The DOL Is From The Government But Is It Here To Help?
Today’s title was inspired by our 40th President, Ronald Reagan. In a speech at Yale in the late 1980’s, he used the phrase “The nine most terrifying words in the English language are ‘I'm from the government, and I'm here to help’." Even considering his concern about the actions of the government in relation to the citizenry, I think he might agree with me that new Department of Labor rules actually are going to help individuals
The issue arose recently when a client shared a concern. A friend’s insurance agent had warned him about an upcoming increase in retirement plan costs. According to the agent, costs were going up because of a new rule from the Department of Labor which requires a different way of handling retirement accounts. Because of all the new government-imposed regulations, costs were simply going to have to rise.
My client called me to ask what the DOL had to do with retirement accounts and why they would impose new rules, especially expensive new rules. The answer to his question requires borrowing the Way Back Machine from the Rocky and Bullwinkle Show for a quick visit to the Depression era, then on to the year 1974 before returning to the present. Here’s a sketch of our journey:
After the Depression, a number of laws and rules were imposed to “make sure that never happened again”. Among them was the Glass-Stegall Act which restricted how banks could invest their capital, especially their depositor’s capital. Over the years, special interest groups managed to weaken the law until the offending sections were fully repealed in 1999, allowing banks to engage in brokerage activities. That decision made the housing crash of 2007-8 possible, as banks underwrote and invested in a wide range of high-risk housing-related securities.
Another piece of post-Depression legislation was the Investment Advisor Act of 1940. It required Investment Advisors to act as fiduciaries, that is, to put their clients’ interests ahead of their own. However several categories of potential advice-givers were exempted from that regulation including accountants, engineers and stock brokers. The first two categories were already bound by adequate professional regulation. In the case of stock brokers, i.e. those who sell securities, there was a different reason. Because sales is a transactional relationship, the conflict inherent between a buyer and a seller was deemed so apparent as not to require comment in the law. Instead, it was assumed that each party knew to look out for themselves. The salesperson always owed that fiduciary duty of care to the employer, not the client. Caveat Emptor was the order of the day.
Around the same time, Securities and Exchange Commission agreed to allow the brokerage industry to regulate itself. It seemed logical that self-policing would work, since industry and government shared a common goal of ensuring the long term viability of an open marketplace for buying and selling securities. The industry group which assumed regulatory duties was the National Association of Securities Dealers, now known FINRA. Disappointingly, although perhaps not surprisingly, this self-regulating industry watchdog hasn’t gone to a great deal of trouble to protect consumers. It has allowed brokerage firms (and their sales representatives) to use advertising and in-person comment to blur the line between sales and advice while charging commissions based on product sales. This, among other reasons, is why the DOL spent six years drafting the recently-promulgated rule which concerned my client’s friend.
Now let’s move ahead to 1974 and the passage of the Employee Retirement Income Security Act (ERISA). This is the legislation that establishes minimum standards for private pension plans, including your 401(k). Although basically not a regulator of the securities industry, the DOL believes that ERISA gives it the power to delve into the costs and other details related to retirement plans. Briefly, the new rule switches the salesperson’s fiduciary duty of care from the brokerage firm (or insurance company) to the customer. After years of investigation, the DOL believes that plan fees are unreasonably high, costing a typical participant several percent of their account value per year. By requiring the salesperson to put the customer’s interest first, the DOL is attempting to reduce retirement plan costs.
While that may sound like a good idea to you as a plan participant, multiple lawsuits have been filed against the DOL, alleging that it lacks the authority to write such a rule in addition to taking issue with most aspects of the rule itself.
By whom were the lawsuits brought? Well, the sellers of such plans, like the insurance company for whom the agent mentioned earlier works. Generally, it’s the industry’s contention that costs will be driven up instead of down, leaving smaller investors with no place to turn.
While I believe that the rule will, in fact, lower costs for participants, this is the perfect time for those involved to review their plans. Plan sponsors have always owed a fiduciary duty to participants so have always been responsible to make sure good quality, low cost funds are being offered. If you are a plan trustee or sponsor, you’d be well advised to review the plan’s total costs compared to the DOL’s guidance. In fact, if you are a participant in a plan, you should probably do the same. The DOL’s contention is exactly right: every dollar of cost paid to a brokerage firm or insurance company is a dollar you don’t have for retirement. The DOL provides information about fees on its website for any who want to take a look.
And the personal attention that brokerage and insurance companies say small investors will lose? Those of you who are participants in a retirement plan may remember that the broker/agent is more an order-taker than a giver of advice. While individual contact is often made, it’s the very rare situation when the salesperson is willing to make specific recommendations based on your personal situation.
Of course, low costs and personalized advice have been available since 1940, as many Registered Investment Advisors offer retirement plan assistance. For a list of advisors who do owe their clients that fiduciary duty of care, you can go to the fee-only planner’s website.
Try as I might to make my articles understandable, I know that others are likely to be better (and more entertaining) at explaining a new topic. For those who can spare 20 minutes, taking a look at John Oliver's perspective on retirement plans might be time well spent.