to more advantageous arrangements, more aptly suited for distribution.”

Those most experienced are quick to see the chance for significant challenges with this.

“When it comes to decumulation, I believe the new guidance adds new risks to decisions by the plan sponsor to add to their 401k plan either an in-plan guaranteed income provision or an annuity-purchase process,” says J. M. (Jack) Towarnicky, Of Counsel, Koehler Fitzgerald, LLC in Powell, Ohio. “The new, proposed requirements reinforce my recommendation that plan sponsors should consider adding a decumulation (retirement income) default in the form of an in-plan installment payout structure for those participants who elect to commence payout between the ages of 62 and 70. I would communicate/market the default annually for all participants age 50+ and highlight the ease with which the participant could opt out.”

These comments represent only the initial thoughts of those immersed in the business of retirement plans. It remains to be seen what comes out of the 60-day comment period.

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books.