Fiduciary Fight Continues - Could Congress cut off funding?

Earlier today, a House bill plans to stop the Department of Labor’s fiduciary proposal by cutting off funding to implement the measure.

The measure was included by the House Appropriations Committee in the draft fiscal year 2016 Labor, Health and Human Services (LHHS) funding bill, slated to be considered in subcommittee on June 17. The legislation includes funding for programs within the Department of Labor, the Department of Health and Human Services, the Department of Education, and other related agencies.

In a summary of the bill, the provision dealing with the fiduciary proposal is included under a section titled “Reducing Harmful Red Tape.” The language itself says simply, “None of the funds made available by this Act may be used to finalize, implement, administer, or enforce the proposed Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice regulation published by the Department of Labor in the Federal Register on April 20, 2015 (80 Fed. Reg. 21928 11 et seq.).”

In another article, published on Investment News Weekly, it is pointed out that if this particular bill doesn't make it through the Senate, this same rider could get attached to another bill.  If it were attached to a bill that would be considered too important for the President to veto, it is possible that the DOL Fiduciary rule proposal could be de-funded. 

The article attached here: DOL Fiduciary Rule in Crosshairs of New Spending Bill?

We've written on this blog about the DOL Fiduciary Proposal, and have summarized it with updates linked here.  Summary of DOL Fiduciary Proposal

Earlier this spring, U.S. House Representative Republican Ann Wagner announced publicly a three-pronged approach to try and kill these rules.  The first strategy involves getting a bill through requiring the SEC to take lead in the rule making to establish a new fiduciary standard. 

Failing that, the second strategy is to employ the private sector to attempt to delay the rules for as long as possible in hopes that it pushes into and beyond the presidential election and the incoming president stops it.  This second strategy is well known and the DOL is aggressively moving to have these rules finalized and in place by the second quarter of 2016.

Her third strategy is the appropriations approach outlined earlier in this post.  Needless to say, there is considerable opposition in both the public and private sector to these rules moving forward.  More updates will come as this unfolds.

- Jason Grantz
 

Mailbag: Q&A with The 401(k) Study Group

The 401(k) Study Group has created a new segment with their Blogtalk radio podcast called 'Mailbag' which is an 'Ask the Expert' style radio interview.  I was fortunate enough to be tapped by Chuck Hammond to be their first "Expert" tapped to answer questions.  Below is the link.  Enjoy!

Ask the Expert' with Chuck Hammond

- Jason

The DOL's Conflict of Interest Rules - Summarized and lots of links!

Last week, the Department of Labor (DOL) unveiled its long awaited Conflict of Interest rules (regulation, not law).  Here is a link to the DOL's fact sheet,  http://www.dol.gov/protectyoursavings/FactSheetCOI.pdf.  The regulation itself is hundreds of pages.

So, at first blush I think that the proposal is slightly less onerous than I thought it would be, but it does some things that are going to be a big deal.

1   1.)    It broadens the definition of who is and who is not a fiduciary and takes away the loophole on what is and isn’t advice.  Essentially, my read is that if you are a financial advisor/adviser, agent, registered rep, broker, Investment Consultant, etc. who recommends anything to a retirement plan, plan sponsor or participant, you will be considered a fiduciary, even if it is singular advice.  My take is that it will be virtually impossible to be a rep on a 401(k) plan and not be a fiduciary.

 

2.) IRAs are pulled in as part of the jurisdiction here.  That includes recommendations about IRA rollovers and in advising IRA holders on underlying investments, holding IRA advice givers accountable to similar standards more/less as they would be on ERISA plans.
 

      3.) There will be a Best Interest Contract Prohibited Transaction Exemption (BIC PTE) – This is going to get a TON of comments during the comment period as it seems pretty significant in the amount of required detail and submission including sending a copy to the DOL, thus requiring an investment consultant to be highly visible to the DOL for regulation purposes.  This is the way the DOL is saying an advice giver can be conflicted, I (along w. others in the industry I've spoken to) are highly skeptical of this process.

