Retirement Security Proposal Addresses ‘Significant Gaps,’ EBSA Official Says

Tim Hauser says the Department of Labor’s retirement security proposal, sometimes called the fiduciary proposal, is not the same as the proposal made in 2016, as some critics have suggested.

The latest iteration of the proposal has been the subject of widespread debate and controversy since it was first proposed in October. Hauser, the deputy assistant secretary for program operations of the DOL’s Employee Benefits Security Administration, offered insight into why the Department of Labor continues to pursue it.

The proposal would modify the test for determining fiduciary status for retirement advice such that certain one-time recommendations, such as annuity sales, investment menu design and rollovers, would be considered fiduciary advice under the Employee Retirement Income Security Act.

DOL’s Case

Hauser explains that the proposal essentially says that if you are presenting yourself as acting in an investor’s best interest, “you should be held to that standard.”

Applying fiduciary status to recommendations made on a “regular basis,” a component of the current regulation that would be scrapped by the proposal, is “under-inclusive,” Hauser says. As an example, he says that if an adviser had been advising a client for years outside of a retirement context, then advised them on buying an annuity or a rollover with retirement assets, that would not be subject to fiduciary duties of prudence and loyalty under ERISA.

He adds that many annuities are “complicated products,” and investors often find themselves “very dependent on insurance people to explain these things to them.” As a consequence, “it is very easy for [investors] to buy something that they don’t understand.”

Hauser says many annuities have this problem, identifying indexed-linked annuities as an example. These annuities may use multiple indices, exclude dividends or have caps and buffers on their performance that partially de-link them from the index, all of which could affect the money an investor can expect to receive from the product.

Any adviser who self-identifies as a fiduciary or has discretionary authority over plan assets would be a fiduciary under the proposal.

A third element would also trigger fiduciary status under the proposal: if the professional “makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.”

Why is the Proposal Necessary?

One common objection to the proposal is that it is redundant, because it overlaps with Regulation Best Interest, enforced by the Securities and Exchange Commission. Reg BI requires investment advisers to offer advice in the best interest of their client; mitigate and disclose conflicts; and tailor their advice for that client. Opponents of the DOL proposal argue that should be satisfactory in the context of retirement plan rollovers.

Additionally, the National Association of Insurance Commissioners’ model regulation, adopted by more than 40 states, requires insurance agents to act in the best interest of their clients in annuity sales.

Hauser responds that the DOL “tried to design this to work closely with how Reg BI is designed” and acknowledges the “delta there isn’t huge.” However, Reg BI is limited only to securities recommendations made to retail investors. Therefore, it does not address other assets, such as real estate or insurance and banking products, and “significant gaps still remain.”

Since Reg BI only applies to retail investors, it also does not cover investment menu designs sold to plan sponsors. Hauser highlighted a comment letter from Morningstar to the DOL that argued plans sponsored by small businesses could be grossly overpaying on plan fees and would benefit from fiduciary duties being imposed. Brian Graff, the CEO of the American Retirement Association, also endorsed this specific element of the proposal at a December 2023 hearing for the same reason.

The NAIC regulation, on the other hand, is quite different from the DOL proposal, Hauser says, and DOL is “filling a very real gap here.” Specifically, the NAIC model does not include any forms of compensation in its rules on conflict mitigation, and “these are exactly the things you would think of when thinking of conflicts.”

“We take conflicts much more seriously,” Hauser says, and the DOL proposal would “make sure you aren’t creating incentive structures that incentivize sales that are worse for the customer and best for you.”

Why is This Proposal Different From Past Proposals?

Critics of the DOL proposal also say it essentially is the same as another proposal, made in 2016, that was vacated by the U.S. 5th Circuit Court of Appeals. In that case, the court ruled that in order for a professional to be a fiduciary under ERISA, the professional must have a relationship of “trust and confidence” with the client in question.

Hauser says the retirement security proposal is a “very different proposal” from the rule the 5th Circuit vacated. The previous rule would have covered any communication to a retail investor, whereas the current proposal focuses more on the nature of the relationship between an adviser and client.

He highlighted several other differences between this proposal and the previous one, including that the new proposal does not make insurance companies fiduciaries when their insurance products are sold by independent agents (only the agent would be) and that the new proposal would not limit arbitration agreements.

The new proposal, Hauser says, emphasizes the nature of the adviser-client relationship and limits itself to those with “trust and confidence.”

For Hauser, the core of the proposal is, “If you hold yourself out as acting in somebody’s best interest based on their individual circumstances, then that’s what you should do.”