Would DOL’s Fiduciary Proposal Help or Hinder Coverage Gap?

The Department of Labor and the retirement industry are often at odds, but the groups generally align on one broad area: reducing the retirement savings coverage gap for working Americans.

In kicking off two days of online public comment on its retirement security rule proposal Tuesday, Assistant Secretary of Labor for the Employee Benefits Security Administration Lisa Gomez made opening remarks highlighting how the amendments to the fiduciary rule would help retirement savers.

“The chief aim is to make sure that when individual retirement investors turn to investment professionals for sound advice rooted in their best interest, they get just that—advice that is prudent, loyal, candid and free from overcharges,” she said.

President Joe Biden, at the announcement of the proposal in October, stressed that the rule is intended to stop brokers from selling “bad annuities” that work for the seller, not the saver.

Does the Proposal Limit Consumer Choice?

But over two days of comments to the DOL this week, a different argument was reiterated by numerous retirement and investment sector leaders: that tightening rules on offering retirement investment products such as annuities or on advising rollovers will limit, not bolster, retirement savings for the masses.

“The Fiduciary Rule 3.0, as written, will hinder the industry and government’s goal of closing the retirement gap,” says Jack Elder, director of advanced markets for CBS Brokerage, a firm that consults with advisers about life insurance products. “Tens of millions of Americans have little to no retirement savings. We may face the potential insolvency of Social Security within the next decade. With this much pressure on retirement security, the government should do everything it can to increase consumer choice, not limit it.”

The argument, reiterated by other industry players during the hearings, is that by putting further fiduciary restrictions on the sale of products such as guaranteed income annuities and on advice regarding rolling 401(k) savings into an individual retirement account, the rule will limit the availability and use of these products, particularly among lower-income savers.

“Closing the retirement gap is only possible by expanding access to professional financial advice—not limiting it,” Elder says. “The proposed rule encourages fiduciary, fee-based advice while attacking commission-based advice. … In practice, fee-based advice is only available to clients with sufficient investable wealth—i.e. the upper wealth bands in the U.S.”

The consultant notes that most “protection” products are commission-based, with product regulation happening at the state level.

Savings … Gap

Susan Neely, CEO of the American Council of Life Insurers, noted that Congress worked specifically to expand access to annuities as a source of retirement income for retirement savers in the Setting Every Community Up for Retirement Enhancement Act of 2019 and the SECURE 2.0 Act of 2022.

“The proposal seems at odds with actions taken by Congress to close retirement savings gaps in part through expanded access to annuities,” Neely told the DOL. “The proposal skips over the long-term benefits of annuities, which can last 30 to 40 years, handling inflation, volatility and downturns. It doesn’t consider how this rule would impact a mutual fund owner compared to an annuity owner over the long term.”

Neely also argued that the rule’s consequences would negatively impact consumer access to financial products, particularly low- and middle-income savers.“For many Americans whose only savings is a 401(k) or IRA, they can turn those savings into a pension with an annuity,” she said. “It provides a ‘set it and forget it’ strategy that needs no further management, just like that of Social Security.”

The rule also impacts rollover advice, and the head of one financial trade group told the DOL that the rule would not only limit rollover guidance, but stymie even educational conversations about retirement savings.

“This proposal … is overly broad, unnecessary and inconsistent with existing federal regulations such as the SEC’s Regulation Best Interest,” said Lisa Bleier, head of wealth management, retirement and state government relations at the Securities Industry and Financial Marketing Association. “As a result, it could limit access to advice and education while also limiting investor choice in advisers.”

Individual retirement account assets, fueled in large part by defined contribution retirement rollovers, currently make up the largest segment of the retirement asset pool at $13.9 trillion, as of 2021, the latest data available from consultancy Cerulli Associates. That market share accounts for 38% of retirement assets, and the firm expects that to grow to 41% by 2027.

Access Improved

On the other side of the aisle are those arguing that workers, particularly in the lower-income range, will get at least equal, if not better services and retirement results from the rule.

Collective Wealth Partners, a financial advisory in based in Atlanta and focused on Black “and resilient communities” voiced support for the rule, noting that the firm does not anticipate “significant” change to its practices if the rule is passed and that it will not negatively impact savers.

“Moderate-income retirement investors will not lose access to ethical and competent investment advice after this rule is finalized,” Kamila Elliot, the firm’s CEO and founder, wrote in a letter to the DOL.

Bartlett Naylor, a financial analyst at consumer advocacy group Public Citizen, told the DOL that if the rule proposal was indeed going to hurt American workers and savers, other organizations would be stepping up.

“If this was going to hurt workers, then the AFL-CIO would make sure you knew that your proposal would hurt workers,” Naylor said during the hearings. “If this was not in the interest of retirees, then the AARP would not let you go forward.”

Meanwhile, others in financial services are not necessarily pinpointing the merits of the rule, but seeking more time and consideration before the DOL implements it.

Cetera Financial Group, a national adviser network of 9,000 financial professionals, expressed in remarks to the DOL that the process was too rushed, calling the window of time “unprecedented” when compared to other DOL proposals.

“The Department should extend the comment period for an additional 60 days and should not schedule any public hearings until after the comment period has concluded,” said Mark Quinn, Cetera’s director of regulatory affairs. “This matter is too important to rush. All stakeholders, including the department, industry members and retirement savers, will benefit from the additional time.”

Pam Krueger, founder of financial adviser matching service Wealthramp, a fiduciary fee-only resource for employees, is neutral on the rule, but believes employers need access to alternative fiduciary advice options. She says the rule does not address the fact that retirement planning and rollover advice often come from “in-house advisers” provided through the plan that may also have product ties to the advice.

“The rule fails to address the type of retirement and rollover advice plan participants deserve. It also doesn’t address the elephant in the room — whether the in-house advisors can truly provide the highly personalized cash-flow planning employees need as they approach retirement,” she says. “Advice for employees transitioning out of the company have very specific planning and tax needs that go beyond investment advice. It does not address the reality that employees are currently captive to their in-house advisors unless they go outside of their jobs and hire their own financial advisors. Plan participants are relying on their employer, and their employer is relying on the same deck of players.”