Should The Biden Administration Start Over With Fiduciary Advice?
The release of the recent DOL fiduciary proposal is another step in what has been a long, challenge-ridden saga for improving investor protections around retirement advice. The Obama Administration recognized in 2015 that Americans lost $17 billion in fees when they rolled over from 401(k) plans to IRAs. This finding justified the 2016 DOL fiduciary rule, which was finalized after a long process that began in 2010. The rule would have protected investors making rollovers from their DC plans to IRAs by making all IRA advice providers fiduciaries, putting pressure on firms to change compensation structures for advice providers, and incentivizing advice to steer most individuals towards lower cost products, such as index mutual funds. The rule was vacated by the Fifth Circuit in 2018, reinstating the previous five-part investment advice fiduciary test, which did not cover rollovers according to the DOL’s guidance as expressed in the Deseret Letter.
And now if the proposed DOL rule becomes final, IRA advice, including on rollovers, could also sometimes be governed by the investment advice fiduciary standard in the proposed rule, which is similar to the Reg BI standard, though the DOL throws in some ERISA language to this standard while saying it is aligning the standard with Reg BI.
If all of this is not confusing enough, the recent proposal clarifies that the five-part test can apply to rollovers provided that the conditions of the five prongs are met. The most difficult of the five prongs for individuals will be the “regular basis” requirement. I have elsewhere argued for this prong to be dropped or assumed satisfied in the case of IRA rollovers.
The proposed rule comment period closed yesterday, and if the DOL is seeking to finalize ahead of the November elections, it is unlikely to make substantive changes in response to comment. Assuming then that the rule is finalized as-is, what should a future Biden Administration do – start over with the fiduciary rule, incrementally improve the current proposal, or change the whole landscape for advice for US investors?
In light of the three different standards discussed here, the last option is rather tempting, though extremely difficult from a political and practical perspective. US investors face a myriad of regulators and disparate requirements when getting advice on retirement accounts. An investment adviser has to meet different standards than a broker, despite the fact that both are regulated by the SEC. If the account is a retirement account, it is subject to ERISA and DOL regulations. Someone who advises on a rollover might or might not be an ERISA fiduciary but is most likely regulated by the SEC, unless the individual is an insurance agent, in which case the entity is regulated by state law. If we were redesigning the US financial system, we would likely want to throw out the current regime and create a uniform standard for investment advice across all products and accounts, retirement or nonretirement, at the federal level. Such a change is practically and politically highly infeasible.
Instead, a few incremental changes can make a huge difference and are likely far more achievable. One is to amend ERISA to clearly make all IRA advice subject to the same standard – whether on the IRA or on the rollover – regardless of who provides it. Such a standard would create a uniform fiduciary standard applicable to brokers, investment advisers, and other financial professionals, for IRAs, but would not apply to non-IRA accounts. This standard could merge the requirements of the SEC and the DOL, which the proposed rule has already done. The fact that the standards are generally aligned makes it difficult for industry to argue against such a statutory provision as they should already be prepared to comply with it. A statutory change would accomplish clear and consistent regulation and enforcement regardless of the views of any one agency head. Currently, both the SEC and DOL have said little about enforcement of Reg BI and the DOL fiduciary proposal. A statutory change could also give individuals a private right of action under ERISA and the securities laws giving individuals more power over the quality of the advice they receive on their IRAs.
Conflicts abound in financial advice. The only way to minimize the effect of these conflicts on individuals is to require that, at a minimum, all retirement advice is provided under a consistent, strong fiduciary standard. Such a standard blends together Reg BI, RIA, and ERISA, so a fiduciary advising on an IRA must meet all of these standards or face the consequences. That is why clear and strong enforcement is required of both agencies. The Biden Administration would need to put in place agency heads who will use their power to enforce these rules in a way that genuinely protects investors and changes certain fundamental practices that are conflict-ridden and harmful to investors today – at their worst – and confusing and leave investors in the dark about their rights and what fees they are paying – at their best. One strong standard for IRA advice, including rollovers, and strong universal enforcement of this standard is the only way to salvage the quality and integrity of advice for the individual investor.