Biden’s 401(k) Advice Proposal Finds Few Friends on Capitol Hill

Support for the US Labor Department’s fiduciary retirement advice proposal appears dwindling as critics are appealing to Congress to step in and halt the rulemaking process before it’s even finalized.

Nearly all the witnesses who testified at a House Financial Services subcommittee hearing Wednesday urged lawmakers to pass agency funding legislation with specific carve-outs that would prevent regulators from enacting or enforcing the disputed proposed rule.

The hearing marks an escalation in the bipartisan pressure against the proposal that the Biden administration has faced since DOL rolled it out in early November. If finalized, the rule would obstruct deep-pocketed financial giants on Wall Street from easily tapping lucrative retirement accounts, a move that appears to have put many Democratic congressional allies on uncomfortable footing during an election year.

DOL’s Retirement Security Rule proposal (88 Fed. Reg. 75890–76045) would redefine who qualifies as an investment advice fiduciary, casting a wider net in an effort to capture rollovers from workplace 401(k)s and toughening standards for annuity and individual retirement account sales. If adopted, the rule would prohibit many broker-dealers and insurance agents from earning commissions unless they conform to modified exemptions, which critics have called severe and “draconian.”

“I think the department is on an ideological crusade over the last 13 years to effectively ban commissions,” said Marc Cadin, CEO of Finseca, a financial security nonprofit with ties to the life insurance industry. “That’s why they continue to come back and back and back with regulations that are so punitive that it will literally make it impossible for our members to do their jobs.”

DOL’s record on fiduciary rulemaking is an apparent impediment to wholehearted support on Capitol Hill.

The latest proposal is the agency’s fourth attempt to rewrite the rules for providing financial advice to workers and retirees—the first of which was withdrawn under similar industry and legislative opposition. The second version was overturned and vacated by a federal appeals court for exceeding statutory authority. The third version, a fiduciary exemption that’s still partially in effect, also faces significant pushback in the courts.

“I am in utter disbelief that we are still having this fight,” said Capital Markets Subcommittee Chair Ann Wagner (R-Mo.), who has been a staunch critic of fiduciary-only regulations since she was sworn in in 2013. “This latest proposal is yet another bite at the same rotten apple and should be withdrawn immediately.”

The second rule attempt, adopted during the Obama administration, reportedly had the effect of cutting access to affordable retirement advice for low- and moderate-income Americans, a point driven home by several witnesses Wednesday.

The burdensome compliance measures the department has proposed placing on financial professionals who earn commissions on the investments they sell would instead force most firms to charge expensive annual fees and place account minimums on their services, effectively pricing out many Americans, four of the five witnesses agreed.

“It’s deeply concerning to me that the Labor Department might again create a regulatory regime with such harsh consequences,” said Rep. David Scott (D-Ga.), who signed onto letters opposing fiduciary regulation in 2016 and again this year. “No, we’ve got to find a way to make it easier for working with families to create and build wealth.”

Scant Support

Only a few Democrats on the Capital Markets Subcommittee appeared willing to fully endorse the DOL proposal at Wednesday’s GOP-led hearing that featured some of the proposed rule’s strongest industry critics. Two Democrats on the committee have already signed onto letters calling on the department’s Employee Benefits Security Administration to withdraw the proposal.

So far, more than 60 lawmakers—including 15 Democrats—have signed onto similar letter-writing campaigns.

The highest-ranking Democrat on the subcommittee, Rep. Brad Sherman (Calif.), said he’s caught between “those who hate” the proposal “and those who love it.”

“The fact is that we need to improve this regulation, but I think ultimately we need a regulation in this space,” Sherman said Wednesday.

Regulators made several key concessions in the preamble to the proposed regulation that weren’t made legally binding in the actual text, he added. The final regulation should make clear the exceptions for practitioners who are pitching their services to plans and clients, making unspecific, generalized advice, and for transactions involving moving money from an IRA to charity, he said.

The US Securities and Exchange Commission and more than 40 state insurance regulators have already applied best-interest conduct standards for all US securities and insurance offerings in 41 states. Sherman said he supports those efforts, but he’s concerned about protections for Americans in the remaining states.

Susan Neely, president and CEO of the American Council of Life Insurers, who testified at Wednesday’s hearing, assured Sherman that all or at least most remaining states will adopt best-interest regulations this year.

“Life insurers have opposed the DOL’s efforts to expand the definition of a fiduciary not because it would preserve a so-called profitable status quo, as some of our critics assert, but because it is unnecessary, ignoring substantive consumer protections that have been implemented in the last few years, and would ice out Americans who rely on financial professionals,” Neely said.

Two Democratic lawmakers on the committee, Reps. Emanuel Cleaver (Mo.) and Stephen Lynch (Mass.), said they supported the Biden administration’s proposal. Lynch pointed to the fact that cryptocurrency poses a unique risk to investors that wouldn’t be protected under the existing regulatory regimes.

The sole witness at Wednesday’s hearing who said she supported the proposed rule is a certified financial planner who already abides by fiduciary conduct standards.

Kamila Elliott, CEO of Collective Wealth Partners in Atlanta, said fiduciary standards protect investors against conflicts of interest that have become all too common in her industry. She pointed to examples of clients she’s served who were victims of ill-advised recommendations that undercut their ability to save for the future.

“Retirement savers want to work with someone they can trust, but that trust is too often misplaced,” Elliott said. “Financial professionals can take advantage of regulations that do not require them to operate as a fiduciary. Financial professionals can be paid handsomely for advice that is not in the investor’s best interest. And financial professionals should not be allowed to make recommendations that compensate them well but burden the client with excessively high fees, unnecessary risk, or harmful illiquidity.”