Compliance February 6, 2017

Fiduciary Rule Double-Take Leaves Retirement Industry Perplexed

The Trump White House has clearly tried to label itself as pro-business, but the effort to halt the fiduciary rule has so far injected more confusion than clarity for advisory firms. 
Reported by

Late last week rumors started to swirl that Republican President Donald Trump would directly order the Department of Labor (DOL) to delay the effective implementation date of the fiduciary rule reform championed by the previous Democratic administration.

There were even reports written directly from a draft version of a presidential memorandum that would have done just that—citing a specific 180-day delay in the effective date of the rulemaking. Many reporters and businesses evidently saw this draft, because even before a final version of the memo was officially shared by the White House, scores of industry providers had already written to PLANADVISER expressing their varying opinions about what the 180-day delay meant, and about what could come next.

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In the end it would have been best to wait to see the final copy, as the 180-day delay, which was interpreted by many to be the key action-point coded into the memorandum, was removed. This left many in the industry wondering exactly what would come out of the memo, which in the end only ordered a review of the rulemaking to determine what its impacts on investors might be.    

It was particularly telling to see trusted Employee Retirement Income Security Act (ERISA) attorneys have to re-adjust commentary that had been written based on the draft memo. One firm, the Wagner Law Group, captured the unexpected change well.  

“We would like to update the ERISA LAW ALERT sent earlier today. In the Alert, which was based on a draft version of the Executive Memorandum, we stated that the DOL Fiduciary Rule would be delayed for 180 days. The final version of the Executive Memorandum, like the draft, directs the DOL to review the Fiduciary Rule, but unlike the draft, does not specify the time period for review or the length, if any, of the delay. In other words, the 180-day delay period was specifically removed. We understand that interested trade groups are working to obtain clarification from the White House as to what this means,” the law firm explains. “As it stands, the final version of the Executive Memorandum does not, in and of itself, repeal, revise or delay the Fiduciary Rule.”

As the Wagner Group attorneys explain, the DOL will have to determine whether and how a delay may or should be implemented. “This leaves financial services firms in the difficult situation, for the moment, of not knowing with 100% certainty if there will be an extended applicability date or not.”

If the DOL determines that the fiduciary rule is inconsistent with Trump Administration policy, it may issue for notice and comment a proposed rule rescinding or revising the DOL fiduciary rule and the best-interest contract (BIC) Exemption. Wagner attorneys predict the DOL may also take action to stay the litigation currently challenging the DOL fiduciary rule and its exemptions, but again all this is left up in the air right now.

On the Wagner attorneys’ interpretation, one possible effect of a delay would be that the Securities and Exchange Commission (SEC) becomes more involved in the process, so that there would be a uniform definition of fiduciary and a uniform standard enforced by both the DOL and SEC.

“It is worth noting that a bill known as the Financial CHOICE Act, passed by the House Financial Services Committee in September 2016, proposes the incorporation of the DOL Fiduciary Rule into the Retail Investor Protection Act (a bill passed by the House in 2016) and requires the SEC to take the driver’s seat on fiduciary rulemaking,” the attorneys observe. “Before the review process has even commenced, it is premature to speculate as to the conclusions that the DOL will reach, although it is highly unlikely that the DOL fiduciary rule and related exemptions such as BIC will survive in their current form, in light of President Trump’s clear willingness to dismiss government officials unwilling to conform to his agenda.”

NEXT: Some still pushing for the rule 

Seth Rosenbloom, associate general counsel at Betterment for Business, an integrated 401(k) advice and recordkeeping provider, says his firm “views the fiduciary rule as an important protection for American investors.” He is very critical of the argument that implementing the rule would necessarily damage investor choice and provider flexibility—although even with the delay still to be determined, he thinks the fiduciary rule reform is most likely on the way out.

“We’re disappointed that the administration is targeting the rule, but we will continue to be an active voice in favor of it, and in favor of investors’ rights to honest investment advice more broadly,” Rosenbloom says. “There is no merit to the claim that the rule would limit investors’ choices by forcing all advisers to all recommend the same low-cost index funds.”

The text of the rule itself is clear on this point, Rosenbloom argues, suggesting the rule “simply requires advisers to make an investment recommendation that they can demonstrate is in an investor’s best interest. That may be the lowest-cost option, but not necessarily. If advisers are not able to defend the investments they are recommending, including their cost, investors will not suffer from their absence.”

