Smaller Accounts, Insurance Product Impact Debated at Hearing on Fiduciary Proposal

Witnesses called to testify at a House hearing disputed whether small balances would still be served under the retirement security proposal and whether annuities are more stringently regulated.

Opponents of the Department of Labor’s retirement security proposal testified at a Congressional hearing Thursday that the proposal would dramatically decrease access to advice for smaller account holders, while proponents argued it is a necessary regulation to reduce and mitigate investor abuses.

The U.S. House of Representatives Committee on Education and the Workforce Subcommittee on Health, Education, Labor and Pensions hosted the hearing, in which witnesses testified to the DOL’s retirement security proposal, often called the fiduciary proposal. The changes to regulation, currently under review by the DOL’s Employee Benefits Security Administration, would expand fiduciary duties under the Employee Retirement Income Security Act to a wider range of recommendations and would include rollovers, investment menu design and annuity sales.

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Support for the Proposal

Joseph Peiffer, president of the Public Investors Advocate Bar Association, was called to testify by Democrats on the committee to represent victims of conflicted advice. He testified that “none of the people that I have ever represented realized that their adviser might be held to a standard below that of a doctor or an attorney” and added that some financial “firms advertise like they have the duties of doctors but litigate like they owe more duty than a used car salesman.”

The proposal will ensure retirement savers get the advice “they deserve and that they believe they are already getting,” Peiffer told committee members.

Current regulatory frameworks do not adequately protect retirement savers, Peiffer argued. Regulation Best Interest, a rule enforced by the Securities and Exchange Commission that requires advisers to mitigate conflicts and provide tailored advice, “does not cover advice to plans,” because it only applies to retail investors. He noted that retirement plan sponsors are not considered retail investors regardless of their actual size or financial sophistication, referring to an element of the proposal that would make investment menu design sales, often a one-time transaction, fiduciary advice. According to a comment letter from Morningstar, this part of the proposal could save small businesses up to $55 billion in excessive fees.

Peiffer was also sharply critical of the notion that the proposal would limit access to financial products to lower-income savers. He noted that small accounts “can least afford to have conflicted advice,” and evidence to the contrary comes solely from “industry-funded studies.” He noted that smaller accounts still have access to advice outside the retirement context after SEC’s Reg BI was enacted, despite it being very similar in substance to the DOL’s proposal.

Representative Susan Wild, D-Pennsylvania, concurred, saying that studies showing a large decline in access were “done by trade associations, and that’s what’s being relied upon.”

Lastly, Peiffer argued that the National Association of Insurance Commissioners’ model regulation, which governs annuity sales in 42 states, is inadequate because it does not require insurance agents to “even count compensation as a conflict.” He added that “if compensation isn’t a conflict, then what is it?”

Opposition to the Proposal

Though it is true that the NAIC regulation does exempt compensation from material conflicts of interest, Thomas Roberts, a principal in Groom Law Group, testified that insurance producers “are duty bound to consider the cost” of a product when making a recommendation. He added that “the mere fact that a professional salesperson receives some compensation, in and of itself, is not a conflict with their best interest obligation.”

Supporters of the proposal have long argued that the SEC’s Reg BI and the NAIC model regulation are adequate to address the abuses the DOL is concerned about and that the proposal, at best redundant, at its worst would sharply reduce access to financial products for lower-income savers.

Doug Ommen, the insurance commissioner for Iowa, testified in opposition to the proposal, noting that the NAIC regulation, like Reg BI, prohibits product-specific sales quotas and contests due to the obvious conflicts they can create.

Roberts explained that the proposal would impose a greater regulatory burden, and large segments of the population would either be “unserved altogether or underserved.” Since imposing ERISA duties and obligations would increase costs and limit the compensation advisers could collect, he argued that it would become uneconomical to serve smaller accounts.

Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, testified that since commission-based professionals “get paid only if they complete a transaction, they have a vested interest in completing the transaction. That vested interest doesn’t prevent them from acting in the client’s best interest, but it does mean they can’t realistically meet a sole interest standard.” As a consequence, they would be forced to increase minimum balances for the accounts they service.

The hearing came as the DOL’s EBSA considers potential adjustments to the proposal before moving it forward. The proposal, first made in October 2023, has already gone through a 60-day public comment period, with EBSA taking that feedback into consideration in its final rulemaking.

Tim Hauser, EBSA’s deputy assistant secretary for program operations, said in a recent interview that if adviser present themselves as acting in investors’ best interest, they “should be held to that standard.”

Product & Service Launches – 2/15/24

CAPTRUST joins list of advisories partnering with Pontera on 401(k) management tool; F&G Annuities & Life launches RILA; and iCapital announces tool designed to build stronger portfolios.

CAPTRUST Adds Pontera 401(k) Account Management Tool

CAPTRUST Financial Advisors joined the list of registered investment advisories partnering with Pontera to offer its 401(k) account management services to advisers.

Pontera, which announced partnerships with numerous advisories and financial services firms last year, providers advisers with a secure, client-permissioned platform to manage defined contribution workplace retirement accounts directly, as opposed to using client logins or working ad hoc with them on their savings. Through the partnership, CAPTRUST advisers can look at clients’ fund options, review historical fund performance and set target-fund allocations.

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The partnership “boosts the ability of CAPTRUST financial advisors to deliver comprehensive wealth planning and investment advice across client accounts, helping more retirement savers achieve their long-term income and lifestyle objectives,” according to the announcement. The firms also highlighted a 2023 Gallup poll that found 59% of retirees rely on Social Security as a source of income, signaling the need for improved focus and management of supplemental retirement saving sources.

“CAPTRUST and Pontera are united in the belief that every investor can benefit from receiving personalized wealth management from a trusted and unbiased financial adviser,” said Eddie Welch, CAPTRUST’s head of wealth management. “Through this partnership, Pontera’s technology can help CAPTRUST advisers make their clients’ money work even harder across all of their accounts, including their employer-sponsored retirement savings plans.”

F&G Annuities & Life Launches RILA

F&G Annuities & Life Inc., a provider of insurance solutions for retail annuity and institutional clients, launched its first registered index-linked annuity.

According to the firm, the F&G Confidence Builder addresses retirement challenges, including volatility and inflation, and aims to find a balance between managing risk and long-term growth potential.

The Confidence Builder personalizes investment strategies through customizable crediting periods, diverse crediting methods, a tailored level of downside protection depending on individual preferences and a broad range of index options, according to the announcement.

“F&G’s new RILA is positioned to be a solution that maximizes growth potential, limits downside risk and offers flexibility to adapt to changing market conditions,” said John Currier, president of retail markets at F&G, in a statement.

iCapital Announces Tool Designed to Build Stronger Portfolios

The global fintech platform iCapital announced that its new portfolio construction tool, Architect, is available on iCapital Marketplace.

With the launch, more than 350,000 U.S. financial advisers will have access to the tool, which combines a “user-friendly” interface with analytics to evaluate alternatives and structured investments alongside traditional assets. The offering aims to help advisers “design portfolios that align with their clients’ return objectives and risk profiles,” according to the announcement.

Architect is also designed for advisers to evaluate the impact of adding alternatives—such as private equity, private credit, hedge funds, private real estate funds—and structured investments, to an existing portfolio that includes traditional investments, including equity, fixed income, ETFs and mutual funds.

Advisers can also fold in custom assets and run them through Architect’s models, allowing advisers to evaluate nontraditional client assets.

The launch on iCapital Marketplace follows a six-month beta phase with more than 300 wealth managers, including more than 150 RIA firms. iCapital also announced a partnership with Morningstar last month, and once the integration is completed, more than 170,000 advisers can subscribe to Architect through Morningstar Advisor Workstation.

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