Compliance April 28, 2020

Trade Groups Call on Iowa to Align with Reg BI

At a digital hearing conducted by the Iowa Insurance Division, industry representatives asked the state regulator to grant a safe harbor for broker/dealers that comply with Reg BI.

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Those who testified Tuesday at the Iowa Insurance Division’s hearing on the state’s best interest standard of care for insurance and securities professionals called on Iowa to grant an explicit safe harbor for federally registered broker/dealers (B/Ds) that comply with the U.S. Securities and Exchange Commission (SEC)’s Regulation Best Interest (Reg BI).

Published for the first time last week, the Iowa best interest standard has received mostly positive feedback from the retirement planning industry—especially relative to the feedback given with respect to conflict of interest rules recently put on the books in more progressive states, such as New York. Those in the industry like the fact that the Iowa approach is closely modeled on the one recently adopted by the National Association of Insurance Commissioners (NAIC).

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However, as they have in other states, industry stakeholders are voicing some concern that the Iowa rules contain potential inconsistencies with Reg BI, which takes effect nationally on June 30. As such, industry representatives at the Iowa hearing asked the Iowa Insurance Division to craft its proposal as closely as possible to Reg BI.

“We appreciate the leadership Iowa is showing,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute (IRI). “We believe the end result of that process will enhance consumer protection, particularly as people prepare themselves for retirement. We have long supported a best-interest standard.”

Berkowitz said there is some inconsistency in Iowa’s standard. For example, the preamble includes guidance on selling particular insurance products. The Inured Retirement Institute believes that information should be in the formal text of the rule, Berkowitz said.

“On the securities side, there are distinctions between Reg BI and the Iowa model,” Berkowitz said. “We believe Iowa should offer a safe harbor for broker/dealers in compliance with Reg BI. That would relieve them of conflicting requirements.”

Berkowitz also asked the Iowa regulators “to further align the rule’s verbiage with Reg BI” and to make clear when the compliance date takes effect.

Nancy Lancia, managing director of the Securities Industry and Financial Markets Association (SIFMA), said she “sincerely appreciates Iowa’s attempt to align this proposal with Reg BI.” She noted that SIFMA members are aware that Reg BI “modifies every aspect of broker/dealer conduct.”

“As a result of the regulation, firms are changing business models, eliminating conflicts of interest and investing significant resources to comply with the rule,” she said.

Like Berkowitz who testified before her, Lancia said she “suggests amending the proposal to include a Reg BI safe harbor, meaning compliance with Reg BI means compliance with the Iowa rule.”

Likewise, Dan Barry, director of state and legislative affairs at the Financial Services Institute (FSI), asked the Iowa regulators to harmonize the rule with federal standards.

“I urge the division to align the proposal as closely as possible with Reg BI and include a safe harbor in the rule so that those who comply with Reg BI will not run afoul of the Iowa rule,” he said. “Our members are working diligently to comply with Reg BI. Allow these firms to continue to focus most directly on Reg BI. The rule should reference Reg BI directly to minimize any confusion.”

Barry praised the division for ensuring that its language on the sale of annuities aligns with the NAIC model.

Vincent Ryan, legislative director at the American Council of Life Insurers, also expressed the trade association’s “appreciation for the insurance proposal being closely aligned with the NAIC model.”

Ryan said he “strongly advises Iowa to align the securities proposal with Reg BI as closely as possible. The differences will undercut Reg BI.” And, like those who testified before him, Ryan asked the division to offer “safe harbor for federally registered broker/dealers in compliance with Reg BI.”

The Markets April 28, 2020

Some Comforting Lessons for Retirement Plan Investors

Data from leading retirement plan recordkeepers shows 401(k) and IRA accounts have seen smaller losses than many broad market indices, thanks in no small part to the efforts of plan sponsors and their advisers. Corporate pensions have also fared better than their public counterparts.

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At this stage, reports abound showing the damage done to the equity markets by the coronavirus pandemic.

