A regulation the U.S. Department of Labor is considering to expand fiduciary status could reduce retirement savings of some American workers by 20 percent to 40 percent, according to a study released Wednesday.
The study's author, policy group Quantria Strategies, came to this conclusion on the basis that workers who leave their jobs would be more likely to cash out their retirement plans if financial professionals are barred from advising them on what to do with the accounts.
DOL is expected to issue reproposed regulations later this year that address the issue of fiduciary liability with respect to retirement savings plans. These rules may limit the ability of financial services firms to assist workers leaving their jobs with distribution options for their retirement savings assets, according to the Quantas study.
This limitation would arise, the study said, because DOL's prohibited transaction rules would generally preclude any advice from a financial services firm, even if the advice were in the best interest of the individual, unless the DOL provided comprehensive exemptions from such rules.
The report was commissioned by Davis & Harman LLP on behalf of a coalition of financial services organizations, including banks, insurance companies, brokerage firms and mutual funds, that provide retirement services to American workers.
Quantria said the proposed fiduciary regulation would effectively prohibit many financial professionals from providing workers with education and guidance on the options available to them when they leave their jobs.
Without this guidance, it said, many workers may jeopardize their retirement security by cashing out their retirement savings at this critical point.
"The difference between what Americans are saving for retirement and what they will need to retire comfortably is in the trillions of dollars," Sen. Jon Tester, D-Mont., the former investment subcommittee chairman, said in a statement. "We need to ensure that all sorts of folks have access to investment advice so they can make informed decisions about their retirement. Any regulations that could cause employees to cash out their retirement savings early are not in the best interest of American workers."
Kent Mason, a partner at Davis & Harman in Washington, told ThinkAdvisor that if broker-dealers and call center representatives are fiduciaries, "the DOL rules would prohibit them from giving advice to workers regarding their distribution options. It is not a business decision by the BDs or the reps; it is a legal prohibition." The legal prohibition, Mason continues, arises under the DOL's prohibited transaction rules. "Under those rules, a fiduciary is prohibited from giving any advice that could affect how much compensation he or his employer receives."
For example, Mason — whose firm represents the companies that participated in the Oliver Wyman study on IRAs released to the DOL and the SEC last April — adds that "if a BD or rep is associated with a financial institution, which is almost always the case, the financial institution may benefit if the participant rolls the money into an IRA that is maintained by the financial institution or into investments provided by the financial institution. Because of this potential benefit, the BD or rep would be precluded from providing any assistance regarding distribution options."
Quantria's report cited a 2011 survey that found that 42 percent of employees took a cash distribution from their retirement savings at job termination, 29 percent rolled their retirement savings to another plan or an IRA and 29 percent left their assets in the employer's plan.
The cash-out rate varied by account size, the survey found: a 75 percent cash-out rate for participants with less than $1,000 in their account, and a 10 percent for participants with at least $100,000 in their account.
Employees cashed out approximately 7 percent of their total retirement assets when leaving their jobs.
