Phyllis Borzi, Savior Of Tax Deferral

April 12, 2016

by Kerry Pechter

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives. An earlier version of this article originally appeared in the March 17 issue of the Retirement Income Journal. It has been updated since then.

Now that the Department of Labor (DOL) has issued the final version of its much-anticipated “fiduciary rule,” let’s pause to ponder the meaning of what Phyllis Borzi, the assistant secretary for employee benefits security at the DOL, and her legal team have done. For the sake of argument, let’s imagine that she’s trying, perhaps even without knowing it, to save the tax-deferred retirement savings system from itself. That may sound ridiculous, but please hear me out.

The apparent aim and effect of the DOL rule is to expand the perimeter of the regulatory fence around 401(k) plans to include retail rollover IRAs. The DOL evidently wants the investing experience of IRA rollover owners to look and feel like the experience that IRA rollover owners knew when they were participants – an online, low-cost, education-oriented, no-hard-sell group experience.

The government has concluded that the rollover IRA itself is an unintended consequence of the tax code, and that tax-deferred retirement savings shouldn’t have been allowed to slip out of the pension world and into the retail brokerage world in the first place. The fiduciary rule is an attempt to correct that perceived error.

And no wonder the brokerage industry hates it. Such a sudden expansion of the ERISA perimeter naturally seems like a radical asset grab. It’s as if the Interior Department tried to extend the borders of Yellowstone Park to include Wyoming and to establish a statewide ban on antelope hunting.

Although the DOL may merely want to ensure that IRA rollover clients enjoy the same protected environment that qualified plan participants enjoy, the effect will be to take pricing control away from private companies that want to sell products and services to retail IRA owners. Because there’s more than $7 trillion (and growing) in rollover IRAs, any form of direct or de facto price suppression is going to hurt broker-dealers.

One less basis point in annual fees on $7 trillion is $700 million in lost revenue. That’s a lot of antelope.

This is what we’re talking about when we talk about the impact of the DOL rule. No abstract legal principle is at stake. It’s not about ethics per se. It’s not about the “definition” of a fiduciary. It’s not about depriving IRA rollover owners of access to advice.

If anything, it’s about depriving the sellers of retail financial products access to rollover IRA owners. It’s about taking bread off their tables and bonuses away from their Christmases – so that fewer retirees end up broke, on public assistance or spending their final years in Medicaid-funded nursing homes.

Hybrid robo-advice is hot right now, in part because hybrid robo is what participants in qualified plans experience. That’s why the robo companies are cheering on the DOL, and vice-versa. That’s why incumbent 401(k) providers like Vanguard and Schwab are also the best-known robos. That’s why Financial Engines, the so-called granddaddy of today’s robos, is well-positioned to benefit from the DOL trends. Annuities, which have difficulty fitting into much of the 401(k) space, may not fit easily into the DOL’s vision of the rollover IRA space. The rule requires sellers of variable annuities and fixed indexed annuities to pledge to act in the best interests of their clients, “without regard” to their own financial reward.

So what makes Phyllis Borzi the savior of tax deferral?

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Phyllis Borzi, Savior Of Tax Deferral

Tax Deferral