Lawmakers Wrangle Over Labors Definition of Fiduciary in Retirement Plans
While Democrats and Republicans are at each other’s throats over how to raise the federal debt ceiling, they are coming together to resist a proposed Labor Department regulation that would expand the definition of “fiduciary” for retirement plans.
For now, though, it doesn’t look as if that opposition will include a legislative response.
In congressional hearings this week, lawmakers expressed concern over whether an appropriate cost-benefit analysis has been conducted on how the rule would impact retirement savings.
The agency holds that extending the standard would better protect workers and retirees. Opponents contend that it would raise liability costs and force broker-dealers to abandon the individual retirement account market, leaving smaller investors without investment advice.
This week after a House Education and Workforce subcommittee hearing, Phyllis Borzi, assistant secretary of labor and head of the Employee Benefits Security Administration, said that the agency is going to continue to press ahead with its goal of promulgating a final rule by the end of the year.
She also said the agency will provide a cost-benefit analysis when the regulation goes final. Last week, a Securities and Exchange Commission rule on proxy voting was overturned by the District of Columbia Court of Appeals because the court said the agency failed to provide a cost-benefit justification.
For now, Congress will rely on moral suasion to slow down the Labor rule.
“Everybody wants to take the foot off the gas,” said Rep. Phil Roe, R-Tennessee, chairman of the subcommittee. “The end of the year is far too soon.”
But he acknowledged that the ball is in Labor’s court, saying that Congress is pushing back by holding hearings and applying pressure.
“We could do legislation,” Roe said. “I don’t think it’s come to that point.”
A Democrat from the other party and the other side of Capitol Hill echoed that sentiment in an appearance July 27 at a Washington event of the Financial Services Roundtable.
Sen. Kay Hagan, D-North Carolina, a member of the Senate Banking Committee, said she is concerned that the Labor rule would conflict with a fiduciary-duty rule for retail investment advice that the SEC said it will propose sometime this fall.
“You can’t have two different definitions on the SEC and the Department of Labor, and still be able to provide the working people the services they need,” Hagan said.
She said that she will soon meet with Borzi and Secretary of Labor Hilda Solis about the issue. She is not inclined to address it through legislation.
“Let us work it,” she said. “We’ll see what we can do.”
At the July 26 hearing, Borzi said that her agency and the SEC are coordinating their rule-making and that the fiduciary standards will not be in conflict, in part because Labor is addressing retirement law, and the SEC is focusing on securities law.
The topic came up again July 28 at a House Financial Services subcommittee hearing on the insurance industry.
Gary Hughes, executive vice president and general counsel at the American Council of Life Insurers, said that the rule puts the IRA market at risk.
“It’s going to drive up the costs of valuable advice to plan participants and IRA holders,” Hughes said.
In an interview after the hearing, he said that his organization’s member companies may make an administrative challenge to the final regulation.
“There was never any justification for the change to the rule,” Hughes said.
On July 26, Borzi maintained that the 35-year-old retirement law needs to be updated to reflect the seismic changes to retirement savings plans over the past generation. She said that workers and retirees deserved to have advice that is in their best interests.
She also pointed out that the Labor Department rule will still allow broker dealers to earn commissions on securities, mutual funds, insurance products and annuities, and act as a seller without becoming a fiduciary. She said that the broker-dealer community “misunderstood” the proposed rule.
On July 28, the American Society of Pension Professionals and Actuaries put out a statement clarifying that it supports updating the retirement law fiduciary rule as long as IRAs are exempt.
“We commend the DOL for attempting to address the issue; however, we believe individual retirement accounts should not be regulated by the department without an effective means to enforce them,” said Brian Graff, the society’s executive director and chief executive.