The District Court for the Middle District of Florida ruled against the Department of Labor on Monday and struck down their interpretative guidance from April 2021 for Prohibited Transaction Exemption 2020-02, concerning the five-prong test for determining when a financial adviser is a fiduciary in relation to a retirement account.
The DOL was responding to inquiries concerning when a solicitation to rollover plan assets into an individual retirement account was considered on a “regular basis,” one of the five prongs of the fiduciary test. The DOL answered that a “single, discrete instance” could not be on a “regular basis,” but if the solicitation was part of an ongoing relationship or the beginning of an intended future relationship than it would trigger fiduciary duties under ERISA.
The Court agreed with DOL that the guidance was an “interpretative rule” and not a “legislative rule.” But it still struck the rule down because it was not consistent with the text of The Employee Retirement Income Security Act, as assets kept in an IRA are no longer workplace plan assets. Despite the court ruling, legal experts caution retirement plan advisers and plan sponsors from abandoning compliance mechanisms as it relates to this DOL interpretation.
Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, says advisers should still “wait and see how things play out” before making any changes in their compliance procedures. He says that there is a “good likelihood” that the DOL will appeal this decision which could result in a favorable outcome for the DOL.
The DOL views the decision to rollover into an IRA as a “very consequential decision” for retirement savers, and feels an obligation to see that rollover transactions are properly regulated.
Though the legal arguments for overturning the rule are solid and other courts have ruled similarly, there are many variables in play, according to Berkowitz. A higher court could still rule in the DOL’s favor and the DOL might issue a new rule which accounts for the court’s reasoning, but which has similar consequences for advisers.
He adds that if IRA rollovers are not regulated by DOL through ERISA that does not mean they are not regulated at all. The SEC and state-level regulatory agencies still oversee advisers in the context of IRA management.
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Among the five financial behaviors that build wealth, retirement savings is last on the list, according to a report released Wednesday by Hearts & Wallets.
So-called “peak accumulators,” which the Rye, New York-based firm has been tracking for over a decade, generally amass more wealth than households with less financially healthy behaviors.
In a survey of nearly 6,000 households backing the research, Hearts & Wallets found that peak accumulators had an adoption rate of over 50% in every area except retirement savings. Their rates of success were:
66% have insurance needs covered (life, home, care, health);
59% have little or no credit card debt;
54% have some savings in case they lose their job;
51% generally spend less than they make; and
43% have a retirement savings plan(s) and contribute to it/them regularly.
“Part of the issue is consumers balancing multiple saving goals,” says Laura Varas, CEO and founder of Hearts & Wallets. “Often they prioritize other goals that take on more immediacy before the longer-term goal of saving for retirement. These other goals include saving for a home, a car or a child’s education.”
When Hearts & Wallets looks at top financial goals for U.S. households, it find the top three goals at the national level were to build up an emergency fund (48%), take a vacation (42%) and have enough money to be able to work less or spend time as they want when older (39%), according to Varas.
Over the past decade, Americans have made the most progress on “some savings,” with 54% of households setting aside some money, up 11 percentage points from 43% in 2011, according to Hearts & Wallets. But when it comes to tax-deferred workplace or individual retirement savings plans, progress lagged at just a 7% gain over the past decade.
Another part of the results may be due to the fact that “retirement is not seen as a goal for some individuals, who may plan to continue working for as long as possible,” Varas says. “Workplace programs may want to shape messaging around saving to meet goals when older rather than using the word ‘retirement’ to get more participants engaged in these longer-term saving goals.”
Fear-Driven
Even as U.S. households lag on retirement savings, they are putting more savings toward liquid assets such as bank savings, certificates of deposits, and taxable brokerages. Nationally, about one in three households save $5,000 annually, one in five save $10,000 or more annually, and 8% save $20,000 or more annually, according Hearts & Wallets.
The lag in retirement savings may be due to a lack of knowledge by consumers who are juggling a variety of financial needs, from mortgages to college savings to everyday expenses, according to Marthin De Beer, CEO and founder of BrightPlan, a fiduciary financial advice and education tool for employers.
“People are trying to figure out if they have enough to save for retirement within an ecosystem of financial questions,” says De Beer, who is not related to the Hearts & Wallets research but tracks real-time financial health scores from employer clients. “People are asking themselves, ‘How which of my company benefits should I enroll in? How much do I need to save for retirement? How valuable is my equity compensation? How can I pay my bills tomorrow?’ There are a lot of unanswered questions that drive fear and have people fretting about their finances.”
BrightPlan launched a data-driven financial wellness tool earlier this month, says De Beer. “We are living in a “hype cycle” of financial wellness, but with an old model that doesn’t utilize all the data points of a person’s situation to personalize.”
There appears to be no shortage of such personalized financial health tools, with offerings proliferating of late from vendors such as BrightPlan, as well as advisory firms, recordkeepers, and even wealth managers. On Wednesday, financial advisory firm Cambridge launched a new client solution that expands beyond investing to areas such as tax and estate planning, legacy planning, and exit strategies for business owners. Cambridge, which has a network of over 3,800 financial advisors, said its Private Client Solutions will leverage multiple areas of its business to provide a range of services to high-net-worth and ultra-high-net-worth clients.
“Serving high-net-worth clients today requires a truly integrated, firm-wide approach,” Jeff Vivacqua, president of growth and development for Cambridge, said in a statement. “Cambridge is committed to ensuring that every one of our professionals is equipped with the resources, technology, and personal support they need to provide these clients with the ‘white glove’ service experiences they expect and deserve.”
De Beer of BrightPlan says technology can provide a holistic experience for everyday workers as well. When his San Jose-based startup started working with 3,000 plan participants, they generated 100,000 pieces of personalized advice in the first week alone. In the first six months, the company saw employee financial wellness scores—as tracked by BrightPlan—double in the first six months.
“You could never do that in the old model,” De Beer says. “With the right technology we can reach people at scale.”
Workplace Financial Wellness Behavior Up
Overall, workers are doing a better job of meeting the five healthy financial habits as tracked by Hearts & Wallets, which has a dataset with over 120 million data points on saving, investing and advice behaviors for over 70,000 households.
Participants reported that behaviors in workplace financial wellness programs are improving steadily for those in accounts with recordkeepers including Empower, Principal Financial Group, T. Rowe Price, Vanguard, and Voya. Among those providers, Voya had the highest proportion of workplace participants who score 47% at all five peak accumulator behaviors among participants who know their plan providers.
“Workplace wellness programs position participants for successful wealth building,” Amber Katris, Hearts & Wallets subject matter expert and report co-author, said in the report. “Such programs can also satisfy sponsor demand and bolster low recordkeeping margins with additional revenue streams.”
De Beer says providing employee data back to the plan sponsor is key. Although the data is anonymous, the aggregate trends can guide employers in the offerings and benefits they provide their employee base.
“Now at the workforce level we can show the employer how their employee base is doing,” he says. “We can show them where the gaps are, and where the strengths are, and how to adjust in a way that improves their business goals as well as employee outcomes.”
