Wednesday, January 29, 2014

Concern Over EBSA Fiduciary Standard is Still Bipartisan

One of the favorite targets of some lawmakers in Washington, D.C., is federal regulations.  The typical argument is that too many regulations strangle business flexibility and opportunity, and have a depressive effect on our economy and job creation.  A contrary view is that, without federal regulations, fair trade, employee welfare, the environment, public health, and other areas of “public good” would suffer greatly.  We’re not going to get into the middle of this broad debate, there undoubtedly being merit on both sides.  But as always, we will eagerly offer our two cents worth when a regulatory issue clearly affects our industry.

One of these issues is the definition of “fiduciary” as it applies to investment advisors and other professionals who deal with employer sponsored retirement plans and IRAs.  Recently a number of congressional Democrats—who have dubbed themselves the New Democrat Coalition—sent a letter to recently appointed Secretary of Labor Thomas Perez, expressing their “concerns about the department’s proposal to redefine the term “fiduciary” for purposes of … ERISA and … Individual Retirement Accounts and similar arrangements.” 

Mr. Perez is the second Secretary of Labor to receive a such a message from Congress.  In November of 2011, 55 congressional Republicans and 30 Democrats petitioned then-Secretary Hilda Solis to request that her agency—more specifically its Employee Benefits Security Administration (EBSA) arm —narrow the scope of the fiduciary definition regulations that were pending at that time.  As we know, the anticipated fiduciary definition regulations were withdrawn and have been “pending” ever since.

Lawmaker concern then, as now, is not merely that EBSA may be poised to overstep its regulatory bounds, but that it will also damage the ability of many IRA owners to get investment advice to help them grow the assets they will need for a comfortable retirement.  It should not be lost on anyone that the concern has been bipartisan, expressed by both Democrats and Republicans.  That Democrats would break ranks and go on record with their anxiety about the direction of their own president and his appointees, speaks volumes.

IRAs are not governed by ERISA and many feel it can be legitimately argued that EBSA does not have regulatory authority over them.  One might counter-argue that assets that have been accumulated in an employer plan may deserve the same fiduciary considerations when they leave that plan and become IRA assets.  Fair enough.  But that’s not the whole story.  What is concerning is the potential of an ERISA fiduciary standard for IRA to leave many, many IRA savers with fewer investment options than they now have. 

There is risk and cost attached to expertise.  It’s as true in the IRA market as it is of the contractor who builds your home, or the mechanic that replaces the timing belt on your automobile.  Those who do it properly have more training or experience—or both—and there is a cost for this level of expertise.  Simply put, it will likely cost more to work with an advisor who can meet the ERISA fiduciary standard than one who operates on a more general level of investment suitability. 

We have heard comments from numerous advisors stating that they will not be able to serve low-balance or beginning IRA investors, because the fees they would have to charge would undoubtedly seem unreasonable; fees that, with a larger balance against which to amortize them, would seem fair and legitimate.  Some have told us that a client with smaller balances  of say less than $25,000, or $50,000, simply could not be served by them. 

The net effect for low-balance or new IRA savers could be the unavailability of some important types of investments, chiefly securities.  Such investments have historically given savers the most attractive returns in the long run, and thereby could have the greatest potential to assist in achieving retirement security. 

While we recognize the need for advisors to act in the best interest of their clients, the concerns being expressed across a landscape stretching from Wall Street to Pennsylvania Avenue seem legitimate.  Any regulations defining fiduciary for retirement saving purposes have to be practical, sensible, and should not be punishing to an important segment of those who are saving for retirement.