Fiduciary Proposal Comment Period Closes, Receives Both Praise and Criticism

Tuesday, the comment period for the Department of Labor’s retirement security proposal, sometimes referred to as the fiduciary rule proposal, expired.

The proposal would apply fiduciary status under the Employee Retirement Income Security Act to certain one-time sales interactions, such as rollovers from retirement plans to individual retirement accounts, annuity sales, and plan investment menu design. The DOL proposal has received a wide range of feedback from firms such as Morningstar and industry lobbying groups including the ERISA Industry Committee and the American Council of Life Insurers, among others.

The ERISA Industry Committee did not take a clear stance on the proposal but did offer some recommendations the group said could improve it. ERIC’s recommendations primarily revolved around clarifying to whom the proposal would apply. Specifically, ERIC asked DOL to exclude “hire me” conversations, educational materials, and human resources employees from being included as fiduciaries under the proposal.

Morningstar’s comment letter was supportive of the proposal and argued that, as proposed, it would help retirement savers in smaller plans significantly by lowering their management fees. Morningstar estimates that $55 billion would be saved over ten years by retirement savers as a consequence of access to better advice and lower fees, especially advice rendered to a plan about investment options. About $47 billion of the savings would come from plans that have $25 million in assets or less.

Speaking of management fees paid by smaller plans, the letter says, “Some of these investment fees look outlandish compared to the investment universe.”

Other commenters, including Brian Graff, the CEO of the American Retirement Association, noted at a hearing hosted by DOL in December, the potential gains for underserved, smaller retirement plans that could come from the proposal.

Lia Mitchell, a senior analyst for government affairs at Morningstar, cautions that Morningstar’s savings estimates are in “completely undiscounted dollars.” This means that they do not account for changes in behavior that could occur because if the proposal if finalized, such as an increase in advisory fees. Recordkeeping and administrative fees “are held constant,” Mitchell explains.

Morningstar also recommended that the DOL require advisers to consider a saver’s potential Social Security income when determining whether a recommendation, such as a rollover or annuity purchase, is in that person’s best interest. Mitchell explains that the age at which someone claims Social Security can have “a higher impact than private solutions” such as an annuity purchase.

The American Council of Life Insurers urged the DOL to completely withdraw the proposal. The council’s letter argues that ERISA is a “sole interest” standard and this is “incompatible with the very nature of sales and marketing activities.”

Further, the proposal would hurt lower-income savers by reducing their access to insurance products and rollovers by increasing their cost, ACLI argued.

The group also said the proposal should not apply to annuity products, because the complexity and labor intensity of the sales process for those products is better accounted for with a commission-based compensation model for insurance agents.