There are few absolutes in life. One is that it’s been a challenging year for benefit brokers and advisers from a regulatory standpoint.
First, the Patient Protection and Affordable Care Act’s medical loss ratio triggered consternation about lower health insurance commissions. Now there’s a U.S. Department of Labor plan to broaden the definition of a fiduciary for the purpose of giving investment advice to a benefit plan, or its participants or beneficiaries. Industry observers fear that such a plan could undermine the level of service that producers offer their employer clients.
“They may be very careful in what they say or do and not provide the same type of hand-holding that they did before because they don’t want to take on the fiduciary status,” explains Jan Jacobson, senior counsel, retirement policy for the American Benefits Council in Washington, D.C. She adds that the proposed change would amend a five-part test that’s been in place for 35 years.
Dave Evans, senior vice president of the Independent Insurance Agents & Brokers of America in Washington, D.C., says the recession necessitated a need for broad financial literacy. But his chief gripe is that oversight of financial services should balance the need to provide consumers reasonable protections with thoughtful regulation that recognizes insurance agents, investment advisers and financial planners have different approaches to product or service offerings.
“A-one-size-will-fit-all approach does not work when you have consumers with different needs, financial goals and resources,” he says. “Instead, it will chill the opportunity for consumers – particularly less-affluent ones – to have access to sound financial advice and products.”
Seller’s exemption
There could be an escape hatch for worried producers. ABC recently lauded the DOL for including in its proposal to modernize the definition of a fiduciary an exemption for those who act as, or on behalf of, purchasers or sellers. The group suggested that the scope of this exemption be expanded and clarified.
Jacobson notes that the seller exemption in its current form applies only to the sale of investment products and not services. And since providing services are such an integral part of what brokers and advisers offer, she says it would be a huge hardship for producers to rework their business in such a way that they fall under this exemption. One way around the issue would be if a safe harbor disclosure were embedded into the seller exemption, but she says it’s difficult to sell services if regulators insist that producers must reveal potential conflicts of interests – a ;loaded phrase that casts a negative light on their involvement.
“An overly broad definition would actually have a very adverse effect on retirement savings by raising costs and inhibiting investment education and guidance for plan participants,” according to Kent Mason, a partner with the law firm of Davis & Harman who recently testified on behalf of ABC at a hearing on the fiduciary definition proposal held by the DOL’s Employee Benefits Security Administration.
In a prepared statement, he went on to explain that “an ERISA fiduciary relationship is a very serious relationship with the highest fiduciary standard under the law. In that context, fiduciary status should not be triggered by casual discussions but only by serious communications that reflect a mutual understanding that an adviser/advisee relationship exists. In our view, a fiduciary relationship should not be treated as existing in any case unless there is a mutual understanding that the recommendations or advice being provided in connection with a plan will play a significant role in the recipient’s decisionmaking.”
Under the proposed regulations, he cautioned, many “middle-level employees who frame issues and make recommendations for senior employees to consider would also be fiduciaries. The effects of too many fiduciaries with no decision-making ability would be severely negative to the plan and the related administrative costs would skyrocket.”
ABC has urged EBSA and the Securities and Exchange Commission “to coordinate and articulate a single standard of conduct applicable to brokers and dealers in providing investment advice and for the Commodity Futures Trading Commission to bring its proposed standards for business conduct regarding swaps in alignment with those of the DOL”.
Jacobson believes it will be difficult for the government to meet its end-of-year target for finalizing this regulation because the DOL would need to build in enough time for internal review before handing off to the Office of Management and Budget, which requires up to 90 days before rendering a decision. “That means all of the policy decisions would have to be made by August at the latest, and there are a lot of big-picture decisions that will have to be made [before then],” she points out.
The issue, however, may be somewhat muted by an evolving focus of the retirement planning marketplace. Jacobson sees a continued movement toward turnkey solutions, such as automated enrollment and deferrals in defined contribution plans, and less emphasis on advisory services, especially should the proposal should become finalized.
— Bruce Shutan is a freelance writer based in Los Angeles.
