Compliance October 19, 2015

Perez Speech Hints at DOL Fiduciary Flexibility

Speaking at a Brookings Institution public meeting, U.S. Secretary of Labor Thomas Perez said he is “confident we will be making changes to improve and clarify our proposal.”
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There is very little doubt remaining that the Department of Labor will stand firm on issuing a revised fiduciary rule under the Employee Retirement Income Security Act (ERISA), but comments made late last week by Labor Secretary Thomas Perez suggest additional revisions to the controversial proposal are still possible—even likely.

Perez started his address by noting “we’re in the middle of a huge shift in the retirement paradigm … to quote the learned philosopher Bob Dylan, ‘the times they are a changin’.”

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“Quite simply, this isn’t your father’s or your mother’s retirement,” Perez said, citing the common theme that Americans can no longer expect to work 40 years at the same company before retiring with a generous, or at least adequate, lifetime pension benefit. In the new environment dominated by defined contribution (DC) plans and a widespread lack of benefits coverage for many private sector workers, Perez said he firmly believes Americans now more than ever “need retirement advice they can trust. They need to work with someone whom they know is acting in their best interest.”

He warned that, without a best interest standard, it is too easy for advisers to benefit from indirect payments and hidden fees. “It’s too easy for working families to be unwittingly victimized by the corrosive power of fine print,” Perez said. “I don’t want to take too much time today, but I could share heartbreaking stories of families that saw their nest egg vanish because they put their faith in an adviser who may have given ‘suitable’ advice, but who wasn’t pursuing their best interest.”

Despite the tough-cop tone, Perez later said he does not want the fiduciary rulemaking to follow “a white hat-black hat narrative.”

“To be sure,” Perez said, “there are a few rogue actors out there. But this isn’t about bad people doing bad things; it’s about good people operating under a structurally flawed system where the incentives of the adviser are not properly aligned with the best interests of the customer.”

NEXT: Concrete changes in proposal still possible 

Perez said the financial advisory industry has been unwilling, for the most part, to admit it is in need of stricter policing.

“When we started doing our outreach as we were developing the proposed rule, some stakeholders' initial reaction could be summarized as, ‘Problem, what problem?’” Perez explained. “The status quo is working just fine, they said. But as our conversations evolved, I am heartened that there was a gradual but growing recognition among many about the importance of an enforceable best interest standard.”

Perez added that some industry practitioners have said that they support such a standard in principle, but that operationally speaking it will be too difficult to implement.

“But the fact is that a substantial segment of the market has already found a way to abide by it and do quite well for themselves,” Perez said. “We've heard and understand these concerns about logistical challenges during the comment period, and we remain flexible on the question of how best to make this work. We want to set parameters, not suffocate industry. The objective here is to provide guardrails, not a straitjacket.”

Perez said the Department of Labor (DOL) knows “there is no one-size-fits-all template here. We believe there should be flexibility for industry to discern the best way, given the unique attributes of their business, to implement a best interest standard while staying toward the center of the road, safely between those guardrails.”

That's why the proposal includes various carve-outs and exemptions, he said, to give industry that flexibility. “Flexibility is also baked into the cake of the proposed best interest contract exemption, which is designed to accommodate existing business models while still protecting consumers,” he added.

NEXT: Think more time is needed? 

“When people said that they needed more time to review the proposal, we listened again and extended the comment period by a few weeks,” Perez said. “I testified in June before a House Education and Workforce subcommittee and in July before a Senate HELP subcommittee. In August, the Labor Department reopened the comment period and hosted four days of public hearings, where we opened the floor to an array of perspectives.”

The second comment period remained open until September 24, giving everyone plenty of time to review the transcripts from those hearings. According to Perez, “this is one of the longest comment periods of any rule I have been involved with,” almost six months on top of at least 18 months of informal outreach. “All told, the number of comments and petitions received on the rule and its exemptions comes to 391,621,” he said.

Perez said the DOL will now focus on “spending the months ahead evaluating all the comments and giving them full consideration. There have been many constructive suggestions for improvements. Among many other things, we've heard concerns about potential burdens associated with the point-of-sale disclosure, data retention and the mechanics of implementing the best interest standard.

