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definition regulations were withdrawn and have been “pending” ever since.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.
