A fervent outcry from a wide range of financial industry groups and bipartisan lawmakers helped persuade the Labor Department to withdraw a proposed rule that would expand the definition of fiduciary for advisers to retirement plans.
Although opponents won a victory in the battle, the war is far from over. In fact, the most controversial aspect of the original rule — including IRAs — will return when the agency issues a revised regulation early next year.
“IRAs will continue to be part of the re-proposed rule,” Assistant Labor Secretary Phyllis C. Borzi wrote in an e-mail. “The rule is designed to provide the strongest possible protections to business owners and retirement savers in plans and IRAs.”
The department argues that the Employee Retirement Income Security Act of 1974, known as ERISA, must be updated to ensure that advisers act in the best interests of workers and retirees as they build their retirement nest eggs — often working on their own through 401(k)s and IRAs.
Critics said that the proposed rule was too expansive and would subject broker-dealer IRA advisers to fiduciary duty for the first time. They said it would curtail commissions, raise compliance and liability costs and drive broker-dealers out of the IRA market, thus limiting small investors' access to IRA advice.
“We appreciate the industry's concern about current fee practices, but we remain confident that a wide variety of fee practices, including commission-based arrangements, will be permissible when the regulation is completed,” Ms. Borzi said. “The agency will carefully craft new or amended exemptions that can best preserve beneficial fee practices, while at the same time protecting plan participants and individual retirement account owners from abusive practices and conflicted advice.”
As the Labor Department redraws the rule over the next couple months, industry groups vowed to stay vigilant.
“We have confidence that the department has heard the concerns of the industry and millions of Main Street Americans who would lose their ability to receive affordable financial advice,” Dale Brown, chief executive of the Financial Services Institute, said in a statement today. “If not, we stand ready to re-engage, and make our voices heard once again.”
Lillian Vogl, director of federal government relations for the National Association of Insurance and Financial Advisors, said the Labor rule should not touch on IRAs because the products are part of the tax code and are regulated by the
Internal Revenue Service, rather than employer-sponsored retirement plans, which are overseen by Labor under ERISA.
“People are completely free in the IRA market to change their service providers,” Ms. Vogl said. “You are your own fiduciary. If you make IRAs more heavily regulated, people won't put money into IRAs.”
In its new proposal, Labor must delineate exemptions that would apply to IRA advice; otherwise, broker-dealers could abandon the IRA market, according to Barbara Roper, director of investor protection at the Consumer Federation of America.
“You can't apply the no-conflicts ERISA model to the IRA world,” Ms. Roper said. “There's not a long line of fee-only advisers ready to step into the breach.”
Ms. Borzi doubts that broker-dealers will exit the IRA business.
“As we have said before, it would be hard to believe that a rule designed to protect employers and workers from conflicted investment advice would cause the entire financial industry to voluntarily walk away from a multitrillion-dollar market,” she said.
One investment company said it will be watching how Labor follows through on the provisions that it has said it will revisit, such as limiting fiduciary duty to individualized advice.
The goal is “making certain final regulations won't diminish the services that we can offer plan sponsors and plan participants,” said Robert Holcomb, executive director of legislative and regulatory affairs at J.P. Morgan Asset Management.
The original proposal would have roiled the business model for retirement-savings advice, according to Mr. Holcomb.
“The impact would have been felt by small IRA holders,” Mr. Holcomb said. “The proposed regulations represented a big change to existing rules and had the potential to impact a lot of different retirement plans.”
Ms. Borzi will get to hear directly from the financial services industry when she addresses the Financial Services Institute's advocacy summit Oct. 4.
Hosting Ms. Borzi “is an indicator of FSI's commitment to constructive engagement,” Mr. Brown said in an interview last week.
