IRI Criticizes DOL’s Fiduciary Redefinition Efforts

A strongly positive perception of the work of retirement plan advisers is just one finding among a list of survey outcomes covered in a new IRI fact sheet, which outlines the importance of financial advice and the need to protect workers’ access to retirement planning services and information. The IRI releases the fact sheet at a time when the retirement planning industry is awaiting a rule proposal from the Department of Labor (DOL) that could change or expand the definition of “fiduciary,” potentially restricting access to certain types of inexpensive advice and account rollover services.

In basic terms, the DOL is considering whether to expand the definition of fiduciary to cover more types of service providers and advice relationships (see “New Restrictions Loom for IRA Rollovers”). The DOL, alongside other federal regulatory bodies such as the Securities and Exchange Commission (SEC), has said it is concerned that converging business models and the widening use of technology may be causing conflicts of interest not currently addressed by the Employee Retirement Income Security Act (ERISA) and other regulations.

The IRI opposes this interpretation in its fact sheet and elsewhere, calling the redefinition a “rule in search of a problem.” On the IRI’s assessment, expanding the definition of fiduciary will likely have the unintended consequence of depriving lower- and middle-income Americans of access to affordable retirement planning services and advice. This could occur in cases where providers of certain low-cost advice and investment solutions—often provided digitally or through remote call centers—will decide it’s too risky to take on fiduciary status for all clients, especially those with smaller account balances and less profit to offer.

It’s a similar argument to the one put forward recently by the Congressional Hispanic Caucus in an open letter to Secretary of Labor Thomas Perez (see “Congressional Hispanic Caucus Weighs in on Fiduciary Rule”), though the caucus appears at least partially open to a redefinition, so long as it truly cuts down on conflicts of interest. Other Congressional groups, such as the New Democrat Coalition, have expressed similar views.

“Time and time again, our studies have shown the benefits of planning for retirement with the help of a financial professional,” says Cathy Weatherford, IRI president and CEO. “Those working with a financial adviser are more likely to have retirement savings, more likely to have determined a savings goal, and overall are more confident with their financial preparations for retirement.”

Weatherford says other studies, coming from inside and outside the IRI, have concluded that working with an adviser leads to better savings behaviors and greater retirement assets.

“Given these findings, it’s imperative that we protect the client-adviser relationship and help ensure that all Americans have the opportunity to attain a financially secure and dignified retirement,” she says.

The new research results contained in the IRI fact sheet are from a January survey of Americans, age 51 to 67, that shows most investors are satisfied with their relationship with their adviser. Key findings from the study and underlying survey show the following:

• Eight in 10 respondents said they are better prepared for retirement because of their financial planner;
• Three in four said they are likely to recommend their adviser to a friend or relative;
• Eighty percent said they are aware of potential conflicts of interest their advice provider may face;
• The overwhelming majority of clients agreed that their adviser acts in their best interest; and
• Less than 5% of investors share the views expressed by DOL to justify its proposed tightening of fiduciary rules, with less than 1% strongly agreeing with the DOL’s perspective that merging business models and technology developments have potentially increased conflicts of interest for certain types of advisers and financial services providers.

In interpreting these figures, the IRI suggests that working with a professional adviser clearly increases the probability that an individual will save. Furthermore, savings rates increase with the length of time a client works with a financial adviser. As a result, professional advice has a positive and significant impact on financial assets, the IRI says, even after accounting for other variables.

Compared to those who go it alone at the same age and wage level, investors working with a financial advisor for four to six years will have about 58% more assets at the end of that time period, says the IRI. Those with an advice relationship lasting seven to 14 years typically see about 99% more in accumulated assets. A 15-year relationship yields approximately 173% in additional assets over those saving and investing without an adviser.

The IRI says professional advice also has a positive influence on other retirement planning behaviors, including increased usage of tax-advantaged savings vehicles, improved asset allocation, greater portfolio diversification and less speculative investing.

The redefinition proposal addressed by the IRI was originally offered in 2010 but was withdrawn the following year in response to industry pushback, particularly concerning IRA investors, the majority of whom have small accounts under $25,000.

According to the IRI’s analysis, most IRA investors today have full-service brokerage accounts. In fact, more than 30 million households—27 million of which are from the lowest wealth segment—hold assets solely in these normally commission-based accounts.

Under the originally proposed rule, advice provided through these full-service brokerage accounts could have constituted a conflict of interest and triggered prohibited transactions if the broker received additional profits from making the recommendation. As a result, these investors would potentially be forced to leave their current accounts and move to either a fee-based adviser account, which are only available to investors with enough assets to meet the applicable minimum balance thresholds applied by most providers, or low-support brokerage accounts. Neither result would be desirable, the IRI says.

In a recent conference call with reporters on the separate topic of fee disclosure within defined contribution plans, top DOL officials declined to provide an update on what the final fiduciary redefinition may look like. However, Phyllis Borzi, Assistant Secretary of Labor for Employee Benefits Security, confirmed the DOL plans to re-release the final proposal in August of this year.

More information is also available at www.irionline.org.