Morningstar: DOL Investment Advice Rule Needs Work

By Staff Reports

With the comment deadline looming Thursday for the Department of Labor's investment advice rule, Morningstar previewed some of the expected criticisms of the long-anticipated rule.

In its comment letter, which Morningstar released to the media, the analyst firm said that the DOL could go further to protect all investors receiving rollover advice in a variety of contexts. The DOL should revisit the “regular basis” prong of the five-part test to either eliminate this requirement or presume that it is satisfied in the context of a rollover.

The rule would replace the controversial fiduciary rule published by the Obama administration. The Trump replacement has two main parts: a new exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" from 1975 to determine what constitutes investment advice.

The exemption piece of the rule is out for public comment until Thursday. The Federal Register reported just 20 comments received on the investment advice rule as of Tuesday afternoon.

Key points from the Morningstar letter include:

• We strongly encourage the DOL to provide more helpful disclosures to investors. The DOL will increase confusion and promote inequity by requiring that investment advice fiduciaries disclose that they are Employee Retirement Income Security Act (ERISA) fiduciaries, without further explanation of what this means and without consideration that investment advice fiduciaries do not have to comply with all of the prohibitions of ERISA. We recommend that a more helpful disclosure – an expanded version of the Securities and Exchange Commission’s (SEC) client relationship summary (CRS) – be provided to all individuals receiving advice on a rollover into an IRA or on an IRA account, and that this document explains an individual’s rights and remedies under both SEC and DOL regulations.

• We urge the DOL to strengthen the mitigation requirements to address conflicts for plans with limited lineups. Regarding plan advice, we agree with the DOL that limited plan and IRA lineups can present significant conflicts and may not be in the investor’s best interest. We believe that the documentation requirements do not go far enough in mitigating this conflict, and the DOL could do more to encourage the use of independent fiduciaries in these cases.

• In addition to IRA rollovers, we think that it is useful for investors to obtain fiduciary advice on health-savings accounts (HSAs), in which flows and a percentage of assets being invested have been increasing. Therefore, we believe the Proposed Rule should cover HSA accounts.

• The DOL should clarify when it will take the lead on enforcement and when it will rely on the SEC to police accountability around IRA advice. Since the Proposed Rule does not create a private action, unlike the previous rule from 2016, it makes agency enforcement particularly important.