Biden Fiduciary Rule Redo Has Gone to White House for Review (1)

The White House is reviewing a US Labor Department regulation that would redefine the kinds of financial advice subject to strict fiduciary standards under workplace retirement plan laws.

The highly anticipated new proposed rule (RIN 1210-AC02) went to the Office of Information and Regulatory Affairs late Friday, signaling that the DOL’s Employee Benefits Security Administration is preparing to issue it.

Regulations governing financial advice have the potential to upend retirement markets by limiting the kinds of investment products financial advisers and broker-dealers can sell. Though the proposed fiduciary rule’s text will not be public until after OIRA review, the Biden administration is expected to use it to hone in on financial professionals who help their clients roll over money from a workplace retirement plan into an annuity or IRA.

Attempts to cast a wider definition for fiduciary investment advice date back to the early days of the Obama administration and involve some of the most controversial issues on Wall Street. Retirement plan fiduciaries are required to act exclusively in the interest of plan participants, prohibiting brokers and dealers who work with 401(k) participants from earning commissions on their trades.

Regulators have insisted that a fiduciary standard is the best way to protect retirement plan participants from falling victim to conflicting interests, but a nearly united coalition of interest groups representing retirement plan sponsors and financial professionals insist that the department threatens to undermine boutique, specialized investment firms and cause the cost of retail investment advice to skyrocket.

“By pushing forward with this proposal, DOL is choosing a path that we know will harm the consumers they seek to help when they can and should instead allow the current rules to work without depriving millions of retirement savers of access to their choice of financial professionals and products,” Insured Retirement Institute President and CEO Wayne Chopus said in a statement after OIRA received the proposed rule.

The Labor Department didn’t immediately respond to a request for comment on the growing body of criticism or a timeline for the proposal’s release to the public.

Embattled Rule

The Obama administration’s fiduciary rule rewrite was overturned by the US Court of Appeals for the Fifth Circuit in 2018.

EBSA’s latest attempt to recast a legal exemption for fiduciary investment advice (85 Fed. Reg. 82798) has met federal district court hurdles in Florida and Texas.

In the absence of new rulemaking, the US Securities and Exchange Commission substantially enhanced the baseline standard for investment advice many registered retail broker-dealers use to recommend IRA rollovers, and dozens of state insurance regulators have adopted a similar standard for the sale of retail annuities.

Combined, those efforts have “greatly enhanced the standards financial professionals must follow,” said Susan Neely, president and CEO of the American Council of Life Insurers. Nearly 70% of Americans are covered by a standard of care that was crafted in the image of the SEC’s best-interest rule when they discuss options to transfer all or a portion of their savings into a guaranteed lifetime income product such as an annuity, Neely said.

“At a time when low and middle-income retirement savers need access to financial guidance and options for lifetime income, it would be a mistake to resurrect a fiduciary-only regulation that denies them both,” she said.

Meanwhile, timing is critical for the department’s revised fiduciary rule approach. The rulemaking process requires at least two White House reviews and a notice-and-comment process that could take months. The longer it takes, the more likely it could run up against a post-election congressional review or, worse, the chopping block under a new Republican administration in 2025.

Fight Brewing

A fiduciary-only standard curtails consumer choices, critics say. Advisers that charge a commission on the products they sell would be forced to comply with expensive and burdensome DOL prohibited transaction exemptions under an expanded fiduciary rule, passing those higher costs off onto their customers and ultimately forcing industry consolidation.

Organizations representing plan sponsors and their service providers have been lobbying on Capitol Hill in anticipation of the rule’s release. Late last month, top Republicans on the Senate Health, Education, Labor and Pensions Committee and House Education and the Workforce Committee urged Acting Labor Secretary Julie Su to halt the fiduciary rulemaking project.

“No American deserves to have his or her financial security threatened for political gain,” wrote Sen. Bill Cassidy, (R-La.) and Rep. Virginia Foxx (R-N.C.) in an open letter to Su.

Groups that first joined forces to oppose the department’s 2016 rule under the Obama administration “won’t back down,” said National Association of Insurance and Financial Advisors CEO Kevin Mayeux.

“Should Labor move forward with this proposal to layer additional regulations on top of the current robust protections, the department will inevitably introduce a new slate of unintended consequences for middle- and lower-income workers who will be effectively barred from receiving quality financial care concerning retirement,” Mayeux said.