“I can't say right now exactly what the outcome will look like on these issues or any other comments and suggestions we have received,” Perez continued. “But I am confident that we will be making changes to improve and clarify our proposal, addressing legitimate concerns that have been brought to our attention. That is what notice and comment rulemaking is all about.”

A full transcript of Perez’s commentary, delivered October 16, is here.

Data and Research October 19, 2015

U.S. Slips in Mercer's Retirement Rankings

A new Mercer study cites increased life expectancy and reduced estimates in funding available for Social Security as primary reasons for the United States' drop in the firm’s 2015 global retirement ranking.
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Global retirement readiness rankings are inherently subjective and often controversial, but Mercer says the U.S. is clearly slipping compared with some other developed nations—from 13th to 14th for the United States in the firm’s 2015 global retirement ranking.

Mercer says the drop reflects a continuation of trends from the 2013 ranking, in which the U.S. placed 11th among the 25 countries surveyed. Now in its seventh year, the firm’s Melbourne Mercer Global Pension index (MMGPI) report measures retirement systems against more than 50 indicators, organized under the sub-indices of adequacy, sustainability and integrity.

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Emily Eaton, a senior consultant in Mercer’s International Consulting Group, says the U.S. still stands firmly in the middle of the pack for retirement system efficacy, but concerns over the adequacy of the typical level of benefits provided under the U.S. system has dragged down scores, especially after the most recent financial crisis.

“The lack of employer-provided supplemental retirement benefits for many Americans and the relatively low labor force participation rates of our older workers are also contributing factors to the U.S. ranking,” she says. “There have been a series of regulatory changes to address these issues, but additional action could improve the adequacy and sustainability of the U.S. system.”

She notes the 2015 MMGPI “looked beyond the annual rankings to observe changes over the last seven years and assess which pension systems will continue to deliver and which ones are at risk.”

 NEXT: Labor participation a major factor

Both a positive and a negative indicator for individual retirement savers, all of the 11 countries that have been part of the MMGPI since it began in 2009 have experienced an increase in the expected length of retirement, with the average length rising from 16.6 years to 18.4 years since 2009. According to Mercer, just five countries—Australia, Germany, Japan, Singapore and the United Kingdom—have increased their pension age to offset the increase in life expectancies.

Eaton says even these changes were “not enough to halt the increasing length of retirement” among these nations, and that it doesn’t require a degree in mathematics see the troubling connection between longer retirements, slow wage growth and macroeconomic sluggishness.

For the 16 countries that have been part of the MMGPI since the 2011 report, Mercer finds the average labor force participation rate for 55- to 64-year-olds has increased from 57.9% to 62.2% between 2011 and 2015, or just over 1% per year. However, averages can be misleading, Mercer warns, as the labor force participation rate among at-risk older population segments in many countries slid backwards since 2009, most notably in the United States.

“Extending the years that individuals spend in the work force is one of the most positive ways of developing sustainable retirement systems when life expectancies are increasing,” adds David Knox, global pension risk index report author and a senior partner with Mercer Retirement. “While there is a natural limit to the participation rate at older ages, with most countries still below 70%, the scope for significant increases across the world remains, which would improve the sustainability of many pension systems.”

 NEXT: Some universal suggestions 

Overall, Mercer finds, there is a persistent and enormous variety in the level of pension assets held within a given country, ranging from 1.8% of gross domestic product (GDP) in Indonesia and 6.0% of GDP in Austria, to 160.6% of GDP in the Netherlands and 168.9% of GDP in Denmark.

Knox suggests the diversity in pension assets held as a percentage of GDP “recognizes that some countries have very limited private pension arrangements, whereas others have well-developed and mature pension systems.” Therefore, widely applied solutions to the global retirement crisis are likely to be less effective than locally driven initiatives that respond to specific situations and problems.

That said, Mercer suggests there are some common goals that should be kept in mind across geographies and distinct retirement systems. For example, Mercer urges policymakers to consider adding or raising minimum pension benefits for low-income workers while adjusting the level of mandatory contributions to increase the net replacement for median-income earners.

Other potential strategies suggested by Mercer include “improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement, … reducing pre-retirement leakage by further limiting the access to funds before retirement … and introducing a requirement that part of the retirement benefit must be taking as an income stream.”

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