      

      4.) Enforcement of the new rules seems to be an issue since while the DOL has the power to write the rules, only the IRS has the power to enforce and, as of this writing, they aren’t staffed to enforce ERISA-like standards on IRAs.

For this proposal to become rule, these are the next steps:

1. Comment Period – 75 days, ending on/about 07/6
2. Public Hearing – within 30 days after Comment Period 
3.  Preparation of Final Rule – This will take some time as DOL will need to absorb the public comments and make changes.  Then sent to the Office of Management and Budget (OMB) to review. 
4. Effective Date – The rule becomes effective 60 days after publication in the Federal Register once back from OMB 
5. Applicability Date – 8 months later

Assuming this goes through with no further opposition (Congressional, SEC, industry, etc.), the industry will need to be ready to function under these new rules sometime in late 2016, figure Q3.

My thoughts, I’m still of the opinion that this can get derailed.  I believe that even written as is, that if any delay in efficiency of the above process from here were to occur that causes it to push into Q4 of 2016 or later will effectively kill it, or will at least be likely to because of the Presidential election.  

It is common for incoming president's to halt any unfinished business from the previous administration, this is often what occurs even when the new President is in the same party as the previous president.  So, while the DOL did a good job in getting this out with enough time to actually get it through, they really did wait until the last minute.  They should have put this out last year. 

That said, the DOL and the industry knows about this timeline concern.  On April 21st, a letter (The letter) was sent to the DOL from an association of 20 industry trade groups  asking for the Comment Period to be extended from 75 to 120 days.  On April 23, Labor Secretary, Thomas Perez indicated that the DOL has no intentions of delaying this indicating that they want this 'fast-tracked' and not impacted by the next presidential election, 'DOL Not Budging'.  

Also, of interest, according to Bloomberg several democratic Senators have actually pushed back against the DOL's proposal despite presidential backing, see article Dems Pushback

citing significant problems with the bill potentially leading to reductions in consumer services.  Seemingly, the fight here is still ongoing and, more opposition is expected. 

UPDATE: As an update to this delay strategy, a group of democratic congressman, 18 of them, have also joined the voices asking for more time, attached here;  Democratic Reps Want Longer Comment Period.

UPDATE 2: More requests for delay, this time from three dozen republican senators, pressure is mounting!  The senate letter here; Senate Letter asking for delay

A number of groups have put out summaries of the regulations, estimates on impact and some general thoughts as to where the problems are initial visible.  I'm sure more will come on this issue.  Below for links to the summaries.

Happy Reading!

http://napa-net.org/Portals/1/Game-Changer.pdf

http://wagnerlawgroup.com/DOLFiduciaryRuleAlert.htm

http://www.fi360.com/news/detail/executive-summary-of-the-dol-fiduciary-rule-proposal

http://www.ballardspahr.com/alertspublications/legalalerts/2015-04-15-department-of-labor-proposes-new-regulations-on-fiduciary-advice.aspx

http://www.jdsupra.com/legalnews/dol-proposes-sweeping-expansion-of-fiduc-87619/

http://www.jdsupra.com/legalnews/dol-reproposes-expanded-erisa-fiduciary-98660/
http://www.sutherland.com/NewsCommentary/Legal-Alerts/172823/Legal-Alert-DOL-Reproposes-Expanded-ERISA-Fiduciary-Definition-and-Revised-Complex-of-Exemptions

- Jason Grantz

 

Fiduciary Standard - The Big Fight

I've written about this topic online a number of times, but I feel like the subject to non-industry people (and even some industry people) is a bit nebulous.   The issue at hand isn't whether or not the retirement plan industry, or the individuals making up the financial services industry are against the idea of a standard of care which puts the individual clients interest first.  In fact, arguably, just about everyone whom I've encountered in my career operates with the idea that putting the clients interests and needs is the primary/exclusive consideration when making recommendations or making decisions on behalf of clients.