Rosenbloom suggests that, if the rule is not implemented, there are a few questions that investors can ask financial professions to ensure that they are receiving sound advice: “They can still ask, are you a fiduciary and are you a fiduciary across all my accounts? How are you compensated? How am I paying you and who else is paying you? What conflicts do you have?” These all remain important even if the DOL rulemaking is stopped outright.

“Even if the rule is rolled back, the publicity around the rule over the past year has had positive impact,” he concludes. “Investors are paying attention to fees and conflicts, asking important questions, and holding financial providers to higher standards. That should continue even if the administration delays or halts the rule. In the long run, investors are going to demand fiduciary advice and we're optimistic that it will also become a legal requirement.”

Given the previously voiced concerns of the insurance industry in particular as it pertained to complying with the fiduciary rule’s prohibited transaction exemptions, it’s no surprise the Insured Retirement Institute (IRI) is in the camp applauding Trump’s attack on the rule. But even such supporters of the rule delay were left in the dark by the fiduciary double-take. Writing to PLANADVISER in advance of the final memorandum’s release, IRI President and CEO Cathy Weatherford clearly expected the memo to establish a 180-day delay. She suggested the IRI “strongly supports President Trump’s decision to delay implementation of the Department of Labor’s fiduciary rule and initiate a thoughtful and comprehensive review of the rule’s likely impact on retirement savers.”

“The rule makes sweeping changes to the existing regulatory framework that will ultimately make it harder for savers to plan for retirement by depriving them of access to affordable holistic financial advice and a wide range of investment options,” Weatherford said. “These concerns, which drove us to pursue our pending legal challenge to the rule, are further exacerbated by the overly aggressive compliance deadline provided by the DOL.” Again, as it stands Trump has not provided the relief sought by IRI and others. 

With some much lingering uncertainty around where the DOL fiduciary rule actually stands, those in the retirement industry will be eagerly awaiting nomination hearings for Andrew Puzder. Unless a major regulatory reform effort will be led by the interim secretary, Puzder will have to lead the effort to gut the rule, and first he will have to be confirmed. 

Client Service February 6, 2017

Some So-Called Financial Wellness Providers 'Not Doing It Right'

Retirement plan sponsors need help filtering out which providers of financial wellness education and solutions are free of conflicts and are really helping participants.
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Liz Davidson, founder and CEO of Financial Finesse, based in El Segundo, California, says “We must ensure that all financial wellness providers act in the best interest of employees by following an established set of standards, or we run the risk of this movement becoming a euphemism for financial services companies, payday lenders, high-interest rate purchasing programs, and others who want to rebrand themselves to gain back trust they have lost. This pollution of an industry that has collectively changed millions of lives for the better is not only unacceptable, it is dangerous to the financial security of millions of Americans.”

In a recent paper, Davidson defined a state of financial well-being as one where a person maintains:

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  • A manageable level of financial stress;
  • A lifestyle at or below their financial means;
  • A strong financial foundation including adequate emergency savings, no high-interest debt, and a sufficient insurance and estate plan to protect assets, income, and loved ones; and
  • An ongoing plan to achieve future financial goals.

A person who is financially well makes good financial decisions, has a higher level of satisfaction with their current financial situation and a greater level of freedom to pursue life on their own terms.

Aditi Gokhale, chief marketing officer of LearnVest and head of LearnVest@Work, based in New York City, says LearnVest defines financial wellness as the ability to feel confident about your money and optimistic about your future by having access to the proper technical tools as well as human support. It requires having a simple, actionable, and realistic financial plan that is personalized to the individual and focuses on protection, optimization, and growth.

“Financial wellness is not just about numbers—it’s about knowing you have control over your finances in the short-term, and that you’re set up to achieve your long-term goals, whether that means paying down debt, retiring on your own timeline, buying a home, or taking a dream vacation. Moving closer and closer to those goals over time is a strong sign of financial health. And as we often say at LearnVest—it’s about progress, not perfection,” she tells PLANADVISER.

