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Department of Labor fiduciary rule: Major unintended consequences

We believe that the DOL is well-intentioned and they are seeking to fulfill their mission to protect working Americans. However, the DOL’s rule could damage Americans’ ability to utilize IRAs. The DOL has proposed a new rule extending strict ERISA fiduciary requirements to persons and entities that only occasionally offer advice incidental to IRA investments and who are acknowledged not to be the account’s decision-maker. Under the present rule, only persons who are primary advisors are fiduciaries. If enacted, this subtle change threatens to make IRAs unaffordable for most Americans and is likely to deter major financial service firms from opening or maintaining IRAs altogether.

{mosads}It is clear that IRAs work. Since their introduction in 1974, they have grown to represent $4.7 trillion in savings with almost 50 million households participating. As the number of employer-sponsored pension and 401(k) plans has shrunk, the percentage of retirement assets in IRAs has increased 265% since 1995. IRI research shows that today, more than six out of 10 boomers plan to rely on IRAs as a source of income in retirement. Not only are IRAs affordable (most can be maintained for roughly a $20 annual custodial fee), but they also are flexible. An IRA can hold almost any asset from mutual funds to real estate; it is not tied to an employer. And virtually every financial institution — bank, insurance company, broker-dealer and investment advisor — can help a family start one. 

Ostensibly, the DOL wants to expand the ranks of fiduciaries to ensure that financial institutions avoid any potential conflicts of interest which might influence investment recommendations. Admittedly, this sounds appealing. A fiduciary standard is the highest and best the law allows, similar to that imposed on trustees and guardians. The trouble is that fiduciary status triggers a little-known IRS regulation making it nearly impossible for broker-dealers to handle IRAs held by average investors. These firms cannot satisfy the labyrinth of rules unleashed by fiduciary status except by (1) curtailing investment advice or (2) forcing IRAs into “advisory accounts” overseen by a registered investment advisor. Either path is a potential problem. The “no advice” approach puts individuals at risk for poor financial decisions, or more likely, for not having an IRA at all. Advisor accounts are beyond the reach of most middle-income households due to high minimum asset thresholds. A recent study conducted by Oliver Wyman concluded that the cost of owning an IRA will increase between 75% and 195% annually if investors are forced into advisor accounts. And considering that more than one-third of IRA’s are owned by families making less than $75,000, such a surge in costs would virtually make IRAs inaccessible by working class Americans.

All this leads to less retirement savings at a time when more is needed. The Wyman study demonstrates that over the next 20 years, the DOL rule is likely to diminish retirement savings by a staggering $240 billion and roughly 18 million current IRAs will be left out in the cold, without any help managing their savings. A bipartisan chorus of concern is rising — over 100 Members of Congress from both parties have voiced caution. We are not asking that the DOL scrap the entire rule, we simply believe that is it prudent to improve the proposal to protect against these unintended consequences. 

Recently, the DOL has sent signals that they are willing to work toward a compromise over the application of the rule to IRAs and other issues that have been raised in public comments to the rule. We applaud the DOL’s willingness to move toward a workable solution. However, we believe that it is prudent that the DOL provide the opportunity for all stakeholders to review the new language by re-proposing the rule.    

Raising the bar is a laudable goal, but shutting the door on improved retirement security for Americans is too big a price to pay. We believe it is possible to achieve the proper balance between protections for consumers while preserving the availability of retirement tools for all Americans and we intend to continue to work toward that goal.

Cathy Weatherford is the president and CEO of Insured Retirement Institute, a not-for-profit organization that brings together the interests of the insured retirement income industry, financial advisors and consumers.


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