Wall Street Set to Fight 401(k) Advice Rule in Public Hearings

More than three dozen witnesses are set to testify on a US Labor Department proposal that would subject more financial professionals to tough fiduciary advice standards under federal benefits law.

DOL’s Employee Benefits Security Administration will host all-day hearings Tuesday and Wednesday, marking the first public clash between the Biden administration and Wall Street over the retirement advice proposal.

Fiduciary standards threaten the commissions many broker-dealers and insurance agents make for selling investment products to 401(k) participants who are cashing out their savings. Regulators say the proposed rule is necessary because advisers with conflicts of interest can steer workplace retirement assets into risky investments for their own personal gain. But regulated stakeholders—including insurance companies and major banks—argue fees-only fiduciary advice will price out low- and moderate-income savers.

“The umbrella of covered fiduciary transactions is widening,” said Bonnie Treichel, founder and chief solutions officer at Endeavor Retirement, a plan sponsor consultancy. “This proposal is the widest it’s been yet.”

EBSA’s proposed rule would replace a nearly 50-year-old fiduciary investment advice regulation with a new facts-and-circumstances analysis that centers on whether an individual or business regularly makes investment recommendations, whether a particular recommendation is individualized, and whether it can be objectively viewed as part of a relationship of trust in the best interests of the investor.

Witnesses set to testify at the hearing include AARP, the American Council of Life Insurers, Federation of Americans for Consumer Choice, the American Bankers Association, and US Chamber of Commerce. Major Wall Street lobbying firms also slated to testify include the Securities Industry and Financial Markets Association, and Investment Company Institute.

By taking on fiduciary status, salespeople marketing financial products would be subject to tougher reporting and disclosure requirements, and their companies could be exposed to new legal risks. The department’s proposal has the potential to “reshape the financial markets,” said Josh Lichtenstein, a partner at Ropes & Gray LLP.

The agency’s focus on a person’s objective understanding of advice marks a renewed attempt to dodge a 2018 appeals court ruling that vacated a substantially similar Obama-era regulation aimed at sweeping more investment advisers under the DOL’s fiduciary umbrella.

“DOL’s proposal poses a threat to the ability of many Americans, especially those in underserved communities, to effectively save for their retirement,” said Mario Lopez, president of the Hispanic Leadership Fund in a letter to the department. “The proposed amendments are effectively the same (or in some cases worse) than the Department’s final 2016 Fiduciary Rule.”

Rollovers Targeted

By rejecting the 1975 five-part fiduciary definition, the agency would avoid a key element that requires “regular basis” relationships. Senior DOL officials have said they want to capture recommendations to roll investments out of a workplace retirement plan into bank or insurance products such as annuities.

Rollovers are often “the most important financial decision many people will ever make,” according to the Save Our Retirement coalition, a group of consumer advocate organizations who support the proposed rule. Rolling assets out of a plan covered by the Employee Retirement Income Security Act of 1974 (Pub. L. No. 93-406) into a lesser-regulated environment could expose investors to higher fees or even lock their savings away for years.

President Joe Biden characterized those rollovers that benefit brokers at the expense of their clients as “junk fees,” a consumer-focused messaging target his administration has adopted in the lead up to the 2024 election.

Meanwhile, EBSA has set an accelerated timeline to finalize the fiduciary rule ahead of the upcoming election. Regulators will want to effectuate the regulation well ahead of November to avoid the possibility of Congress passing a disapproval resolution or a new administration axing it.

This week’s hearings come in the middle of a 60-day window for public comment on the proposal, rather than at the end, which was the case for prior attempts at fiduciary rulemaking. EBSA denied a stakeholder request to extend the comment period. Groups critical of the rule said they needed more time, since the comment period runs through several end-of-year religious holidays.

The comment period is set to close Jan. 2.

Stakeholders are likely to use the hearings as a public stage to make their case that fiduciary investment advice is actually more expensive for consumers. 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.

Plan sponsor advocates are aiming to advance their claim that the government is ignoring key distinctions between salesmanship and financial advice. EBSA’s rule would muddy the waters, they say, forcing thousands of investment advisers to comply with reworked best-interest exemptions that require them to formally accept fiduciary status and comply with costly disclosure requirements.

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