“If You Like Your Financial Advisor, Can You Keep Him?”
On January 29, at President Obama’s personal direction, the Labor Department sent a major regulation to the White House for final review. The new regulation would make the Labor Department the primary financial regulator of retirement savings financial advice. You read that correctly—the Labor Department would be the primary Federal regulator of financial advisors to Individual Retirement Accounts (“IRAs”), 401(k)s and similar retirement plans. If that sounds like a big change, it is because it is. And unfortunately, small businesses and individual retirement savers are the ones who will pay the price for this ill-conceived and poorly executed regulatory overreach.
We have seen this movie before. With Obamacare, the government took on an even bigger regulatory role promising to protect workers, reduce costs and improve quality…all while not disturbing your current relationship with your doctor. It did not end well. Federal regulators botched implementing the new rules, health insurance costs for workers are skyrocketing, and many people did have to change doctors.
Putting greater control of retirement savings and financial advice in the hands of Labor Department bureaucrats is not going to end well, and we are all going to suffer for it. That’s about $16 trillion in retirement savings the Labor Department wants to control, telling small plans and individuals what kind of financial advice they can get, and telling advisors how they can be paid and how to act.
It is true the Labor Department has always had a role in regulating the benefits employers offer their workers in the private sector. However, this pending final regulation, which may be published by the end of March, goes well beyond that traditional role, imposing new and expanded fiduciary standards on advisors helping companies offer retirement plans, helping workers make retirement savings decisions, and helping individuals who own IRAs.
The Labor Department proposed the draft rule last year. It was a mess, chock-full of both technical and policy problems. Put simply, it just did not work as written. Unsurprisingly, the Department received tens of thousands of comments, a record-number for a retirement regulation, including letters of concern from hundreds of Members of Congress, including 129 Democrats. Many of these comments raised very complex problems that required careful scrutiny and additional discussion. Undeterred, however, the Labor Department has moved forward to the final rule only a few months after the comment period closed, suggesting only cursory consideration of these issues.
Here are seven reasons you should be worried that the final rule is going to make it harder for you and small business employees to save for retirement:
- We will not know what is in it until we have to live with it—Despite tens of thousands of comments identifying dozens of major and complex problems with the proposed regulation, the Department has refused to reissue the rule for one more round of public review and comment. You could not get away with skipping a final draft in high school English, but going from the first draft to the final paper is exactly what the Labor Department and the White House are doing. This is a recipe for disaster, but it is a consequence of the Administration’s drive to complete the rule this year no matter what.
- The rule discriminates against small businesses and individuals—The proposed rule discriminates against small businesses and individuals, denying them the choices of advisors it permits large businesses in their 401(k)’s. A retirement plan with more than 100 participants essentially retains the choices and options it has today, while a small plan with less than 100 workers, and all IRA owners, can only receive advice under the new rules that limit the types of advice available.
- The rule will increase costs and reduce financial advice choices, particularly for small business plans and IRAs—The proposed rule would change how many advisors, particularly those serving small plans and small account balance IRAs, can charge for their services, change what services they can offer, would increase their legal liabilities, and would require onerous new disclosures. The cost of this increased compliance burden will be passed on to plans and individuals. Advisors and plans have both testified in Congressional hearings that this will cause some small plans and IRA owners to lose access to their advisor.
- The rule could actually prevent advice that is in your best interest—Part of the proposed rule would actually limit the types of investments that advisors could recommend in certain circumstances. For example, it might not be possible for an advisor helping you “roll over” money from a 401(k) to an IRA to recommend a managed account or other investments not on the Labor Department’s “approved” list, regardless of whether that investment is in your best interest.
- The rule conflicts with existing securities laws and financial regulation—The Labor Department’s new rule would apply at the same time as the extensive securities, banking, insurance and other Federal and State financial laws and regulations. Unfortunately, the Labor Department did not coordinate well with these existing regulators, because the proposed rule directly conflicted with some securities rules, and creates new and slightly different parallel standards for others. This creates confusion and chaos in trying to comply with the rules—costs we all pay for.
- The rule makes it harder to offer investment education and to consolidate retirement accounts to prevent “leakage”—Workers and IRA owners need help saving for retirement. The proposed rule would convert many current educational efforts into financial advice subject to all of the new rules and requirements. For example, under the proposal, giving a model asset allocation chart to a worker would become advice if the chart showed which plan investments corresponded to each asset class. As another example, telling a worker to roll their old 401(k) into the new employer’s plan could become fiduciary investment advice. These kinds of educational assistance programs have been in place for nearly 20 years, helping employee understand their workplace plans, and should not be disrupted.
- We need more advice, not less—A few years ago, the Obama Administration issued a DOL economic analysis showing that lack of access to investment advice cost workers more than $100 billion every year in preventable investment mistakes. The rule will make it even harder to provide that advice by increasing costs and regulatory hurdles; even though that same economic analysis showed that regulatory barriers were one of the causes of a lack of access to advice.
Everyone wants to expand access to quality, affordable retirement investment advice. Unfortunately, the proposed regulation would increase costs and reduce access. The U.S. Chamber will examine each of these issues in more detail in a series of blog posts over the next several weeks as the countdown to a final rule continues.
For more information, contact Alice Joe at email@example.com or (202) 463-5340