Perhaps it’s fitting that the country is in the period we’ve
come to know as “March Madness.” As even
casual sports fans know, the term refers to the NCAA men’s and women’s college
basketball tournaments. It’s a time when
basketball junkies are filling in the brackets for their friendly “it’s not
really gambling” office pools, scratching their heads over the prospects of teams
they’ve never heard of, and getting caught up in a fever that is the college
sports equivalent of the Super Bowl.
In the retirement industry we are generating a little March
madness of our own. I’m not aware that
any Las Vegas bookmakers are establishing odds, but the players in this contest
are definitely serious about the outcome.
No one will be cutting down basketball nets, or pulling a “Champions”
T-shirt over their uniform when it’s over.
But without a doubt, one side or the other will see itself as the winner
if it prevails. The contest in our industry is the battle over the Department of Labor’s proposal for defining “fiduciary” in the context of retirement plan accounts and IRAs. In question is: under what circumstances will a financial advisor, investment advisor, or broker, be considered a fiduciary, with all of the responsibilities and the duty of care that entails?
We have seen these same opposing forces arrayed against one another on this stage before. In October of 2010, DOL’s Employee Benefits Security Administration (EBSA) issued proposed fiduciary definition regulations. This guidance expanded the fiduciary definition beyond the so-called “five-part test” that has been in effect for some 40 years. Certain advising relationships that might not have been considered “fiduciary” under the old regulations, now would be.
The regulations applied to advising IRA owners as well as
qualified plan participants, and to situations where participants might be
rolling over assets from employer plans to IRAs. Under much criticism for this expanded
application, EBSA withdrew the proposed regulations in September of 2011,
promising to perform a more robust economic study of the impact of these rules and to review the issues raised by public comments on the original proposed regulations. Some cynically suggested that the decision to
withdraw the controversial proposal and to re-propose it a later date was
motivated by presidential and general election year politics, a time when
regulatory red tape is always in the crosshairs of one party or another.
Fast-forward to today, and the oft-promised (threatened?)
and several-times-postponed reincarnation of EBSA’s fiduciary regulations has now
left that office. The regulations now reside
with the federal Office of Management and Budget (OMB), where such guidance
typically resides for up to 90 days for “fly-specking” before eventual
release.
It seems almost as if we’re still in the midst of an
election campaign, so visible, caustic and politically-charged are the energies
and commentary being poured into support – or opposition – to the anticipated
regulations. The match-to-the-tinder seems
to have been the Obama administration’s release in late February of a report
entitled The Effects of Conflicted
Investment Advice on Retirement Savings.
As is now widely known, the report contends that many retirement savers
suffer substantial financial losses due to advisor conflicts of interest. It is significant that these anticipated
regulations are now widely being referred to as the “conflicted advice”
regulations, a name that unquestionably is more charged than “fiduciary
definition” regulations. “Politically
charged” would not be putting it too strongly.
There have been numerous salvos fired by members of Congress
in the direction of Labor Secretary Thomas Perez, including letters from the
House Committee on Education and the Workforce, and the Senate Health,
Education, Labor and Pensions (HELP) Committee, expressing concern that the
anticipated regulations will lead to advisors abandoning many investors with small
accounts, and that the EBSA regulations may conflict with fiduciary regulations
that the Dodd-Frank Wall Street Reform and Investor Protection Act charged the
Securities and Exchange Commission (SEC) with drafting. These committee letters pointedly ask for
proof that EBSA has attempted to coordinate its regulations with the SEC. A bill, the Retail Investors Protection Act,
has been introduced in the House that would require EBSA to defer issuing
fiduciary regulations until the SEC acts first.
Meanwhile, Secretary Perez has said emphatically that these regulations will be issued.
Not all lawmakers are challenging the administration and
EBSA on the advisability of EBSA going forward with release of its fiduciary
definition regulations. Elizabeth
Warren, widely expected to be in the running for a nomination to the Democratic
Party presidential ticket in 2016, recently used the forum of a Senate Special
Committee on Aging hearing to reinforce the administration’s message that
advisor conflicts of interest are hurting Americans’ retirement preparedness.
Apart from the vigorous sparring among administration
policymakers and Washington lawmakers, there are numerous pro and con analyses
and opinion pieces appearing almost daily in industry and general media. It appears that the all-too-brief calm
between election cycle storms that we’ve come to expect may not be a reality
this time. Instead it’s “game on” for
what could be one of the defining regulatory actions of the Obama
administration – or not!