Critics of the Labor Department’s new proposal to let financial firms receive “reasonable compensation” for some investments on behalf of retirees plan to argue in court or public policy circles that the agency is abdicating its duty under retirement law.
“We believe it is important to make a record that will help a future administration undo this damage,” Micah Hauptman, financial services counsel at the Consumer Federation of America, wrote in an email. He declined to discuss legal strategy beyond that but hinted at how his group will portray Labor Secretary Eugene Scalia in future debates about retirement policy.
“It’s unfortunate but not unexpected that Secretary Scalia is continuing to serve his former clients’ interests instead of retirement savers,” he said of the DOL’s proposed guidance to provide exemptions to a range of investment professionals in how they manage retirees’ money.
Scalia, while in private practice, helped the U.S. Chamber of Commerce defeat a more restrictive Obama-era rule that would have required investment advisers to act in the best interests of their clients.
The new proposal could also find its way into court as consumer groups argue it runs counter to the the Employee Retirement Income Security Act of 1974, which mandates plan fiduciaries act solely in the interest of plan participants and provide them prudent advice. Consumer advocates argue that the proposal lowers the bar that fiduciaries must meet under ERISA.
Meanwhile, the nation’s leading association of investment banks and asset managers lauded the agency’s effort to create “compliance efficiencies” in the retirement market.
“We applaud the Department of Labor’s work to preserve investor choice,” Kenneth Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association, said in a statement.
Best Interest Standard
The Employee Benefits Security Administration’s proposal creates exceptions for transactions, currently blocked under ERISA, made by financial professionals who have satisfied conflict of interest guidelines from the Securities and Exchange Commission.
The SEC’s best interest standard calls on broker-dealers to disclose potential conflicts of interest to clients seeking investment advice. The standard is aimed at curbing incentives to upsell retirees on pricier or riskier products in order to boost commissions.
But following that standard suggests Labor is “favoring the industry they’re supposed to police, at the expense of millions of Americans struggling to save for a decent retirement and facing even more challenges as a result of the pandemic,” Steve Hall, legal director of Better Markets, said. Better Markets is a nonprofit that works on financial reform issues.
Sen. Patty Murray (D-Wash.), ranking member of the Senate Health, Education, Labor and Pensions Committee, denounced the proposed exemption in a statement on Monday.
“Instead of moving ahead with this proposal that will leave people across the country vulnerable, the Department should go back to the drawing board and come up with one that actually protects them and meets the high standard that Congress mandated in ERISA,” she said.
House Education and Labor Committee Chairman Bobby Scott (D-Va.) criticized the administration for “choosing to side with unethical advisors” rather than hardworking 401(k) holders.
“After delaying the Obama-era rule and then refusing to defend it in Court, the Trump administration is now turning back the clock and reinstituting a deficient standard that fails to protect retirement savers,” he said in a statement.