In a blow to middle-income families across the United States, the Labor Department appears to be moving forward with plans to slap more restrictions on their retirement savings.
A proposed rule currently under discussion would broaden the definition of which investment professionals must be classified as fiduciaries under the 1974 Employee Retirement Income Security Act (ERISA). This misguided proposal stands to fundamentally limit the number of Americans who have access to affordable retirement planning.
This is not the first time Labor has tried to strengthen its grip on retirement investment advisors through regulatory fiat. In 2016, the department issued a similar rule, known as the Fiduciary Rule, aimed at reclassifying the status of nearly all investment professionals and financial institutions working with retirement savers.
The Fiduciary Rule would have effectively eliminated the most affordable savings option used by most Americans – commission-based financial guidance – where they pay per transaction.
If implemented, Americans would have been left with primarily fee-based advisory arrangements, typically where investors pay their financial professionals a percentage of their assets under management, which are often costlier and less accessible. By removing both choice and competition from the market, the lower-income Americans, whom the DOL claimed would benefit from the new rule, stood to be the most harmed.
Even economists at the left-leaning Brookings Institute commented to the Labor Department that fee-based advisory “may seem to take less of the investor’s funds, but that is not usually the case. . . . Regulations that push savers into accounts with (ongoing fees instead of commissions) may not be in their best interests.”
Thankfully, the Fiduciary Rule was vacated in federal court in a split decision, where the court admonished Labor for redefining the term “fiduciary” inconsistent with the text of ERISA, and engaging in an “unreasonable exercise” of administrative power.
Nonetheless, the mere threat of a fiduciary expansion caused investment advisory firms to reduce their investment product offerings preemptively. For example, Deloitte found that 53% of financial firms surveyed limited access to commission-based brokerage for retirement accounts, all in preparation for the rule’s implementation.
These actions – all proactively taken in good faith to comply with Labor’s impending rule change – made affordable savings options less available for low- and middle-income Americans. A recent study from the Hispanic Leadership Fund found that if the Fiduciary Rule had not been eliminated in court, the loss of commission-based services could have reduced the projected accumulated IRA balances of Black and Hispanic Americans by approximately 20% over ten years. Projections of compliance costs nearing $4.7 billion illustrate clearly how less affluent Americans would be priced out of retirement guidance.
In 2019, the Securities and Exchange Commission took a measured approach to create new investment advice regulations without restricting low- and middle-income Americans’ choices. The rule, called “Regulation Best Interest,” required financial professionals to only make recommendations that are in the best interest of their clients, and to mitigate conflicts of interest that could impact their guidance.
Unsurprisingly, the career bureaucrats in President Biden’s Labor Department have signaled that they are launching another regulatory power grab and intend to ramp up efforts to revive the original Fiduciary Rule.
Earlier this month, representatives from the AARP, AFL-CIO, and Public Investors Advocate Bar Association (PIABA) held a briefing on Capitol Hill to “respond to questions” from staffers on the proposed rule. In reality, this meeting was the first step in the hand-in-glove effort between the Biden administration and special interest groups to gin up support for the resurrected rule.
The Labor Department should halt its regulatory crackdown by abstaining from issuing an expanded Fiduciary Rule. Instead, it should let Regulation Best Interest stand, and study its effectiveness in preventing conflict of interest violations.
A new Fiduciary Rule would be a devastating blow to low-income and middle-income Americans seeking affordable and secure retirement options.
Gerard Scimeca is an attorney and chairman of CASE, Consumer Action for a Strong Economy, a free-market consumer advocacy organization.
The new Biden 1040 1.How much did you make? 2. Send it in.
Follow the money. Are financial advisors “donating” to the ruling party in exchange for these regulatory favors boosting their bottom lines? Regulatory capture, perhaps?
The ultimate goal is no private retirement savings at all, especially 401k’s.
Expect continuing, intensifying pressure by Washington on Americans’ retirement savings. Our “representatives” want control of that money. And if they get control, they’ll do to it exactly what they did to the Social Security Trust Fund.
Some years ago, Teresa Ghilarducci of the New School for Social Research testified before Congress about a “reform plan” for retirement funds. Her “plan” was to seize all privately held or controlled retirement funds — pension plans, 401(k)s, IRAs, everything — and transfer them to the Social Security system. In return, Americans would get an increment in their Social Security payments…should we live to collect them. She received a respectful hearing. That’s the sort of thinking that dominates among “reformers” today. Beware.