After a record-breaking bull run, investors at one point in the first quarter saw the S&P 500 touching levels 30% below its February 19 peak. The markets have rebounded some since that time, but they remain depressed and volatile.

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Indeed, according to Fidelity’s internal analysis of first quarter performance, the coronavirus market downturn caused average 401(k), individual retirement account (IRA) and 403(b) balances to drop. The average 401(k) balance was $91,400, down 19% from the record high of $112,300 in Q4 2019, but still higher than the Q1 2010 balance of $71,500 seen in the wake of the Great Recession.

The average IRA balance was $98,900, a 14% decrease from last quarter but also higher than the Q1 2010 balance of $66,200. The average 403(b)/tax exempt account balance was $75,700, down 19% from last quarter but still above the average balance of $50,000 in Q1 2010.

Discussing these figures with PLANADVISER, Katie Taylor, Fidelity vice president for thought leadership, says the numbers are painful to see in one sense, but at the same time they actually underscore the fantastic work being done by retirement plan sponsors and advisers.

“The numbers show that people in the defined contribution (DC) marketplace have access to some very well-designed plans that allow them to diversify and protect their investments,” Taylor suggests. “It is also encouraging that we see very clear evidence that people are sticking with their long-term strategies within retirement plans, in no small part due to the communication and education efforts of plan sponsors and advisers.”

One remarkable fact in the Fidelity reporting from Q1 is that investors actually opened IRAs at record pace, with more than 407,000 new accounts opened at Fidelity alone. And, according to Fidelity’s data, contributions to IRAs among Millennials increased a whopping 64% over Q1 2019.

“It is so encouraging to see that many investors stayed the course and did not make drastic changes to their asset allocations, with some investors increasing contributions to their retirement accounts,” Taylor observes. “However, we know that investors continue to be concerned about how the economic environment and global pandemic may impact their health and financial futures, and we are already seeing the impact of the market downturn on our clients.”

Another bright spot in the markets has been the relative outperformance of investment funds with environmental, social and governance (ESG) mandates, as observed by Nigel Green, the chief executive and founder of deVere Group. Economic and social upheaval, plus the collapse of oil prices, have pushed responsible and impactful investing further into mainstream finance, he says.

“Even before the start of the COVID-19 pandemic, ESG investments often outperformed the market and had lower volatility over the long run,” Green says. “What is perhaps more impressive is that those investments with robust ESG credentials are still typically continuing to outperform throughout the coronavirus-triggered stock market crashes where major indices were extremely volatile, with some plummeting 20%. Clearly, this is going to increasingly attract both retail and institutional investors seeking decent returns in turbulent times.”

Green speculates that the collapse of oil prices, which he says are likely not to rebound to pre-crisis levels in the short term, has also helped drive ESG investments to the top of the performance charts and keep them there.

“This is because ESG funds circumnavigate oil stocks, so their performance will not be adversely impacted by the fall in share prices,” he says. “There is a wider and growing force behind the rise of environmental, social and governance investing. The current situation has acted as a wake-up call in many respects. It underscores that human health is reliant upon healthy ecosystems, that we need to ensure the sustainability of supply chains and that those companies with robust corporate governance and good business practice fare better in difficult times and are ultimately best-positioned for the future.”

On the pension front, there are also some bright spots amid the pain. Of the three institutional segments tracked by the Northern Trust, corporate pension plans subject to the Employee Retirement Income Security Act (ERISA) performed the best, with a reported median return of negative 8.1%. This compares favorably with public funds, which had a median return of negative 12.6%, and foundations/endowments, which produced a negative 11.6% median return in the quarter.

According to Northern Trust analysts, ERISA plans benefited from a large allocation to fixed income securities. U.S. fixed income exposure was 40.4% for the median ERISA plan at the end of the first quarter, a 4% increase from the end of last year. Meanwhile, the median U.S. equity allocation for ERISA plans declined almost 5%, to 23.6% at the end of the first quarter. While U.S. equity exposure remains significant for the Northern Trust-tracked plans, it is down from 33.9% five years prior.

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