Compliance February 23, 2015

President Fires Warning Shot in Fiduciary Rule Debate

The Obama Administration is strongly backing the Department of Labor’s ongoing fiduciary redefinition effort, with the president advocating for a strengthened fiduciary standard amid a flurry of industry reports that new rule language is imminent.
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The Obama Administration today published an outline of remarks that the president would deliver to the AARP, in which he argues financial advisers are subject to serious conflicts of interest that hurt millions of working and middle class families.

“The rules of the road do not ensure that financial advisers act in the best interest of their clients when they give retirement investment advice, and it’s hurting millions of working and middle class families,” the administration says. “A system where Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investments—with high costs and low returns—instead of recommending quality investments isn’t fair.”

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The administration says these conflicts of interest are costing middle class families and individuals billions of dollars every year. On average, they result in annual losses of about one percentage point for affected investors, the remarks suggest.

“To demonstrate how small differences can add up, a one percentage-point lower return could reduce your savings by more than a quarter over 35 years,” the administration notes. “In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.”

The remarks explain that many advisers do in fact work through different business models that put their customers’ best interest first. “They are hardworking men and women who got into this work to help families achieve their dreams and want a system that provides a level playing field for offering quality advice,” the remarks continue. “But outdated regulations, loopholes, and fine print make it hard for working and middle class families to know who they can trust.”

Reacting to President Obama’s planned speech to the AARP, and to his suggestion that delivery of a new version of the fiduciary rule proposal by the Department of Labor (DOL) to the Office of Management and Budget (OMB) would soon occur, industry groups strongly rejected his claims of widespread adviser impropriety. 

The National Association of Plan Advisors (NAPA) issued the following statement in response to the Obama Administration’s remarks: “Today the White House launched an attack on advisers and so-called ‘hidden fees’ and ‘backdoor payments’ by moving forward with a regulation that has its own hidden backdoor effect —keeping many Americans from working with the trusted adviser of their choice, even in the critical decision regarding rollovers from their 401(k) and 403(b) plans.”

Brian Graff, executive director of NAPA, says investors should be protected from unfair and deceptive practice, “but all indications are that this rule will block Americans from working with the financial advisers and investment providers they trust simply because they offer different financial products—like annuities and mutual funds—with different fees.”

“This rule could even restrict who can help you with your 401(k) rollover,” he adds.

Graff’s warning encapsulates the other side involved in the fiduciary redefinition fight. Like NAPA, other advisory industry advocacy groups point back to the failure to reach consensus on a previous version of the controversial regulation, which was withdrawn in 2010 following harsh bipartisan criticism of its potential impact on access to professional investment advice, particularly for lower- and middle-income workers. 

“The best way to address concerns about ‘hidden’ fees is through better transparency, not by blocking 401(k) participants from working with the adviser of their choice,” Graff says. “If the administration moves forward with this proposed rule, American savers will be forced to pay out-of-pocket for their financial advice, or be limited to financial products with identical fees. Tens of millions of American savers who cannot afford to pay out-of-pocket will lose access to their financial adviser or be severely restricted in their choice of financial products.”

For its part, the DOL says it is still getting ready to issue a notice of proposed rulemaking at some point in the months ahead, “beginning a process in which it will seek extensive public feedback on the best approach to modernize the rules on retirement advice and set new standards, while minimizing any potential disruption to good practices in the marketplace.” According to the DOL, the rule language must first be reviewed by the Office of Management and Budget, which can take up to 90 days but can be expedited.

Given the controversy, it remains unclear what the path forward will be for the new fiduciary rule. Some have speculated swift Congressional action could follow the proposal or adoption of the rule, which would require the DOL to merge its rulemaking effort with a similar but lesser-developed effort ongoing at the Securities and Exchange Commission. 

The administration’s remarks are here.

Data and Research February 23, 2015

Special Planning Needed for Health Costs in Retirement

Individuals should consider the expense and usage of non-recurring health care services, which increases with age, when planning for retirement.
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The cost for the more predictable health care expenses—doctor visits, dentist visits, and usage of prescription drugs—remains stable throughout retirement, according to an analysis from the Employee Benefit Research Institute (EBRI). 

EBRI data shows the average annual expenditure for these recurring health care expenses among the Medicare-eligible population is $1,885. A person with a life expectancy of 90 would require $40,798 at age 65 to fund his or her recurring health care expenses, assuming a 2% rate of inflation and 3% rate of return. This required amount does not account for recurring expenses such as insurance premiums or over-the-counter medications.

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However, the usage and expense of non-recurring health care services, such as overnight hospital stays or outpatient surgeries, increases with age. Nursing home stays in particular can be very expensive, EBRI notes, with average spending in this category for people ages 85 and above during a two year period being $24,185.

“Health care is one of the key components of retirement expenses, and is the only part of household expenditures that increase with age,” says Sudipto Banerjee, EBRI research associate and author of the report. “While some of these costs are more predictable, others are uncertain, and for many people these expenses spike toward the end of life when resources are slim. To successfully manage your resources in retirement, a good plan may include separate preparations for each.”

Usage of recurring health care services typically goes up with income, while usage of non-recurring health care services goes down with income (except outpatient surgery and special facilities use). The top income quartile spends significantly more on both nursing home and home health care expenses than the others, with the average expenses for nursing home and home health care at $16,595 and $1,642, respectively, for the third income quartile, and $28,133 and $4,695, respectively, for the top income quartile. These findings are potentially a result of Medicaid coverage for the lower-income, lower-asset groups, according to EBRI.

EBRI also finds nursing home stays, home health care usage, and overnight hospital stays are much higher in the period preceding death. The survey reveals a majority of people in every age group above age 65 received in-home health care from a medically-trained person before death. For those ages 85 and older, 62.3% had overnight nursing home stays before death and 51.6% were living in a nursing home prior to death. Statistics show women older than 85 use nursing homes at a much higher rate than men.

The “Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees” report includes data from the Health and retirement Study (HRS) of a nationally representative sample including U.S. households with individuals older than age 50. The full report is published in the February 2015 EBRI Issue Brief No. 411, online at www.ebri.org.

 

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