The conflict centers on who will be asked to follow the fiduciary standard—and the Department of Labor (DOL) has not even released its re-proposal for the regulation.
“Firms recommend inappropriate rollovers to 401(k) participants to collect fees for managing the assets,” the memo said, among other statements about the complex array of investment products and services confronting American workers.
The newly launched SaveOurRetirement website has a self-stated mission of educating workers and retirees on “the retirement advice loophole.” The group of national public interest organizations behind the site wants to mobilize public support to close this loophole, which they say can “drain away thousands of dollars of hard-earned savings from a single retirement account.”
One glaring issue for advisers is a page on the site contending that a loophole dating back to the 1970s allows “Wall Street banks, brokers, mutual funds, and insurance agents with major conflicts of interest” to provide investment advice that puts their own interests ahead of their clients’ interests. It describes the loophole as one that affects millions of unwitting Americans. “Over time, the losses can be devastating, just as a colony of termites quietly eats away an entire house.”
The organizations that created the site are AARP; the American Federation of State, County, and Municipal Employees (AFSCME); American Federation of Labor and Congress of Industrial Organizations (AFL-CIO); Americans for Financial Reform; Better Markets; the Consumer Federation of America; and the Pension Rights Center.
Jim Lardner, communications director of Americans for Financial Reform, says the website is not implying that all advisers are mercenary or evil, but that some consumer protections need to be considered. “There is evidence from multiple sources that collectively American workers and retirees lose out on a lot of retirement security because they follow advice that turns out not to have been the safest and best for them,” Lardner tells PLANADVISER.
But some advisers are offended by the overall tone of the site. “I have a big issue with describing advisers and providers as termites,” says Steven Dimitriou, managing partner of Mayflower Advisors and president of the National Association of Plan Advisors (NAPA).
“It is a gross mischaracterization that is reckless, sensationalist and part of a strategy to characterize this as a Wall Street versus Main Street issue, which it most certainly is not,” Dimitriou tells PLANADVISER. “Every NAPA member I know puts participant interests ahead of their own.”
Bradford Campbell, counsel at Drinker Biddle & Reath, agrees that the conflict has taken on a political tone. “In the last few months, the issue went from a financial services community fight to something more politicized,” he tells PLANADVISER. This is unfortunate, Campbell says. “At the end of the day, the goal is to get better retirement savings for workers.”
The way the argument is currently unspooling obscures some of the real facts, Campbell said, most importantly that most participants in retirement plans get no advice at all. Where is the middle ground? he asks. “That’s the biggest problem,” he says, pointing out that the DOL’s own economic analysis from 2011 estimates the annual costs to participants making poor investment decisions on their own at $100 billion.
In its report, the DOL said it believes that many participants make costly investment mistakes and therefore could benefit from receiving and following good advice.
But Brian Hamburger, founder, president and chief executive officer of MarketCounsel, feels the fiduciary re-proposal may well cause more confusion among investors who are already unclear on the differences between broker/dealers and investment advisers. “At the same time, it will likely give retirement plan trustees a somewhat false sense of security that their financial advisers are acting in a fiduciary capacity when, in fact, they may be subject to a watered-down version of that standard,” Hamburger says. “And anything less than a fiduciary standard is simply not the fiduciary standard.”
While the White House memo is internal and does not yet represent publicly stated policy, it might seem unfair to discuss it, but it’s been widely reprinted and talked about, and many of the positions it takes seem to be mirrored in the SaveOurRetirement site.
Financial professionals must have a legal obligation to put the interests of their customers first when they offer retirement advice, according to David Certner, AARP’s legislative policy director. “The reference to termites is to suggest that small, less noticeable losses over time can be as devastating in the long run as one large loss in time,” he tells PLANADVISER. “In either case, retirement security can be put at great risk.”
Campbell calls the data cited in the White House memo entirely one-sided and says it ignores the reality that there is a tremendous cost that comes from participants getting no advice at all.
Another thorn is the prohibited transactions that could result from a strengthened fiduciary rule. Dimitriou says NAPA’s primary issue is that as originally written, the fiduciary redefinition would in fact “hurt those they are trying to protect by creating a prohibited transaction if an adviser or provider works with the participant on a rollover or distribution.”
Dimitriou points out that the plan adviser and provider is often the only investment professional the participant knows. “This rule would force [participants] to work with outsiders who are not even required to disclose the fees within the plan for comparative purposes,” he says. “The rules would actually inhibit fair competition.”
According to Campbell, prohibited transaction rules prevent most participants from getting any type of advice, because the advisers are “conflicted” out of providing it. “The reality is, you have a predecessor in ERISA [the Employee Retirement Income Security Act] that makes it difficult for participants to get advice,” he says.
One solution could be creating a new list of exemptions for prohibited transactions. Campbell says regulations could outline specific procedures for doing rollovers and giving advice in ways that protect workers’ interests. At the same time, the procedures would protect their need for advice and give advisers a viable way of delivering advice.Doing the Right Thing
Another way of categorizing the conflict between the two sides, Campbell says, is making “the perfect” the enemy of “the good.” In other words, he explains, some aspects of the fiduciary standard make it much more difficult to do the right thing. “Because [the adviser has] been vetted by the plan, you may not be able to do this work,” he says. “It doesn’t seem like the right outcome. It’s bizarre. ERISA is hyper-protective, and the prohibited transaction rules are extraordinarily broad. We’re so concerned about people taking advice that we make it difficult to do some routine things that are very important.”
“We should be able to mitigate conflict enough to provide real, valuable services,” Campbell says. “If we take the view these conflicts can’t be mitigated—that they must be eliminated altogether—it results in the systems we have now. No advice at all for participants.”
Eric Droblyen, president and chief operating officer of Employee Fiduciary, a 401(k) plan provider in the small and midsize market, says some in the industry may be interpreting the website as taking a default position that advisers are bad and are only going to take from the system, and take from participants.“I think that is a gross mischaracterization,” Droblyen says “Wall Street banks, brokers, mutual funds, and insurance agents are mentioned in the website, while investment advisers are not. I think that’s an important point. Investment advisers are already fiduciaries. If you subject all financial advisers to the fiduciary rule, you’re not necessarily going to increase costs. Investment advisers prove that point today.”
The notion that financial advisers provide no value is ludicrous on its face, Campbell says, and most people, if they are honest, will say they have no real understanding of dollar-cost averaging, or the value of diversification or how to manage 401(k) assets. “People make tremendously costly mistakes without advice,” he says “Is it true that there are people who take advantage? Of course. The question is, is that regulatory structure there to actually facilitate advice, or to prevent advice from being provided?”