Despite a recent show of political opposition, the U.S. Department of Labor seems poised to press ahead with a proposal to broaden the definition of fiduciary to cover advisers working in the retirement plan segment, a leading opponent of the measure warned on Monday.
Brian Graff, who heads the American Society of Pension Professionals and Actuaries and the National Association of Plan Advisors, argued that the proposed rules would create "unintended consequences" that could lead plan advisers to abandon the small business market.
For advisers, the real pain from the rules would not come from the expanded definition of fiduciary per se, according to Graff, who noted that many of those advisers already operate as fiduciaries in their practices. But when applied in the context of the plans covered by the 1974 Employee Retirement Income Security Act, the rules could amount to an effective ban on the commission-based model.
"Under the fiduciary standard you can't get a commission," Graff said in remarks at the annual Schwab Impact conference. "That's really the question here. It's not so much that more people will be fiduciaries. It's very much how much they're going to get paid."
Assistant Labor Secretary Phyllis Borzi, the department's leading advocate of the proposal, has said that new rules are needed as a safeguard against conflicts of interest, but that they will include certain transaction exemptions and would permit plan advisers to continue collecting commissions.
Graff, who has been voicing his concerns in meetings with DOL staffers, relayed a rumor that the rules are all but finalized, and waiting for the sign-off of Secretary Thomas Perez. At that stage, they would head to the Office of Management and Budget for a review, likely their last stop before being released to the public, which Graff expects in April or May of next year.
"All signs seem to be suggesting they're pretty close to getting this thing done," Graff said. "The two big issues that we're going to be dealing with next year are this regulation and the stuff that's happening at the state level."
By Graff's framing, retirement plans aren't bought by small businesses, but rather are sold to them. Put differently, the typical small business isn't likely to go shopping for a retirement plan on its own, suggesting the important role that advisers play as salespeople. Graff points out that employer plans account for the lion's share of most Americans' retirement savings, suggesting that any proposal that could limit access — such as barring advisors from collecting commissions — is an unwise policy in the midst of growing concern that workers aren't saving enough for retirement.
"If somebody doesn't have a plan yet, who's going to sell them a plan without getting paid?" he said. "If people don't have a plan at work, they don't save. ... If we can't get small businesses to adopt a plan, then they won't have a plan at a work."
He also argued that the new rules could be essentially unenforceable, noting the scant resources at the division of the IRS that would be responsible for policing the industry.
"The concern is if you impose a standard that's harsh with no teeth in terms of enforcement, are you creating the Wild West where people know they can get away with stuff?" Graff said. "That's a real concern."
The DOL has heard an earful from critics of its proposal on both sides of the aisle. Late last month, the U.S. House of Representatives passed a bill that would require the DOL to delay its rulemaking until the SEC completes its work on an unrelated fiduciary issue that would establish a uniform standard of care for advisers and broker-dealers.
The Republican-backed bill, which passed with only modest bipartisan support, appears unlikely to come up in the Senate, and White House advisers have said they would recommend a veto if the bill made it to the President's desk. That suggests that last month's action was more of a show vote that will do little to slow down the Labor Department.
"It's more of a message thing," Graff said. "The [regulation] is going to come out next year."
Corbin writes for Financial Planning, a SourceMedia publication.
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