The comment deadline closed yesterday on the Department of Labor’s proposed fiduciary rule, which is intended to protect workers and retirees against conflicted investment advice. This is a huge problem – one that, over time, can easily add up to a difference of tens or even hundreds of thousands of dollars in retirement savings. Under the current rules, some of the financial professionals offering retirement investment advice are legally bound to look out for the best interests of their clients; but other professionals, while perceived as having such a duty and clearly benefiting from the perception, are free to put their own interests first, even if that means saddling their clients with needlessly high fees or inappropriate risks.
In a comment letter submitted today, Americans for Financial Reform urged the Department to follow through on its commitment to close this regulatory loophole. “In our view, these proposals represent a critical and long overdue improvement of investor protections mandated by the Employee Retirement and Income Security Act (ERISA),” the AFR letter stated. “We support these reforms, with the proviso that the protections currently in the rule against possible abuses of exemptions and exclusions must be maintained in full.”
Last week, AFR, CREDO Action, MoveOn,org, and Public Citizen delivered petitions in which more than 230,000 Americans called for a strong fiduciary-duty standard for retirement investment advice across the board.
AFR’s letter to the Department Of Labor on protecting the retirement savers
July 21, 2015
Office of Regulations and Interpretations
Office of Exemption Determinations
Employee Benefits Security Administration
U.S. Department of Labor
200 Constitution Avenue, N.W.
Washington, D.C. 20210
Re: Conflict of Interest Rule, RIN 1210-AB32
Proposed Best Interest Contract Exemption, ZRIN: 1210-ZA25
Dear Sir or Madam:
We are writing on behalf of Americans for Financial Reform (AFR) to comment on the Department of Labor?s (DOL) proposed rules changes to better protect retirement savers from conflicted investment advice.1 In our view, these proposals represent a critical and long overdue improvement of investor protections mandated by the Employee Retirement and Income Security Act (ERISA). We support these reforms, with the proviso that the protections currently in the rule against possible abuses of exemptions and exclusions must be maintained in full.
ERISA contains powerful statutory protections for retirement savers. Section (3)(21) of ERISA designates individuals or entities as fiduciaries to a retirement plan if:
A) They exercise any discretionary authority regarding plan management or assets, or
B) They render investment advice for any fee or other compensation, direct or indirect, regarding any moneys or other properties of the plan.
Fiduciaries are personally liable for any losses caused by a breach of their fiduciary duty.
This statutory framework is straightforward and direct, and is clearly intended to apply the fiduciary duty broadly. The breadth and force of the statutory framework shows that Congress was deeply concerned that retirement investors receive advice that is free of conflicts of interest, provided by fiduciary advisors who are required to put the interests of the investor first.
However, in implementing the statute the Department of Labor in 1975 issued regulations that placed significant additional restrictions on the application of fiduciary duties to providers of investment advice. The 1975 regulation added a five-part test, each prong of which must be satisfied before an individual or entity can be considered as giving „investment advice? that triggers ERISA fiduciary status. The five part test requires that an advisor must (1) render advice, (2) on a regular basis, (3) pursuant to a mutual agreement, (4) that the advice will serve as the primary basis for investment decisions with respect to plan assets, and (5) that the advice is individualized to the particular plan or saver. If even one of these requirements is not met, the fiduciary duty protection is not triggered.
See full letter below.