Jeopardizing retirement savings

Amid many signs that the economic recovery is languishing, the U.S. Department of Labor (DOL) is stubbornly insisting on a proposed Rule measure that experts say would actually reduce the level of retirement savings in America.

While this 65-page Rule is shrouded in a vague desire to “reform” a well-established set of regulations based on the 35-year-old ERISA statute, the most startling “reform” will be the loss of millions of retirement savings accounts: IRAs and 401(k)s. And worse, most of the remaining accounts would become “do-it yourself investing”, losing access to investment education.
 
At its most basic, the proposed Rule would apply fiduciary standards to IRA and 401(k) providers and employers. This is a noble-sounding goal, but as a practical matter, over 90 percent of IRAs are simply too small to afford investment education in a fiduciary model.

Small balance IRAs most often purchase their stocks and mutual funds from registered broker-dealers, who charge a transparent and fully disclosed commission. A fiduciary standard would prohibit that form of payment, leaving IRA holders to fend for themselves.
 
In the 401(k) world, the Rule would extend fiduciary standards to a large and undefined group of people who may be tangentially involved, but who are not actually “offering advice” in the layman’s definition: co-workers, outside appraisers, accounting personnel, and others on the periphery. Small business owners, fearing private right of action lawsuits that come with ERISA and fiduciary standards, could cancel existing 401(k)s and slow down new starts. The Rule does other damage to the system, but this negative effect on small-balance IRAs and small business 401(k)s is the heart of the debate.
 
Noted research house Oliver Wyman studied this Rule and its outcome on retirement savings. Wyman found that 40 percent of IRAs in the study sample contain less than $10,000 and most are managed through brokerage relationships. Ninety-eight percent of investors in the study sample with $25,000 or less in their IRAs rely on broker relationships. Eliminate broker commissions, and IRA holders will either have no advice, or will have to pay a separate annual fee for advice, far exceeding what they are paying now, and in many cases exceeding the value they are receiving. (To further complicate things, Broker-Dealers are prohibited by another federal agency, the SEC, from charging more for advice than the size of the account warrants.)

Wyman goes on to predict that this Rule would close or convert to “self-managed” 7.2 million IRA accounts, and reduce total retirement savings by $96 billion.

Additionally, a total of 18 million American IRA account holders would be impacted, either by not qualifying for investment education, or their costs for that education would increase anywhere from 75 to 195 percent. And that’s just existing accounts.

The proposed Rule would affect future investors also. The study went on to estimate that 360,000 fewer accounts would be opened in 2011 if the Rule had been in place. Assuming zero population growth and simple projections, after just 10 years, 3.6 million fewer Americans would have retirement savings accounts.

Ironically, the SEC is simultaneously conducting a formal study, mandated by Dodd-Frank, to consider updating the definition of fiduciary standards. A logical conclusion would be that these two agencies should consider this one subject together and propose a coherent, coordinated set of standards.

While the SEC has been authorized by legislation to conduct this study, DOL has acted on its own.

Lawmakers have spoken, clearly and firmly on this issue, urging DOL to reconsider this ill-conceived action. Over 50 members of the House of Representatives and 20 members of the Senate have signed letters objecting to DOL’s actions. In addition, a House subcommittee held a hearing with objections coming from both sides of the aisle. Indeed, while these objections are truly bipartisan, the most vociferous objections have come from the Democratic side of the aisle, particularly from the New Democratic Coalition.

DOL should listen to Congress, to the SEC, to consumer groups, to practicing financial advisors, and to those who want to retire with dignity. Withdraw this ill-considered rule, then work with all interested parties to develop rules that would actually increase retirement savings, rather than jeopardize it, while protecting plan participants and IRA holders.
 
Steve Bartlett is President and CEO of the Financial Services Roundtable.

 

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