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“mettere un lupo a sorvegliare le pecore”
Translation: “To set a wolf to guard sheep.”
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I listened with interest on October 31, 2023, as our current president outlined his new proposed rules for Retirement plan Investment advisers. [The proposed rule(document ID: EBSA-2023-0014-0001).]
Since regulation of the Fiduciary standard has been an ongoing theme for many years, I felt that it was worthy of a closer look.
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The Executive Summary for EBSA-2023-0014-0001 states: The Department of Labor is proposing a new regulatory definition of an investment advice fiduciary for purposes of Title 1 and Title Il of the Employee Retirement Income Security Act (ERISA). As compared to the existing regulatory definition, which dates to 1975, the proposal better reflects the text and the purposes of the statute and better protects the interests of retirement investors, consistent with the mission of the Department’s Employee Benefits Security Administration to ensure the security of the retirement, health, and other workplace-related benefits of America’s workers and their families.
The Department proposes that a person would be an investment advice fiduciary under Title I and Title II of ERISA if they provide investment advice or make an investment recommendation to a retirement investor (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary); the advice or recommendation is provided “for a fee or other compensation, direct or indirect,” as defined in the proposed rule; and the person makes the recommendation in one of the following contexts:
- The person either directly or indirectly (e.g., through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities, or other investment property for the retirement investor;
- The person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or
- The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.
The proposal is designed to ensure that ERISA’s fiduciary standards uniformly apply to all advice that retirement investors receive concerning the investment of their retirement assets in a way that ensures that retirement investors’ reasonable expectations are honored when receiving advice from financial professionals who hold themselves out as trusted advice providers. The Department’s proposal fills an important gap in those advice relationships where advice is not currently required to be provided in the retirement investors best interest, and the investor may not be aware of that fact.
Together with proposed amendments to administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA published elsewhere in this issue of the Federal Register, the proposal is intended to protect the interest of retirement investors by requiring investment advice providers to head here to stringent conduct standards in mitigating their conflicts of interest, the proposals’ compliance obligations are generally consistent with the best interest obligations set forth in the Securities and Exchange Commission’s (SEC’s) Regulation Best Interest and its Commission Interpretation Regarding Standard of Conduct for Investment Advisers (SEC Investment Adviser Interpretation), each released in 2019.
The department anticipates that the most significant benefits of the proposals will stem from the uniform application of the ERISA fiduciary standard and exemption conditions to investment advice to retirement investors. Under the proposals, advice providers would be subject to a common fiduciary standard that would reduce retirement investor exposure to conflicted advice that erodes investment returns and would be obligated to it here to protective conflict-mitigation requirements. Requiring advice providers to compete under a common fiduciary Standard will be especially beneficial with respect to those transactions that currently are not uniformly covered by fiduciary protections, consistent with ERISA’s high standards, including recommendations to roll over assets from a workplace retirement plan to an IRA (e.g., in those cases in which the advice provider is not subject to Federal securities law, standards, and, as is often the case, does not have an ongoing and pre-existing relationship with the customer); investment recommendations with respect to many commonly purchased, retirement, annuities, such as fixed, indexed annuities; and investment recommendations to plan fiduciaries.
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This new proposal would clarify and redefine the fiduciary standard and outline how the fiduciary standard would be applied when advisors are giving advice to retirement account holders. The document contains a proposed amendment to the regulation defining when a person renders “Investment advice for a fee, or other compensation, direct or indirect. “
This document will again attempt to clarify and define what rules of conduct investment advice fiduciaries must legally follow. I use the term “again” because this document follows the Securities Act of 1934 (which established the Securities and Exchange Commission), the Investment Advisors Act of 1940, the Employee Retirement Income Security Act of 1974, the Dodd-Frank Law of 2010, and the DOL Fiduciary Rule of 2010.
The current proposal marks the fourth time since 2010, that the federal government has attempted to clarify and expand fiduciary standards. Previous proposals since 2010 have been struck down by US appeals courts, or abandoned by the US government.
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It would seem that the US government is working hard to protect the US consumer. Why would I use the title: When the Wolf Guards the Sheep?
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It’s at this point that it’s important to understand that this is the same US government that passed the Secure Act of 2019, and all the previous laws and provisions outlined above.
