DOL's Perez in Lively Hill Discussion on Fiduciary Proposal

By John Iekel • June 18, 2015 • 0 Comments
The June 17 Health, Employment, Labor and Pensions Subcommittee hearing provided ample illustration that the debate on the Department of Labor’s (DOL) fiduciary proposal is far from over. DOL Secretary Thomas E. Perez appeared before the subcommittee of the House Education and the Workforce Committee and offered a defense of the proposed rules and answered sometimes pointed questions.

Subcommittee Chairman David Roe (R-Tenn.) set the tone in his opening remarks. “Our goal as policymakers should be to advance bold, bipartisan solutions that will help more Americans pay, invest and save for retirement. Regretfully, the department’s fiduciary regulation would move our country in the opposite direction. It would cut off a vital source of support that many low and middle income families and small business owners rely on — and that is the help of a trusted financial advisor.”

Perez, however, argued that the proposal’s time has come. “ERISA is over four decades old. Times have changed. Defined benefit plans have given way to defined contribution plans. Now, consumers are in control making their own investment decisions through 401(k)s and IRAs. We can still count on a commemorative pen at retirement, he said, “but a secure retirement is less predictable. For the majority of Americans without a finance degree, the market is at best a confusing place.”

While Perez acknowledged that there are many retirement professionals who are doing the right thing, he posited that others are not. “Many of them are fiduciaries already,” he said, “yet, many more are not fiduciaries and despite marketing that might suggest otherwise, they operate under no such commitment to do what’s in the best interest of their clients.”

“The playing field is not level,” said Perez, adding, “The challenge is that the system is flawed.” The prescription? “Simply put, we want to create an enforceable best interest standard so that you can have certainty that your financial advisor is working for you first and foremost.”

In response to a question from Roe, Perez said that the rule would make it easier, rather than harder, for small businessmen to provide retirement benefits. Roe pressed further: “This is going to be thousands of things you have to do. Does this sound like it’s easier?” Perez’s rather indirect response was that “this rule is very straightforward. You have an obligation if you’re providing advice in your customer’s best interest.” He indicated that in his view, it isn’t the rule, but the current system of providing advice, that is opaque. And he indicated that he considers the rule beneficial to small investors. Small savers are those that can least afford bad advice, he told Rep. Ruben Hinojosa (D-Texas).

Perez dismissed some concerns over the proposed rule. He told Rep. Virginia Foxx (R-N.C.) that under the rule, it will not be necessary to sign a contract before engaging in a conversation concerning an IRA. Still, he seemed to acknowledge that the language may be taken as making such a requirement, telling her that it is “an issue I’m confident we’ll clarify.”

Perez gave conflicting signals regarding commissions. In response to Rep. Suzanne Bonamici (D-Ore.), Perez said that the rule does not ban them; however, as in his response to Foxx, he said that this is an area the DOL is willing to work on. And he told Rep. Joe Heck (R-Nev.) that advisors need to make sure they are putting their clients’ best interest first and not pick options for them that will garner the highest commissions.

Perez also touched on rollovers. “The rollover market is a huge market. That is where you really need the right advice,” he said.

And Perez had a pointed disagreement with Rep. Earl Carter (R-Ga.), who said that the premise behind the rule seems to be that conflicts of interest have resulted in higher fees associated with IRAs than with 401(k)s. “Many people in the industry say we need a best interest standard,” Perez responded, adding that the system is “misaligned.”

After Perez finished his testimony and answers to questions, a panel of executives from the financial industry appeared before the subcommittee. The panel included Jack Haley, Executive Vice President, Fidelity Investments; Dean Harman, CFP, Managing Director, Harman Wealth Management; Dennis Kelleher, President and CEO, Better Markets; Kent Mason, Partner, Davis & Harman LLP; and Brian Reid, Ph.D., Chief Economist, Investment Company Institute. They argued that the proposed rule is flawed and would accomplish the opposite of what Perez says it will do.

“The problem with the [department’s] proposal is not the best interest standard; the problem is the ‘prohibited transaction rules’ that cut off low- and middle-income individuals and small businesses from access to personal investment assistance,” said Mason. Haley struck a similar note, suggesting that the proposal turns “best interest” on its head: “Under the DOL proposal, access to affordable financial help will effectively be prohibited — even when it is in the investor’s best interest.”

Reid and Harmon, for their part, stressed that the proposal is “based on flawed assumptions” and is unworkable as currently drafted.