Reinstating ‘fiduciary rule’ would hurt underserved communities
As a first-generation American who grew up in a low-income neighborhood, I know the challenges that working families face in building a solid financial future for themselves. So, when the federal government moves to impose rules that could hurt the ability of many Americans to save for their retirement, it is particularly dismaying.
Saving for retirement isn’t easy for everyone, particularly people in underserved communities. For example, Hispanic and Black families typically earn less than others, and their employers are less likely to offer 401(k)s or other retirement savings plans. In fact, nearly two-thirds of Hispanic families and more than half of Black families don’t have any form of retirement savings account.
The uphill road that people in underserved communities face is a big reason why it would be a bad idea for the federal government to reinstate a “fiduciary-only” regulation.
First proposed by the Obama administration’s Labor Department, the regulation worked against commission-based financial professionals, limiting information about and access to annuities, a popular product for low- to middle-income retirement savers. The rule promoted fiduciaries who provide financial and retirement planning services under fee-based compensation arrangements. The regulation was short-lived; a federal court struck it down in 2018.
Had the regulation been allowed to stand, it would have reduced retirement plan choices even more than it did in its brief life. A new regulatory push attempting to sidestep the court’s ruling also would make education and information about lifetime income options less accessible. In effect, the government would be tilting the playing field toward the type of financial planners that typically only the wealthy can afford.
Commission-based financial professionals tend to have low- to middle-income clients — people not always comfortable investing their hard-earned money in the stock market who prefer safer, more stable financial products such as annuities that commission-based professionals offer.
Annuities not only support long-term, tax-deferred savings, but they act like traditional defined benefit pension plans that guarantee lifetime income after you retire. No other financial product can guarantee lifetime income. Under a federal “fiduciary-only” regulation, these products would be virtually off limits to low- and middle-income savers, because the strict requirements would push many financial professionals out of the business. Alternatively, these financial professionals would be forced to become fiduciaries themselves and get compensated in a way that would discourage annuity sales.
Fiduciaries often require account holders to invest at least $100,000. Working families simply don’t have the level of savings needed to meet fiduciary account requirements. One-time fees charged by commission-based financial professionals tend to be more appropriate for working families.
In addition, fiduciaries charge annual fees of 1 percent or more on assets they manage for clients. This also can put them out of reach of budget-conscious retirement planners. But it’s important to recognize that annuities don’t typically count as assets fiduciaries manage. That means they will get less income if they recommend annuities.
The effect of a fiduciary-only approach would be to cut off access to certain financial options and valuable financial products for millions of people. Limiting help to the people who need it most is not what the government says it intends to do. But what good are intentions when the effect of a fiduciary-only approach could be harmful to so many people?
When the Labor Department imposed a fiduciary rule in 2016, the owners of more than 10 million smaller retirement accounts lost access to their financial professionals, and the research my organization has done shows it would happen again.
This in-depth analysis finds that reinstating the rule would reduce the retirement savings of 2.7 million individuals with incomes below $100,000 by $140 billion over 10 years. And it would increase the wealth gap by a staggering 20 percent for Hispanic and Black Americans.
If they truly have the best interest of lower-income people at heart, regulators and politicians might at least consider other ways to “protect” them that do not limit access for working families who want to build secure financial futures.
Eighteen states so far have passed laws and regulations that require financial professionals to act in consumers’ best interest when offering recommendations about annuities. Many more are considering similar actions. And the Securities & Exchange Commission enacted its Regulation Best Interest in 2020, establishing a best-interest standard of conduct for broker-dealers when they make a recommendation to retail customers.
As families across the country struggle to recover from the personal and financial toll of the COVID-19 pandemic, it is concerning that the Department of Labor might again create a regulatory regime with harsh consequences for low- and middle-income families. We should be finding ways to make it easier for working families to create and build wealth — and the evidence shows that a fiduciary-only approach is the exact wrong policy to adopt.
Mario H. Lopez is president of the Hispanic Leadership Fund, a public policy advocacy organization that promotes liberty, opportunity and prosperity for all Americans. Follow him on Twitter @MarioHLopez.
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