Congress Should be in Charge on Fiduciary Rules

Commentary

There are fifteen departments serving the executive branch whose constitutional role is the day-to-day enforcement and administration of federal laws. The U.S. Department of Labor was created after a long campaign by labor leaders to win Cabinet status for the agency and was signed by President William H. Taft on March 4, 1913.

According to the DOL’s website: “[its creation] was virtually overlooked among the historic events of that day. The city of Washington was bursting with goings on of all kinds. It was Inauguration Day for Woodrow Wilson and there was the usual social whirl that accompanies such an event. In addition, the 62nd Congress was still in session on Inauguration morning. The retiring President had a pile of bills upon which to act, one of them being the Sulzer Bill to create a Department of Labor headed by a Cabinet officer.”

This history is interesting because after little attention in its creation, it is one of the most powerful departments in the president’s cabinet with an over $40 billion-dollar budget – the 6^th largest according to the White House website. And, since the DOL is assuming authority to radically change the retirement landscape for millions of Americans, the rationale behind the change should be considered and the question of authority addressed.

One of the rationales for the fiduciary rule is that ERISA is an old law that needs updating and a major argument for the need to update is the significant shift away from defined benefit plans to defined contribution plans. But, if the need is so strong, shouldn’t the department seek Congressional approval for any proposal?

In addition, the change from defined benefit plans to defined contribution plans has been well underway for the past 30 years. Moving from 170,000 DB plans in 1985 to less than 50,000 in 2000 and DC plans increasing from 460,000 to almost 700,000 over that same period. In fact, the winds of change began to blow in 1974 with ERISA’s own minimum funding requirements and mandated forms of benefits for pension plan providers.

So why not Congressional intervention? After all, the executive branch looked to the legislative branch to reconstruct the health and banking industries. Shouldn’t the same be true for the retirement industry? If, as the department states, Americans ability to save adequately for retirement hangs in the balance of an outdated law, shouldn’t the department turn to Congress to determine the best course of action?

The argument for Congressional authority is strengthened by the fact that the DOL has addressed provisions in the law continuously over the years; keeping it updated and relevant to changing times. The fiduciary questions were addressed as recently as 2005 in a December 7^th Advisory Opinion. According to the department, “advisory opinions issued by the office provide answers to inquiries from individuals and organizations, which apply the law to a specific set of facts (our emphasis).”

In the advisory opinion, the department addressed three specific questions related to the fiduciary role. The first question set the stage regarding who is considered a fiduciary, but the DOL went further and addressed what constitutes investment advice.

The second question was specifically directed at IRAs and asked if a recommendation to rollover an account balance to an IRA to “take advantage of investment options not available under the plan” constitutes investment advice?

The department’s answer appears to run contrary to the provisions of the proposed rule. The letter states that “merely advising a plan participant to take an otherwise permissible plan distribution, even when that advice is combined with a recommendation as to how the distribution should be invested, does not constitute "investment advice" within the meaning of the regulation.”

The DOL further clarified that it “does not view a recommendation to take a distribution as advice” or a recommendation concerning the purchasing or selling of a particular investment to be “contemplated by the regulation.”

The last question addresses the form of payment received by the advisor. Specifically, the interested party asked if an advisor who is not a plan fiduciary and who recommends that a participant roll funds from the plan into an IRA engages in a “prohibited transaction if the advisor will earn management or other investment fees related to the IRA?”

The advisory opinion’s response was a simple and clear “no.” The opinion reiterates that a recommendation to take a permissible distribution by someone who is not connected with the plan “is not investment advice.” The DOL emphasizes what they stated in their answer to question two that the recommendation, in and of itself, is not an “exercise of authority or control over plan assets that would make a person a fiduciary.”

The opinion concludes its answer to question three by reinforcing the department’s view that a person in this case would not be a fiduciary solely on the basis of making the recommendations, and “would not engage in an act of self-dealing” if he or she advises the participant to roll over his account balance from the plan to an IRA that will pay management or other investment fees to such person.

If, as the DOL stated in its second answer, the IRA recommendation was not “contemplated by the regulation,” then wouldn’t a reversal suggests a new regulation from Congress?

Americans for Annuity Protection supports the recent measures by both the House and the Senate taken earlier this month to require Congressional approval before any rule is final. We urge you to support the Affordable Retirement Advice Protection Act (H.R. 4293), introduced by Rep. Phil Roe, R-Tenn., and the Strengthening Access to Valuable Education and Retirement Support (SAVERS) Act (H.R. 4294), introduced by Rep. Peter Roskam, R-Ill.

Let your representatives know that it is the job of Congress to make sure that any federal agency rulemaking of this magnitude does not negatively impact Americans ability to choose an advisor and the retirement products that works best. Contact your representative today by taking action at www.aapnow.com!

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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