Republican leadership of a House subcommittee tipped their hand with the title of a hearing on the Department of Labor's proposed fiduciary rule.
Seconds into the inquiry—"Restricting Access to Financial Advice: Evaluating the Costs and Consequences for Working Families and Retirees"—the chairman of the Education and Workforce subcommittee on Health, Employment, Labor and Pensions, David Roe, R-Tennessee, threw the first of many haymakers at Labor's proposal.
"We're here to address a regulatory scheme that will hurt a lot of families, retirees and small business owners, and it could not come at a worse time," said Roe, a medical doctor whose practice has sponsored a 401(k) plan.
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Calling for "bold, bipartisan" solutions, Roe said the DOL's proposal would "move the country in the opposite direction," and that low and middle-income workers will "bear the brunt of this misguided proposal."
Roe said the latest proposal should suffer the same fate as the first proposal the DOL advanced in 2010.
In his opening statement, Labor Secretary Thomas Perez countered that, while most retirement advisors try to do right by their clients, they operate in a "structurally flawed" system that misaligns the interests of the financial services industry with their clients.
The proposal's "singular goal" is to realign customers' best interests, said Perez.
In more than two hours of testimony, Perez responded to claims ranging from the specifics of the proposal's prohibited transaction exemptions to the veracity of the Council of Economic Advisors' cost estimates, to whether or not the DOL adequately consulted with the Securities and Exchange Commission.
Chairman Roe took issue with the $17 billion IRA investors lose annually from conflicted advice, a number arrived at by the White House's Council of Economic Advisors and widely-cited by proponents of the proposal, as it was in Secretary Perez's testimony.
That figure, which Roe said came from a comparison of front-loaded mutual funds and annuities in IRAs, is questionable, because it assumes that when you pay a front-loaded mutual fund fee, you pay that every year.
"I've got a loaded mutual fund in my own retirement plan I haven't changed in 15 years," suggesting that higher one-time fees paid with loaded funds can end up being competitive with no-load funds, which can charge 12b-1 fees that are assessed annually.
Beyond more nuanced discussion on the merits of loaded funds and proposed prohibited transaction exemptions against them, Roe suggested the DOL's plan would make it more difficult for individuals to save for retirement, and more challenging for small business to provide retirement plans.
"It's a confusing world for people that want to get advice," said Perez, referring to the split fiduciary and suitability standards that now govern the marketplace.
"That's remarkably confusing for consumers," he added.
In creating a uniform standard, the proposal will make saving for retirement easier for individuals, and providing retirement plans more clear for small employers, countered Perez.
But questions of the proposal's workability were also raised from Democrats.
The ranking member on the subcommittee, Jared Polis, D-Colorado, echoed Rep. Roe's concerns over the Best Interest Contract Exemptions, which would allow advisors to make commissions on products like loaded mutual funds, but not without thorough cost disclosures, including one, five, and 10 year projections of "anticipated" costs.
Polis wondered about the cost-benefit to such an extensive disclosure contract and whether such a complicated contract can provide the average investor with "information they can process."
"Is that additional burden worth it," asked Polis.
Maybe the touchiest point in the testimony came from questioning from Education and Workforce Chair John Klein, R-Minnesota, who said he expects the rule will prove to be unworkable, and implied the Labor Department had not been fully forthcoming in documenting its coordination with the SEC.
Klein said that months of requests for documentation of communication between the agencies had been ignored until just before the hearing, when the DOL delivered 827 pages of "mostly scheduling emails."
"This leads us to believe the Department has still not provided a complete response to our inquiry," Klein added.
"You're not claiming executive privilege for not providing more documents, you just haven't found them yet," asked Klein.
The issue presented in the oversight request was whether or not the DOL had collaborated with the SEC, said Perez.
"The documents you have, I would respectfully assert, demonstrate both a wide breadth and depth of collaboration with the SEC," added Perez.
Perez said that "virtually" every section of the proposed rule involved input from the SEC.
"If the question is were we talking, the answer is 'a lot'," countered Perez.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