The issue at hand isn't one of altruism vs. evil, rather it is one of practicality of implementation.  Simply put, the delivery systems in place that allows financial services to be delivered has primarily been built as a commission for service (sales) foundation.  Combine this payment system with the idea that giving advice which then generates a commission is a conflict of interest and what you have is 'conflicted advice'.  Under most regulations, whether it be ERISA or SEC rules, or the IRC all have conflicted advice in the category of prohibited.

It is in this area that the fight for/against the fiduciary standard lives, not whether or not actually providing advice in the best interest of clients is the right thing to do or not.  We all know it is.  Over the years, many practitioners; more and more every day are switching to a fee for service model.  This business model disconnects the revenue payment to the practitioner from the advice they are giving and eliminates the conflict of interest......theoretically.

However, I have seen registered reps (brokers, financial consultants, etc.) give very sound advice, frankly sole interest of the client type advice which would be a prohibited transaction should a fiduciary standard be applied ---AND--- I've witnessed so-called fiduciary, fee-only practitioners, significantly overcharge (because they can) for mediocre, and sometimes poor advice. 

What I'm positing is that the practitioner who operates in one model or another can be great, okay, mediocre or poor and the environment that they operate in shouldn't matter, but the legislation that gets drafted to deal with the practical issues shouldn't penalize any of the great practitioners from continuing to provide great financial services.  Unfortunately, from what I've seen from the DOL and the SEC on this so far, final rules not yet published, it appears that barriers are being built rather than roads.

In short, all clients are owed a fiduciary standard of care and as practitioners we should all operate that way.  Legislating a one-way system is not the answer, however, both models, the fee-only and the commission-based should have a valid way to operate so that it isn't a practical issue anymore.

- Jason Grantz

  

Obama directs Labor Department to move ahead on fiduciary rule

Earlier today, the white house put out a press release stating that the president plans to direct the Department of Labor to move ahead with a proposal that would raise investment-advice standards for brokers handling retirement accounts, arguing that conflicted advice is costing Americans billions.

It is the opinion of this author that the government doesn't understand that the cost of distribution is the main reason for the high costs of financial products in the retail channel, and that registered reps steer people into products whose expenses cover the cost of distribution--not necessarily because they want Americans to pay excessively for those products.




Professionally, in my experience, most of the financial service professionals (registered reps, financial advisers, financial consultants, RIAs, etc.) all genuinely try to give good advice or good counsel to their clients and prospects.  No one works for free, and thus when working with a client often times the mechanics of payment force this financial professional to choose between embedding their fees into the products (mutual fund 12b-1's for example) or working with clients on a fee-only arrangement where the client is invoiced.  


Strictly from the perspective of ease, it is often easier to have the investments foot the bill of the professional.  That is what the government is using as its primary factor in stating that the industry costs clients billions.  Not that the advice is bad, but rather that the investments are more expensive and thus intentionally harmful when really, they are more expensive due to the fees paid for the advice received.  


A good old American exchange of fees for services rendered.  


Don't get me wrong, I'm all for the idea that financial consultants must be required to always act in the client's sole interest when giving advice, however this rule will paint all financial professionals as fiduciary advice givers when many of them really aren't doing that or are even qualified to do so.  It's a poorly written rule from where I sit and think it needs to go back to the drawing board.

The link to the press release here: 
  
http://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf


**UPDATE**
http://www.sec.gov/news/speech/022015-spchcdmg.html#.VOtkXi65lz6


See the above link.  Apparently, SEC Commissioner Gallagher agrees with my opinion.  Within this speech is some pretty harsh criticism of the DOL's rule making calling it a "runaway train" and goes on to really pick apart the White House's internal memo.  Worth the read.



