The Fiduciary Battle Heats Up

FiduciaryBattle.BLOGThe U.S. Department of Labor (DOL) published the final Fiduciary Rule in April 2016. Within a month of the ruling, Congress passed legislation to block the DOL from moving forward with the new rule. President Obama vetoed the bill.

On June 1, the U.S. Chamber of Commerce and others filed suit to stop the DOL’s fiduciary rule from taking effect. The plaintiffs contend that the DOL exceeded its authority by expanding fiduciary liability to investment advisers dealing in retail sales with employer retirement plans and individual investors. In this suit, the Chamber stated that the DOL “disregarded the regulatory framework established by Congress, exceeded its authority, and assumed for itself regulatory power that is vested in the [Securities and Exchange Commission] in ways that will harm retirement savers … [The DOL] possesses neither the expertise nor the authority to regulate financial services in a manner that properly balances the needs of retirement savers and small businesses.”

Soon after the suit was filed, Secretary of Labor Thomas Perez responded, “People saving for retirement have a legal right and a compelling economic need to receive retirement investment advice that is in their best interest. Today, a handful of industry groups and lobbyists are suing for the right to put their own financial self-interests ahead of the best interests of their customers.”

So, what is the problem? The DOL believes the new rule is necessary to protect plan participants and, in some cases, unsuspecting plan sponsors from being “taken” by investment and other industry “experts” who advise them on plan investment fund selection and related matters. Some practitioners of small to medium plans have witnessed a trend among many advisers to “sell” qualified retirement plans as a simple turnkey service. The impression sometimes given by providers is that they will take care of everything, and all the employer has to do is sign their documents. This can be very tempting to some small- and medium-sized employers who are so busy running their businesses they do not have the time or interest to study what sponsoring a retirement plan seriously involves, or to conduct a fee analysis of the funds recommended to their plan in comparison to comparable, lower-fee options. Sometimes, it only becomes a problem when a participant complains or an agency audit arises where the employer realizes the documents they signed hold the employer plan sponsor liable and relieve the adviser/provider from fiduciary liability.

Retirement plans have become an incredibly big business, with some $25 trillion invested. Consequently, the fees on these investments generate tremendous income for investment managers and advisers, who are happy to share the fees with third-party administrators and consultants who bring in business. This is the view from the DOL’s perspective. The investment community, under Securities and Exchange Commission (SEC) jurisdiction, was not nearly as involved or interested in retirement plans until the asset pool became so lucrative.

Some investment advisers view the final DOL fiduciary rule as restricting their business opportunities by either making them share fiduciary responsibility or restricting the services and advice they provide employer plan sponsors while maintaining a non-fiduciary role. The suit properly credits the SEC with more than 80 years of experience regulating financial markets and services, including the provision of investment advice. In fact, in 2011, the SEC studied and issued a report to Congress regarding the obligations and standards of conduct of financial professionals. (Click here to view a summary.) They proposed a study regarding the propriety of adopting a uniform fiduciary standard and have been so charged by Congress. The suit claims the DOL has interfered in the authority given to the SEC on this issue.

Yet, even the SEC in its 2011 report acknowledged that many retail investors do not understand and are confused by the roles played by investment advisers and broker-dealers. “Retail investors (i.e., employer plans and individuals) should not have to parse through legal distinctions to determine” the type of advice they are entitled to receive. “Instead, retail customers should be protected uniformly when receiving personalized investment advice about securities regardless of whether they choose to work with an investment adviser or a broker-dealer.”

By mid-June, more lawsuits were filed in an attempt to stop the DOL from moving forward with the fiduciary rule. The American Council of Life Insurers, the National Association of Insurance and Financial Advisers (NAIFA) and six NAIFA chapters in Texas brought the claim in the U.S. District Court for the Northern District of Texas. Both organizations have a serious business stake in how this plays out. Within days, the Indexed Annuity Leadership Council and others filed a claim in the U.S. District Court for the Northern District of Texas. This is the third group to file in this particular Texas court, which has in past years ruled against other DOL regulations.

As the summer moves on, so will the battles over the definition of fiduciary and ultimate jurisdiction. In the end, the amount of clarity and protection employer plans and their participants can expect in this area may end up being decided on the courthouse steps.

MSEC’s Benefit Update Conference in July has noted experts speaking on this topic and others. Log on to or call 800.884.1328 to register today.