Plan sponsor advocate pushes for exemption in DOL fiduciary rule

Advisers whose compensation does not vary based on the investments they recommend for retirement plans should be carved out of a Labor Department proposal to raise advice standards, an advocate said Wednesday.

Marcy Supovitz, president-elect of the American Retirement Association, promoted a so-called level-to-level exemption in the proposed rule in her testimony during the third day of hearings on the measure at DOL headquarters in Washington.

The DOL rule, which is designed to reduce conflicts of interest for brokers working with retirement plans, includes a so-called best-interest contract exemption. That provision allows brokers to use a variety of compensation methods, including commissions and revenue sharing, as long as they enter into a legal agreement to act in their clients’ best interests.

That exemption and the related compliance requirements should not apply to advisers who receive level compensation regardless of the assets in a retirement account, Ms. Supovitz said, even if that money is rolled from a cheaper 401(k) to a more expensive IRA.

The DOL proposal should be revised to include the level-to-level exemption, she said, that would, for instance, apply to a 401(k) adviser who receives 30 basis points for her services and rolls a participant over to an individual retirement account for which she is paid 75 basis points — independent of the fund lineup. In the IRA, for example, a client would receive personal investment guidance on withdrawals, which could justify the higher fee, according to the American Retirement Association’s July 20 comment letter.

Ms. Supovitz argued that the level compensation deters conflicts of interest in both the 401(k) and the IRA. But the best-interests contract exemption would be trigged by the rollover itself because the fee level of the IRA is higher than that of the 401(k).

The problem, Ms. Supovitz said, is that the best-interest contract comes with costly compliance requirements that aren’t necessary for advisers who already operate under level compensation.

Some 401(k) plan participants turn to the plan adviser to help them roll over to an IRA. As drafted, the DOL rule would be a roadblock, according to Ms. Supovitz.

“It would discourage [advisers] from serving participants after retirement,” said Ms. Supovitz, a principal at the consulting firm Boulay Donnelly & Supovitz.

The level-to-level exemption also would pertain to an adviser who had not worked with a client previously in a 401(k) but would receive a level fee for managing an IRA into which the client rolls over 401(k) funds.

William Taylor, a DOL official participating in the hearing, discussed with Ms. Supovitz the need for the DOL rule to apply to rollovers, referring to billboards he sees on the road enticing investors to transfer their 401(k) funds into an IRA.

“There’s a lot of sales activity out there,” Mr. Taylor said.

Ms. Supovitz responded that the level-to-level exemption would include conditions, including a requirement that the adviser document why the rollover is in the best interests of the investor.

She was one of dozens of witness who have testified about the rule before a panel of DOL officials this week. The rule was proposed in April with White House backing. An initial comment period ended on July 21 and generated more than 2,500 letters.

Another comment period has opened and will run until two weeks after the transcript of the hearings is published. A final rule could come out next spring, as the DOL tries to get it on the books before the end of the Obama administration.

Ms. Supovitz said a recent letter to DOL from eight Senate Democrats bolsters the case for the level-to-level exemption.

Under the DOL rule, “plan advisers who received level compensation from a retirement plan, and would receive level compensation for investment advice provided to an IRA rollover from a retirement plan, would be discouraged from working with plan participants on rollovers,” wrote Sen. Ron Wyden, D-Ore., Senate Finance Committee chairman, and seven colleagues in an Aug. 7 letter.