Public comments closed last month on a proposed DOL rule to redefine the conflict-of-interest standard retirement plan fiduciaries must meet. It’s part of an Obama administration effort to require defined-contribution retirement-plan advisors to act in account holders’ best interests, not just provide “suitable” advice, as the law currently requires.
At issue: Employee Retirement Income Security Act of 1974 (ERISA) provisions that govern how defined-contribution retirement plan assets should be managed. Affected are 401(k) and 403(b) plans that now dominate the employer-sponsored retirement savings market.
That market is now worth $17.4 trillion (including individual retirement accounts, or IRAs), vastly more than the less than half trillion dollars it was worth 41 years ago when the law was written.
But the fiduciary responsibility rules haven’t changed since then. Labor Secretary Thomas E. Perez recently told a Brookings Institute conference, “We’re operating under anachronistic rules that were written when IRA was your elderly uncle and 401k was a road in the rural Midwest.”
The problem: Financial advisors earn commissions and other forms of compensation that are tied to sales of specific products. Sometimes those products are exactly what retirement plan participants need. But sometimes, critics claim, advisors push products that are merely “suitable” according to ERISA, but not the best choice. Reason: They’ll earn higher commissions.
That’s not good enough, Perez said. “You wouldn’t accept a mere suitability standard from your physician,” he said, “No, you want what’s best for you and your family, not just what’s suitable.”
The DOL contends that such conflicts of interest lead, on average, to about 1 percentage point lower annual returns on retirement savings, adding up to $17 billion of losses for Americans every year.
The DOL’s proposed rule, which runs to 34 pages in the Federal Register boils down to this, according to Perez: “If you want to give financial advice, you have to put your client’s best interests first and not your own.”
The DOL has no specific timetable it must meet, but a final rule will probably be issued in 2016.