NEXT: Financial wellness includes action, not just education

 

In her paper, Davidson says workplace financial wellness programs must meet the following criteria to be considered a financial wellness benefit, versus financial education or financial advice;

  • Unbiased - free of sales pitches or conflicts of interest, delivered by a financial education company not a financial services firm;
  • Designed and delivered by qualified experts who have extensive financial planning experience;
  • Delivered as an ongoing process, to provide the support and accountability that employees need in order to make, sustain and build upon positive financial habits and behaviors;
  • Holistic and comprehensive in nature - covers all aspects of financial planning from debt management to advanced estate planning;
  • Personalized to the employee based on their specific needs;
  • Integrates all employee benefits, with guidance on how employees can most effectively manage their benefits as part of their overall financial plans; and
  • Offered as a benefit available to all employees, regardless of age, income, gender or job classification.

Brian Hamilton, vice president of SmartDollar, based in Nashville, Tennessee, agrees with Davidson’s definition, and he stresses that financial wellness programs should include a clear plan and the motivation needed to get people to apply what they are learning. “For us, it’s all about behavior change; employees know what to do, the hard part is doing it,” he tells PLANADVISER.

Hamilton says three things drive behavioral change. First, information should be simple and clear. A lot of information that is not simple and clear causes confusion, and employees are overwhelmed or lazy and don’t know the best way to go about changing behavior.

Secondly, he says an employee wellness program should build in inspiration and motivation. “Our company drives motivation. Every financial wellness provider says get out of debt and that’s the extent of it. We show them the best way to get out of debt is to list the smallest to largest and pay off the smallest one faster, then roll over that payment to next smallest. We show them exactly which debt to pay off, and they keep seeing progress, so it inspires and motivates."

According to Hamilton, the third thing is to people into an environment for success. “Most employees don’t want to sit with colleagues and talk about money problems, so things such as lunch and learns are not effective,” he says. He adds that including a spouse is necessary, as well as offering packaged tools in a mobile friendly way. “They can use the tools off hours. A budgeting tool is key to winning with money. Employees should be given tools, whether paper forms, worksheets or banking tools,” he says.

NEXT: The dangers of other so-called “financial wellness” solutions

Davidson tells PLANADVISER, the point Financial Finesse is making is financial wellness needs to be unbiased. Financial services firms can have conflicts of interest.

She says the difference between recordkeepers and advisers and a financial wellness company is recordkeepers and advisers may have the temptation to steer employees toward certain products. Even the sale of programs for a fee has to make a difference for individuals to continue, she adds, because the mission for financial wellness is to achieve results.

Davidson adds that she is “exactly” calling out providers of such things as credit cards for employees and purchasing programs for employees. “Employees may be buying something they don’t need, and going into debt they don’t need,” she says. “We don’t want people to roll their eyes when they hear financial wellness because so many out there are doing things that will make them worse off, not better off. We need to get standards out there, so the financial wellness movement is not hijacked by firms not doing it the right way.”

Gokhale believes there is a danger, because employers should be enlisting the help of an organization whose core competency is financial wellness and where financial wellness is the objective. At LearnVest, all planners are trained in behavioral finance as there is a correlation between one's behavior and their spending habits. In addition, she says, in order for education to be successful, there has to be a call to action and that action needs to be measured.

Gokhale notes that many providers simply offer tools and general information about personal finance and they’re not going to move the needle. “Education on broad financial topics can be informative, but personalization is paramount. The ability to speak with a financial planner that is licensed, acting in his or her client's best interest, and trained in behavioral finance, simply can’t be replicated with online tools alone,” she says.

Hamilton agrees that programs should be personalized to be successful and there should be no solicitations. He says SmartDollar is teaming up with others who think behavioral change is a solution.

Davidson adds that a lot of psychology and behavioral finance is woven into financial wellness. What people do day in and day out matters more over time than one discrete decision. “That is sometimes missed because the adviser industry is focused on investable assets,” she says.

Gokhale says with new "financial wellness" providers popping up daily, employers have their work cut out for them when it comes to determining who the strongest players are in this space and which is the best match for their company. “In order to effectively roll out a program, employers need to think critically about the problems they’re trying to solve and what success actually looks like. For example, if you’re looking simply to check off the box, then perhaps an existing provider makes sense. But if you want to drive action and have an impact on important issues such as retirement, health care costs, absenteeism, productivity and benefits optimization, then you’ll be choosing from a much smaller pool,” she concludes.

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