JDJournal (September 28, 2023) - Consumer Advocates Rekindle Fight for Retiree Financial Protection as Labor Department Pursues Fiduciary Rulemaking

Reviving the Cause

In the arena of financial advice for retirees, consumer advocates are gearing up for a renewed confrontation with Wall Street. This battle comes as the US Labor Department prepares to embark on its latest fiduciary rulemaking project. Advocacy groups, which had either closed shop or scaled back their efforts after a federal appeals court invalidated the first fiduciary regulation during the Obama administration in 2018, are now resurging. Their resurgence is fueled by a more favorable administration determined to make another attempt at enacting stringent financial protection measures.

Investor Advocates on the Frontlines

Special interest groups representing investors are poised to play a pivotal role in supporting a relatively small federal benefits agency that is taking on some of the financial giants of Wall Street. The anticipated stricter fiduciary standards from the Labor Department can potentially disrupt the multitrillion-dollar industry of securities advisers and insurance brokers, which wields considerable influence and lobbying power.

Setting the Stage

Regulators have set the stage for a public clash over conflicts of interest in the financial advice market. The Department of Labor’s Employee Benefits Security Administration submitted a regulatory package (RIN No. 1210-AC02) for White House review on September 11, signaling the imminent proposal of a rule.

The department’s efforts are expected to focus on retirement plan rollovers, where newly retired individuals transfer their 401(k) or pension savings to individual retirement accounts or annuities. Concerns revolve around the loss of protections under the Employee Retirement Income Security Act when retirement savings exit workplace plans, potentially leaving savers vulnerable to risky and expensive financial products.

Reactivating the Coalition

In response to EBSA’s new rulemaking, organizations such as the Consumer Federation of America (CFA), Public Investors Advocate Bar Association (PIABA), and the AARP are reactivating the Save Our Retirement Coalition. This coalition opposed the financial services industry’s narrative that claimed the Obama-administration rule was too broad and would inflate consumer costs in the lead-up to the 2016 final rule.

Nearly a decade later, the US Securities and Exchange Commission has established a best-interest standard for stock sales, and more than two-thirds of US states have adopted similar best-interest model language for annuity sales.

Differing Perspectives

Critics of the department’s rulemaking effort argue that the potential for consumer harm no longer exists in the new legal landscape. Chantel Sheaks, Vice President of Retirement Policy at the US Chamber of Commerce, stated, “Look, we’re good now. We have Regulation Best Interest being implemented for rollovers; we have these state models; the landscape is so different than it once was.”

The US Chamber of Commerce was the lead plaintiff in the lawsuit against the Obama-era fiduciary rule and has lobbied against other iterations of the regulation. Other groups, including the Insured Retirement Institute and the National Association of Plan Advisors, have also taken positions against the rule.

Questioning Regulatory Authority

Industry groups argue that the legal challenges faced by EBSA in its previous attempts to implement the fiduciary rule indicate that the agency is exceeding its regulatory authority and is constrained by the confines of ERISA (Employee Retirement Income Security Act).

Three Types of Advice

Benjamin Edwards, a business and securities law professor at the University of Las Vegas William S. Boyd School of Law who has joined the Save Our Retirement campaign, emphasizes that standards for retirement advice can be categorized into three camps:

  1. Strict Fiduciary Standard: Requires advisers to prioritize the investor’s interests above all else.
  2. Suitability Standard: Mandates that advisers ensure their recommendations are suitable for the consumer.
  3. Best-Interest Standard: Allows advisers to consider commission as long as they equally serve the investor’s best interests.

The SEC’s 2019 Regulation Best Interest (Reg BI) standard applies only to corporate securities, excluding advice directed at retirement plans. This means some riskiest alternative assets, such as real estate and cryptocurrency, are not subject to stricter standards.