More Waste! Less Fulfilling: Three Flaws with the DOL Fiduciary Rule

Commentary

There has been a tsunami of reporting on the DOL fiduciary rule and Americans for Annuity Protection (AAP) has contributed mightily to the wave. Much of what’s written has an air of inevitability about the outcome.

The DOL has until today (June 3) to make any modifications and nobody should expect that we will see any substantive changes.

As we write this, we’ve already seen four national trade associations and four Texas trade associations join with the U.S. Chamber of Commerce in a Texas complaint. Texas is one of the largest states for annuity consumers and is a good venue for this filing. We’ve heard credible rumors that more suits will follow and organizations have until Monday to do so.

This is all good news. However, unless the lawsuits succeed in getting an injunction to stop the DOL rule from moving relentlessly forward, any legislative or litigation fix is moot because most of the industry must begin preparations and move to comply with the rule.

In fact, because of the uncertainty of any legal outcome, we know that many in the annuity industry are moving forward to prepare for implementing the requirements of the rule; developing product solutions, building compliance infrastructure and creating supervisory technology and processes.

Those in favor of the rule state their political and social interest is to provide Americans advice that is in their best interest. AAP applauds that consumer focus.

In fact, we believe that annuity owners overwhelmingly believe their annuity serves their best interest with protected savings with guaranteed income options. The decades of satisfaction of annuity buyers (both with their annuity and their advisor) has been demonstrated with inarguable quantitative studies by many different sources.

Americans for Annuity Protection’s argument is not with a best interest standard. What we object to is the way the DOL rule is demanding we get there; with impossible and unclear requirements imposed on IRA advisors and complicated red-tape supervisory standards on IRA financial institutions.

The best interest destination isn’t the problem. The road map and the rules of the road are.
AAP maintains that the rule’s construction is flawed, the analysis of its impact is flawed and the assumptions about what matters to Americans is flawed.
Let’s highlight the most egregious.

1. A Uniform Standard of Care

This was the nexus of the rule, or as Assistant Secretary Phyllis Borzi exclaimed at a Congressional hearing last year – “the North Star.” Yet, the rule doesn’t provide uniformity. Yes, best interest is the core, but if you are a “variable fee” advisor providing recommendations you have one set of standards – the Best Interest Contract (BIC) and BIC Exemption.

If you are “level-fee” advisor you get to operate under what is being dubbed “BICE Lite” with its own, differing standards and requirements. And, if you make fixed rate annuity recommendations, you have another set of standards called Impartial Conduct Standards (ICS) with different requirements.  In addition, if you are recommending an annuity that must also adhere to suitability standards.

So under this rule, IRA customers are likely to bump into at least three different types of advisors operating under different rules and, yet, they have only one expectation – protecting their retirement.

Okay, let’s do the math. ONE expectation - FOUR standards (BICE, BICE Light, ICS, Suitability). Add to the complication that advisors will most likely be following at least two of the DOL standards in addition to suitability.

More Standards - LESS Conflicted?

2.  Protect Workers from high-fee investment products that erode savings.

The department says this outcome is a cornerstone of the rule. Yet, the Regulatory Impact Analysis (RIA) used to demonstrate it relies on the now infamous and widely debunked claim that conflicted advice costs retirement savers $17 billion dollars. The false narrative that is used to arrive at the claim could be the source of a skit on Jimmy Kimmel Live. Unfortunately, this is no laughing matter for American savers.

As a reminder, the chart outlining “the most relevant studies identified by the department,” on page 172 of the RIA cites eight studies dealing exclusively with mutual funds. Not one study was even conducted on what this rule would do to consumers seeking annuity advice - advice that protects consumer’s savings from market risk and provides guaranteed income opportunities.

The RIA’s coverage of annuities is a tutorial on what annuities are, a historical perspective on the regulation of annuities and sales numbers. Any analysis provided of annuities was, as the DOL itself states, based on “media reports and a few [cherry-picked] lawsuits.”

Congress or the courts (or both) need to demand that a rule impacting millions of Americans ability to protect their savings must provide an impact analysis on the products it will affect. That analysis must be qualitative, comprehensive and irrefutable. Curiously, the final rule imposes requirements on IRAs and does nothing to fix high-fee 401(k)s.

Our recent article on Stemming the Tide points out this problem. Recent lawsuits have seen some downward pressure on fees. But, the rule itself doesn’t impose any new requirements to protect 401(k) participants from savings eroding fees. The DOL relies on the courts to address that problem, but the courts don’t always remedy the past.

More Compliance – Less Cost?

3. Disclosures aren’t enough

One assumption in the flawed RIA is that “disclosure alone has proven ineffective to mitigate conflicts in advice.”

Ok, we get it. Disclosures are often too long, too legal, and too confusing to read. So why does the rule dump tons more disclosures on the unsuspecting public? According to one analysis of the rule by David Levine, principal at Groom Law Group, BICE includes “a mountain of disclosure requirements,” Levine said.

The article goes on to delineate that the BICE requires “contract disclosures, point-of-sale disclosures, website disclosures with requirements for quarterly updates, and disclosures necessary for proprietary products and third-party payments,” to name just a few! The department feels that disclosures won’t mitigate conflicts, so why not pile on mountains more?

Tons of paper will not help consumers understand their retirement options and encourage saving. Instead, more paper and legalese will cause even more polarization from saving or from making a prudent decision on how best to save.

More disclosures - Less Confusing?

As AAP and many other credible organizations have pointed out, the DOL’s impact analysis was flawed throughout with conclusions based on the political end-game instead of empirical evidence. Their assumptions are conflicted by political and institutional bias from the 401(k) industry.

This is clear by the rule’s favoritism to 401(k) plan providers, plan fiduciaries and plan administrators by imposing the most restrictive and legally numbing requirements on IRAs.  This bias literally forces Americans to stay in under-performing, limited choice, and high fee 401(k) plans.

Confusing and varying standards, less choice and mounds of paper will not help America save.  Please help Americans for Annuity Protection with our grassroots effort to stop this rule from harming savers. Visit www.aapnow.com for more information.  Let’s grab a beer!

Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.
Contact Kim at [email protected].

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