One of the lesser-known provisions of the Secure Act is that it encouraged employers to include more annuities in 401(k) plans by removing employers’ fear of legal liability if the annuity provider fails to meet its financial obligations. It allows employers to choose any plan, not necessarily the lowest cost or most appropriate plan.
So, the government is now trying to hold financial advisor’s feet to the fire by clarifying and redefining the fiduciary standard to become much more restrictive while at the same time allowing more advisor access and more insurance products in retirement plans.
According to acting labor secretary, Julie Su: “These updates are designed to close current loopholes and gaps in the law, and bring the rule in line with how most people save for retirement in our modern economy. It’s time to make sure that money goes where it belongs, in the pockets of millions of workers and their families. It’s time to make sure working Americans get the peace and security in retirement they deserve.”
In passing this proposal the government feels that it will save millions of dollars taken from American retirement savers by unscrupulous investment advisors. This is the same US government that passed the Secure Act which allowed the wolves to guard the sheep in the first place. The Secure Act expanded employee access to annuities within retirement plans and set the stage for gross manipulation by investment advisors.
So, the current law (Secure Act of 2019) allows unscrupulous financial advisors (the wolves) to guard the sheep (Retirement account holders).
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Will the current proposal actually protect retirement account holders?
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The correct answer is that the proposal would provide needed protection for retirement account holders. (The validity of this answer is questionable as previous proposals have been overturned or abandoned.)
Insurance lobbyists in Washington exert a great deal of pressure and have the potential to modify or torpedo proposals that are not in the best interest of the insurance companies they represent. The fact that the Secure Act expands employers’ ability to provide annuities within retirement plans has been a great financial boon to insurance companies.
Increased fiduciary responsibility would mean that annuity contracts provided to retirement account holders would have to meet fiduciary standards and be in the best interest of retirement account holders instead of meeting the lower “suitability” standard of being a suitable, but not necessarily an appropriate, investment. The bottom line is that it would become much harder for Advisors to recommend annuities under the Fiduciary standard than under the suitability standard under which most advisors now operate.
This higher bar would adversely affect the bottom line of the companies providing annuity contracts. Insurance companies want to protect their bottom-line profits and will oppose any legislation that will limit their profitability. Since 2010, all prior efforts to redefine and strengthen Fiduciary standards have been legally set aside or abandoned by the US government.
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Why is This Important to Retirement Plan Investors?
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This proposal illustrates one of the great American fallacies: “I’m from the Government and I’m here to help!” The Government creates a problem and then enriches our lives by attempting to correct the same problem. (This is much the same as a robber who takes all your clothes at gunpoint and then enriches you by returning your underwear.)
This is important to retirement plan investors because no one is going to care more about your retirement plan than you care. The majority of Investment Advisors are sincere and hard-working professionals. Most advisors will act as an advocate for their clients, but there will always be a conflict between the self-benefit for insurance companies and advisors versus the deemed benefit to retirement plan holders when receiving advisor’s products and services.
Retirement plan participants must become more aware and involved in the decision-making process concerning their retirement plans. Many annuity contracts are irrevocable and once money changes hands it is non-returnable. It is CRITICALLY important that plan participants understand the terms, provisions, and costs when considering any financial advice or decision, especially when that advice includes the purchase of an annuity product.
For additional information please read: THE QUEST FOR THE RIGHT ADVISOR: EFFECTIVE STRATEGIES AMIDST MULTIPLE DESIGNATIONS #1 and THE QUEST FOR THE RIGHT ADVISOR: EFFECTIVE STRATEGIES AMIDST MULTIPLE DESIGNATIONS #2.
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Final Thoughts
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- The Government has a new proposal to close loopholes and clarify the Fiduciary standard.
- All advisors, whether giving one-time advice or ongoing planning, would have to act as Fiduciaries when advising clients.
- Insurance companies are not in favor of more stringent Fiduciary policies as these policies will adversely affect insurance companies’ ability to sell annuities and other insurance products under stricter Fiduciary standards.
- It is incumbent on retirement plan participants to self-educate concerning investment costs, terms, and provisions when considering investments, especially any investment that involves the transfer of irreversible dollars.
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