Borzi on the Hot Seat, Again

Besides the IRA issue, "there is a huge small business issue here," Mason says. A critical issue that's been largely overlooked, he argues, is that small businesses looking to offer a 401(k) plan for their workers would be prohibited from offering advice. Mason offers this example: Say you have a 12-employee hardware store that's ready to offer a plan. The owners have a discussion with a financial institution that can provide 2,000 investment options to choose from—a number that Mason says is not unusual. The small business owner, however, wants to offer only about 15 to 20 investment options. "Today, there's a lot of education that's provided by the financial institution, such as 'Here's 15 or 20 options offered by similar businesses,' or 'Here's some screening techniques you can use,'" to help the employer make an informed decision, Mason says.

Under the EBSA's proposed regulation, argues Mason, that kind of help "would now be prohibited."

So a small business like the hardware store, Mason says, would then be forced to make one of two choices: select the investments itself, subject to fiduciary liability; or find an independent expert, also subject to fiduciary liability.

Indeed, Fred Reish, partner and chair of the ERISA team at Drinker Biddle & Reath, says that small IRAs with, say, $25,000 or $50,000, "won't receive individualized advice from RIAs who sign on as fiduciaries, because the annual fees are so small."

For example, he says, "a 1% fee would be only $250 or $500 per year." In those cases, he says, "commissions can provide higher compensation for services."

Reish says that DOL should write rules that preserve current successful practices while also protecting plans, participants and IRA owners. To a degree, he says, that could be accomplished by requiring disclosures and by providing exceptions to the prohibited transaction rules.

Former EBSA head Brad Campbell, who's now with Drinker Biddle's Washington office, says that despite the numerous concerns that have been raised about DOL's proposal "in the context of ERISA plans alone," he agrees that extending the fiduciary rule to IRAs will present "lots of new problems," and have the effect of making it much more difficult for people to get advice on IRAs.

He cites the fact that as it stands now, less than 20% of workers in 401(k) plans have access to advice. "That same problem would be significantly increased in the IRA marketplace," Campbell says.

Presidential Politics and Purview

While Borzi has said she worries about investor protection as boomers roll over their retirement money from 401(k)s to IRAs (see sidebar above), Campbell says he doesn't believe the IRA marketplace "is the wild, wild West that it's being portrayed to be." DOL is insisting that the IRA market is "a problem, and they need to do something about it, but it's not clear DOL is the right agency, and it's not clear their solution is the right solution."

Indeed, Mason says that while DOL has the authority to write the rules that apply to IRAs, the Department has "no enforcement authority." That is up to the Internal Revenue Service (IRS).

No doubt DOL will receive further objections to its inclusion of IRAs in its reproposal once it's released, which Campbell predicts won't come until after the presidential election in November.

DOL, he said, has not sent a rule proposal to the White House's Office of Management and Budget within the last six months, something he called "an unusual dry spell" for the department. Even if Labor sent its reproposal to the White House today, he said, it usually takes three months for an approval.

If President Obama wins re-election, however, Campbell said DOL's rule amending the definition of fiduciary under ERISA will quickly appear at OMB. If Obama does win a second term, Campbell predicts "we will see a renewed push for more aggressive regulation."