Biden 401(k) Fiduciary Rule Angers Precursor’s Wall Street Foes

Shortly after the Obama administration finalized its “fiduciary rule” in 2016, Brad Campbell got a message from his bank.

The financial firm said it could no longer offer investment advice on one of his small-balance, commission-based IRAs. Under the US Labor Department’s new regulation, Campbell was told, small-fish investors like him weren’t worth the risk anymore.

At the time, Campbell was seven years off a stint as the DOL’s assistant secretary for employee benefits security under the George W. Bush administration, leading the subagency that oversees retirement benefits.

“It’s ironic that the former head of the agency that was responsible for that rule was one of the people who lost access to investment advice under it,” said Campbell, now a partner at Faegre Drinker Biddle & Reath LLP in Washington.

Now, with the Obama rule since overturned by an appeals court, the federal government is at it again.

President Joe Biden announced Tuesday that his administration is proposing a rule that would once again attempt to broaden the kinds of retirement advice subject to the strictest fiduciary standards of care under trust law and federal benefits statutes.

It’s a repeat nightmare for Wall Street and a financial services industry eager to skirt costly regulatory oversight. But critics say it’s also bad news for low-income and middle-class Americans.

Industry stakeholders are already putting up roadblocks to defend against the fiduciary rule a second time around, and this time they’ve brought receipts.

As a result of the 2016 rule, more than 10 million smaller retirement account owners with more than $900 billion in savings lost the ability to work with their preferred financial professionals, a Deloitte LLP study found in 2017.

Strict fiduciary advice standards limit the commissions that brokers and advisers can earn on the funds and annuities they offer savers, forcing those advisers to abandon small-dollar clients for wealthy investors who can make up those lost commissions in fees.

But the Biden administration and consumer advocates say commissions are inherently conflicts of interest, especially when workers and retirees expect that the advice they’re receiving is in their best interest.

The proposed rule would apply expensive disclosure requirements to advisers who do earn commissions to ensure their interests align with those of investors. It will be retail customers who ultimately bear those costs, financial professionals said.

“Cutting off retirement options ignores the realities of the savings gap and builds a barrier to financial inclusion,” Jillian Froment, executive vice president and general counsel of the American Council of Life Insurers, said shortly after the DOL issued its proposed rule Tuesday.

‘Same Old Pig’

It could be a long time before either side of the fiduciary debate comes out the winner. Once finalized, the rule is almost certain to trigger lawsuits, just like earlier iterations, said Jason Levy, of counsel at Covington & Burling LLP.

The Insured Retirement Institute has said that it is already preparing to file a request with the DOL to extend the proposed rule’s 60-day comment period to give industry insiders more time to pore over the nearly 500 pages of regulatory text.

The trade group is partnering with other financial sector organizations to deliver the administration a clear message about what they say are the harmful effects of fiduciary regulation. The vocal coalition of financial sector organizations opposing the rule has already attracted early Republican supporters in Congress.

“This latest proposal is just new lipstick on the same old pig, and it will harm retirement plans, retirees, and savers,” Rep. Virginia Foxx, (R-N.C.), who chairs the House Committee on Education & the Workforce, said in a statement.

Some retirement-level securities advice is already regulated by the US Securities and Exchange Commission’s Regulation Best Interest standard, plus 40 state-based annuity sales regulations that mirror best-interest policies. Biden and the DOL say those rules left loopholes that ill-intentioned advisers are taking advantage of to prey on workers and retirees.

Senior Labor Department officials vehemently reject the industry’s characterizations of the rule. Instead, they say it “levels the playing field” for retirement consumers, ensuring they only get quality investment advice.

The president himself told an audience at the White House Tuesday that the rule is “about fairness” for workers and advisers who play by the rules and whose business is undercut by bad actors.

But in states such as New York that have applied stricter standards on the insurance product sales they oversee, savers have suffered, said Marc Cadin, CEO of Finseca, a nonprofit trade group representing financial security professionals. Nearly half of the 20 largest individual life insurers in New York saw premium revenue declines in 2022, three years after the state’s fiduciary-like insurance sales regulation took effect.

Carriers that saw the biggest dips included Equitable Holdings Inc., whose volume of business dipped 10% to $398 million, and Manulife John Hancock, with a 10% decline to $374.9 million, S&P Group Inc. data show.

“This proposal we believe is unnecessary in light of the existing framework,” said Jason Berkowitz, IRI’s chief legal and regulatory affairs officer. “We also fear that it will have will have similar repercussions to what we saw in 2016, where low- and middle-income consumers—in that case, 10 million-plus—lost access to advice and products, because they just didn’t have enough money saved up to qualify for fiduciary-level accounts.”