Is DOL’s new fiduciary rule an 'overreach'? House subcommittee holds hearing

Depending on who you believe, the Labor Department’s new fiduciary rule proposal to require investment advisors to comply with fiduciary standards is either a much-needed update to current rules or a serious regulatory overreach by the department.

Those deep fissures emerged again last week, as the House Health, Employment, Labor, and Pensions Subcommittee held a hearing Feb. 15 on the divisive proposal, “Protecting American Savers and Retirees from DOL’s Regulatory Overreach.”

“The broad-reaching new fiduciary rule regulates retirement accounts far beyond employer-sponsored benefits, like IRAs,” subcommittee Chairman Rep. Bob Good, R-Va., said, as he opened the hearing. “The rule is clearly outside the purview of the agency, yet they are trying to regulate it anyway.”

Full Education and Workforce Chairwoman Rep. Virginia Foxx, R-N.C., said that the Labor Department proposal was a “solution in search of a problem.”

Ranking subcommittee Democrat Rep. Mark DeSaulnier, D-Calif., disagreed.

“The Biden Administration’s retirement security rule levels the playing field and will ensure that workers, retirees, and retirement plan sponsors receive advice that is in their best interest,” he said.

In proposing the fiduciary rule at the end of October, the Biden Administration said that the existing definitions in the old rules no longer protect investors.

“Requiring investment advice providers to comply with fiduciary standards protects retirement investors from harmful conflicts of interest,” the Labor Department said.

The department added that “Conflicts of interest can put an investment advice provider in the position of choosing between what’s good for them and what’s best for you.”

Until recently, employer’s fiduciary responsibilities for managing their retirement plans have been fairly straightforward. The Department of Labor requires plan sponsors to exercise prudence when evaluating and choosing retirement options, managing risk and avoiding conflicts of interest. But the DOL’s new rules could hold plan sponsors responsible for ensuring that retiring employees receive appropriate fiduciary investment advice long after they retire and employers who fail to meet these fiduciary standards could find themselves in the crosshairs of the DOL and disgruntled participants.

Comments on the proposed rule were due Jan. 2; the department received more than 20,000 comments on the plan.

Witnesses testifying at the subcommittee hearing also were divided over the impact of the proposal.

“The proposal’s fundamental flaw is that it would sweepingly confer fiduciary status on virtually all financial professionals and salespeople, including broker-dealer representatives and insurance agents, who today are available to provide much-needed assistance to retirement investors, including plan participants and IRA owners,” Thomas Roberts, an attorney with the Groom Law Group, told the subcommittee.

Related: Key steps employers should take (before DOL’s ‘complicated’ new fiduciary rule is final)

Roberts said that the “inappropriate” assignment of fiduciary status to professionals such as broker-dealer representatives and insurance agents who earn transaction-based compensation would curtail retirement savers’ access to much-needed advice.

Roberts added that if fiduciary status were assigned to those financial professionals, the commissions that they earn would automatically be classified as kickbacks.

However, Joseph Peiffer, president of the Public Investors Advocate Bar Association, said that the change is long overdue, adding that when ERISA was enacted in 1974, 401(k)s did not exist. He said that back then, most Americans had defined benefit plans such as pensions, which are afforded strong ERISA protections.

“All of my clients over my nearly 25 years of experience, like nearly all investors, thought that their advisors were their fiduciaries,” he said.

But Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute said that the Labor Department is seeking to impose ERISA fiduciary status on nearly every transaction between a financial professional and a retirement saver.

“The DOL has provided no objective evidence of actual harm to retirement savers that cannot be effectively addressed under current rules,” he added.