- Jason Grantz

Fiduciary, as easy as 1., 2., 3.,

A solid reminder piece was written and published today on NAPA-net.org.  The article was titled '3 Things Every Plan Committee Member should know'.  Here is the link.
 
3 Things Every Plan Committee Member Should Know

Here are the three things:
  

1. You are an ERISA fiduciary. Even as a small and relatively silent member of the committee, you’ll direct and influence retirement plan money — and it’s that influence over the plan’s assets that makes you an ERISA fiduciary. 

2. As an ERISA fiduciary, your liability is personal. How personal? Well, you may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. You can obtain insurance to protect against that personal liability — but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today. 

3. You are responsible for the actions of other plan fiduciaries. All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do, and are permitted to do.

Besides the three basic's, which essentially say, being a fiduciary is serious, potentially hazardous and requires responsible caution, the article also raises a few very good points, namely:

- Many plan committee members come from staff of the employer and are frequently put on the committee for no other reason than that someone has to do it.  Background may not be part of the decision and expertise may be absent altogether.


- Fiduciaries are required to act solely (re: exclusively, i.e. ONLY) in the best interests of the plan participants and beneficiaries, and that they MUST act prudently, usually means they have process' in place for making important decisions.  It goes on to iterate the importance of investment diversification and ensuring that the plan pays only reasonable expenses for services.


Finally, the best point that the article makes, in my opinion, is that it's hard  to be a plan fiduciary.  This is especially true if the committee hasn't read plan documents, doesn't have any policies or procedures to follow or doesn't understand how much they are being charged, and for what or how the fees are being charged. 

Unfortunately, in my professional experience, often it is the case that the expert standard of care fiduciaries are bound to under ERISA is not realistic to expect of the plan committee.  Most plan committees are well intentioned, but not experts.   A wise person once told me that in the absence of expertise when expertise is needed, a prudent person will hire it.  Good advice for the majority of well intentioned, inexpert fiduciaries.

- Jason Grantz

2014 ERISA settlements top $1.3 billion

The largest class-action settlements in claims brought under the Employee Income Retirement Security Act topped $1.3 billion in 2014, almost 10 times the sum of the biggest settlements from the previous year.

No other area of employment workplace law saw that kind of explosive growth last year. In fact, settlement numbers in other areas of workplace class-action claims were down, according to the 2015 Workplace Class Action Litigation Report, published by Seyfarth Shaw, a Chicago-based law firm.

The settlement figures for the biggest ERISA cases were higher in 2014 than at any other time in recent history. In 2011, sponsors settled nearly $900 million in the largest cases, the only time since 2009 when the figures were remotely close to last year’s record numbers.

Settlement figures for other areas of labor law paled in comparison: $215 million was settled in wage and hour class-actions, and about $228 million in employee discrimination cases.

By the close of 2014, ERISA lawsuits totaled 7,163, down marginally from 2013. Several “mega-settlements” pushed the ERISA tab for the 10 largest settlements beyond the billion-dollar mark. Among them: 

In August 2014, a $480 million settlement was reached in Meyers vs. Daimier Trucks North America LLC, in a class-action filed by retired UAW workers alleging the truck manufacturer illegally cut benefits. 

The next month, a $415 million settlement was approved in Healthcare Strategies Inc. vs. ING Life Insurance & Annuity Co. 

And in December, a tentative $140 million settlement was reached in Haddock vs. Nationwide after 13 years of litigation. It’s believed to be the largest ever in a service-provider revenue-sharing case. 

A couple of quick conclusions:

• The amounts here are staggering, especially from the perspective of class action attorneys.  Surely, this information will draw more attorneys into the fray.
• Based on these figures, litigation on ERISA cases seemingly is poised to increase in both quantity and voracity.
• As a result, one would naturally expect the number of players in the ERISA space to decrease due to the risks, with a natural result being those firms doing the right thing for their clients and those firms with a truly dominant position in the space where litigation can be fought or absorbed.

-Jason Grantz