Fiduciary Proposal Comment Period Ends With More Mixed Feedback

The comment period for the Department of Labor’s retirement security proposal, sometimes called the fiduciary adviser proposal, expired Tuesday, with a flurry of comment letters submitted ahead of the deadline.

The proposal would apply fiduciary status under the Employee Retirement Income Security Act to certain one-time sales interactions, such as rollovers from retirement plans to individual retirement accounts, annuity sales, and plan investment menu design. The proposal has received a wide range of feedback from firms such as Morningstar and industry lobbying groups including the Investment Adviser Association, and the American Council of Life Insurers.

Morningstar’s comment letter was supportive of the proposal and argued that, as proposed, the rule would help retirement savers in smaller plans significantly by lowering their management fees. Morningstar estimates that $55 billion would be saved over ten years by retirement savers as a consequence of receiving better advice and lower fees, especially advice rendered to the plan about investment options. About $47 billion of these savings would come from plans that have $25 million in assets or less.

Regarding management fees paid by smaller plans, the Morningstar letter says, “Some of these investment fees look outlandish compared to the investment universe.”

Other commenters, including Brian Graff, the CEO of the American Retirement Association, noted at a hearing hosted by DOL in December, the potential gains for underserved, smaller retirement plans that could come from the proposal.

Lia Mitchell, a senior analyst for government affairs at Morningstar, cautions that Morningstar’s savings estimates are in “completely undiscounted dollars.” This means that they do not account for changes in behavior that might occur because of the proposal if finalized, such as an increase in advisory fees. Recordkeeping and administrative fees “are held constant,” Mitchell explains.

Mitchell says that the data her firm cites was obtained mainly using Form 5500 data. Morningstar then calculated fee savings, based on the assumption that if plans with the highest fees had their fees reduced to levels more like plans of their size.

Morningstar also recommended that the DOL require advisers to consider a saver’s potential Social Security income when determining whether a recommendation, such as a rollover or annuity purchase, is in his best interest. Mitchell explains that the age at which someone claims Social Security can have “a higher impact than private solutions,” such as an annuity purchase.

Another group, the Investment Adviser Association, sent a comment letter that was broadly supportive of the DOL proposal, and offering a few recommendations. It noted that most of IAA’s members in the retirement sector are already fiduciaries under ERISA.

IAA recommended that the DOL clarify that initial “hire me” conversations where an adviser is pitching services to a prospective client be excluded from the proposal, a request made in many comment letters including that from the ERISA Industry Committee.

IAA also asked the DOL to remove disclosure and analysis requirements for IRA rollovers when the rollover is mandatory, such as those related to a required minimum distribution or an inheritance. The proposal requires a professional recommending a rollover to document alternatives they considered, but there are not always alternatives to a rollover, IAA notes.

Both IAA and Morningstar argued that the DOL should exclude advice rendered to independent fiduciaries representing larger plans from fiduciary status due to their more sophisticated nature. IAA says the cut off for making this distinction should be at $50 million in plan assets, while Morningstar advocated for $100 million and up.

The American Council of Life Insurers urged the DOL to completely withdraw the advice proposal. The council’s letter argues that ERISA is a “sole interest” standard and this is “incompatible with the very nature of sales and marketing activities.”

Further, the proposal would hurt lower-income savers by reducing their access to insurance products and rollovers by increasing the cost of those products, ACLI argued.

The group also said the proposal should not apply to annuity products, because the complexity and labor intensity of the sales process for those products is better accounted for with a commission-based compensation model for insurance agents. “Life insurers have long sought to structure their compensation arrangements in a way that encourages insurance agents and broker-dealers to devote appropriate time and attention to consumers in the sale of annuities. For that reason, insurers typically pay a sales commission upon the completion of an annuity sale to compensate agents and broker-dealers for the significant effort involved in learning about and marketing and selling annuity products.”