The Department of Labor’s final rule regarding who is a fiduciary moved one step closer to implementation last week, with the final comment period closing on Sept. 24. Industry experts expect the final regulation will publish in the spring so that it will go into effect before President Barack Obama leaves office in January 2017.
The rule as proposed would force brokers who work with 401(k) or IRA clients to act in the best interest of their clients. Currently, brokers operate under a separate set of rules than registered investment advisers, meaning they can suggest that their clients invest in certain suitable products that may generate commissions.
Obama has argued that these types of practices are eroding people’s retirement savings because most individuals aren’t savvy enough to know they are paying commissions and fees as part of their dealings with brokers.
The proposed fiduciary rule includes a Best Interest Contract Exemption, which would allow companies to continue to set their own compensation practices as long as they commit to putting their client’s best interest first and reveal any conflicts that may prevent them from doing that.
Mary Supovitz, principal at Boulay Donnelly & Supovitz Consulting Group Inc. in Worcester, Mass., and president-elect of the American Retirement Association, said during hearings in August that the best interest contract exemption would put “impediments in the way of advisers who want to work with small businesses.”
The ARA also is concerned with how the fiduciary rule relates to rollovers in connection with employer-sponsored plans.
In a letter last week, John Engler, president of Business Roundtable called on Secretary of Labor Thomas Perez to consider changes to the fiduciary proposal.
“Business Roundtable CEOs believe that Americans deserve to have full confidence that financial advisors are acting in their best interests, but we share the serious concerns raised by members of Congress about the Labor Department’s proposed changes to the legal definition of ‘fiduciary,’” the letter stated.
“The complex and prescriptive rule, as proposed, likely will lead to serious unintended consequences. A rule intended to benefit consumers should not limit their ability to obtain guidance, restrict access to products and services, have disproportionate impact on certain communities or raise the costs of saving for retirement.”
Engler added that the “administration needs to go back to the drawing board on this one: Look at the publicly available data, do a comprehensive cost-benefit analysis and seriously evaluate the availability of less burdensome alternatives.”
The Insured Retirement Institute has worked closely with the Department of Labor to ensure that the Best Interest Contract Exemption doesn’t hinder individuals’ access to lifetime income products such as annuities.
“We are concerned that the proposal will have unintended consequences for savers, including limited access to retirement planning advice and fewer choices for consumers on how to ensure they do not outlive their savings,” said IRI president and CEO Cathy Weatherford. “Our goal has been to be constructively engaged in the process to identify the changes that are needed to prevent these harmful outcomes and provide specific language to achieve a workable rule that can be used in the marketplace.”
Also see: DOL hearings a regulatory tug of war
The rule as proposed removes variable annuities from the scope of Prohibited Transaction Exemption (PTE) 84-24, which for more than 30 years has been used to make lifetime income available to savers through IRAs. IRI believes that variable annuities should be restored to PTE 84-24. At the same time, the BIC exemption also should be changed to ensure it does not impede the availability of lifetime income products to savers.
The IRI also suggested replacing the BIC exemption’s disclosure requirements with those already in place in the DOL, SEC and state insurance rules, “which provide savers with the information they need to make informed investment decisions.”
It also asked that the DOL revise its definition of “best interest” to clarify that financial professionals and firms must always put their clients’ interests first but do not have to completely disregard legitimate business interests.
The BIC exemption should permit the sale of proprietary products or a limited range of products and the use of commission-based compensation and other customary compensation practices, the IRI said in its latest letter to the DOL.
Paula Aven Gladych is a freelance writer based in Denver.
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