Department of Labor's Retirement Account Fiduciary Rule Faces Challenge


New Administration Memorandum Calls For Review

Since the passing of the Employee Retirement Income Security Act (ERISA) in 1974, the Department of Labor (DOL) has had authority to protect tax-deferred retirement savings accounts. In April 2016, under the Obama administration, the DOL announced a new fiduciary rule for 401(k) and Individual Retirement Accounts (IRA).

The DOL spent five years refining the details of the Fiduciary Rule, which recognizes the importance of protecting consumers’ retirement accounts. Retirement savings, for a growing number of baby boomers, has shifted away from defined benefit plans into self-directed IRAs and 401(k)s. More than 40 million Americans have over $7 trillion in IRA assets that are not subject to a fiduciary standard under the current ERISA or IRS rules.

Fiduciary Standard vs. Suitability

Since 1940, regulations established by the U.S. Securities and Exchange Commission, have required that Registered Investment Advisors meet a fiduciary standard when advising clients. The fiduciary standard requires them to put their client's interests above their own and to act in their best interest. As a fee-only advisor, River Wealth Advisors adheres to the higher fiduciary standard, when advising clients about investments.

Broker-dealers, who are regulated by the Financial Industry Regulatory Authority (FINRA), had been held to a suitability standard. This lesser level only required that the broker reasonably believed that recommendations were suitable for clients. There was no requirement to disclose conflicts of interest to investors. Unscrupulous brokers could benefit from hidden fees or recommendations of investments with high costs and low returns without any retribution.

An analysis by the White House Council of Economic Advisers found that conflicts of interest by brokers resulted in annual losses of $17 billion per year for U.S. investors.

Opposing Viewpoints

The proposed fiduciary standard was scheduled to be implemented on April 10, 2017. However, since the White House directed the Department of Labor to review and either revise or rescind the rule, the Department has proposed an extension of the implementation schedule. The proposal extends the implementation date to June 9, 2017, giving the DOL more time for their review.

Some financial and insurance industry groups have attempted to quash the rule since it was originally proposed in 2010. Their arguments against the rule include assertions that it will increase regulatory burdens, result in higher litigation costs and make it harder for advisers to serve clients for one-time transactions. The Indexed Annuity Leadership Council (IALC) and the American Council of Life Insurers (ACLI) brought suit in Texas, seeking to vacate the fiduciary rule. The federal judge in the case recently upheld the rule and refused to delay its implementation. Three other court rulings also rejected the industry challenges.

A variety of groups, including AARP, AFL-CIO, Pension Rights Coalition and the Consumer Federation of America, support the fiduciary rule. The Financial Planning Coalition, which represents certified financial planners and fee-only planners, said it was “gratified that the DOL prevailed in this case. We will continue to encourage the Trump Administration and Congress to avoid delay of the rule’s implementation so that the American retirement saver will benefit from investment advice in his or her best interest.”

Potential Impact To Be Reviewed

The Administration’s memo listed three factors for the DOL to consider when reviewing the rule.

1.) Would the rule eliminate consumers’ choice of products
2.) Would it cause disruption in the retirement market to the detriment of consumers
3.) Could it cause an increase in litigation

If there is a positive finding with any one of the three factors, it may be possible that the rule could be rescinded or revised.

The third point is perhaps the biggest concern to those who oppose the new rule. If upheld in its current state, the rule allows individual customers to pursue class action lawsuits against financial advisors. Currently, disputes between customers and firms are handled through individual arbitration. However it may be challenging to support a conclusion of higher litigation costs, since the obstacles to joining a class action suit are formidable.

Given all the shifting scenarios, predicting the potential outcome is nearly impossible. In a perfect world, all financial advisors would adhere to a fiduciary standard and do right by their clients, instead of acting in their own self-interest. Unfortunately, history has shown that industry regulations are needed to curtail unscrupulous behavior.