White House memo offers a peek at DOL fiduciary strategy

The White House believes that many retirement plan participants aren't adequately protected from advisors with conflicts of interest.

That's why President Barack Obama's chief economic advisor supports the Department of Labor's effort to amend the definition of fiduciary in retirement plans.

In a Jan. 13 internal memo to senior White House advisors that was obtained by LifeHealthPro's sister site ThinkAdvisor, Jason Furman, chairman of Obama's Council of Economic Advisers, states that the redraft "represents a middle ground," and that he agrees with DOL that the current regulatory environment allows brokers to give "conflicted" advice, which costs retirement savers more than $6 billion a year.

Furman and Betsey Stevenson, another council member, provide what they describe as "evidence" that proves DOL's draft "Conflict of Interest Rule for Retirement Savings," which seeks to broaden the definition of who is a fiduciary under the Employee Retirement Income Security Act, is sorely needed.

(In a footnote, the writers say the memo "uses the term financial advisor broadly to include brokers. The allocation of the harms of conflict to different advice channels is beyond the scope of the memo.")

ThinkAdvisor reported last July that the White House's National Economic Council would be performing "industry outreach" regarding the DOL's fiduciary redraft. The NEC was part of a White House working group charged with overseeing the DOL fiduciary redraft.

Furman and Stevenson note that while DOL's plan allows businesses to "continue using existing, conflicted business models," it requires that they adopt "additional consumer protections such as ensuring advisors follow a best interest standard, enacting policies and procedures to manage and mitigate conflicts, and refraining from certain self-dealing transactions."

The measure doesn't ban commissions, as some other countries have done.

The DOL redraft "offers consumers meaningful protections, especially by also newly facilitating enhanced enforcement over violators, thereby holding them accountable," the two economic advisors say.

However, Andy Blocker, executive vice president of policy and advocacy at the Securities Industry and Financial Markets Association, told ThinkAdvisor last Friday that the memo "fails to address the potential impact" of DOL's redraft "on everyday investors, which has been our concern all along." The memo "doesn't mention anything regarding the impact of a rule change on how people get their financial help," he said, adding that 80 percent of people choose to put their money in a brokerage account.

The Financial Services Institute, a staunch opponent of DOL's fiduciary rulemaking, declined to comment on the memo.

The two White House advisors state that academic research supports DOL's argument that the current consumer protections for investment advice in the retail and small plan markets are "inadequate" and that the current regulatory environment under ERISA "creates perverse incentives" that cost retirement savers billions of dollars.

The main culprit of these costs, they argue, arise from the incentives financial advisors are given that "encourage savers to move from low-cost employer plans to often higher fee IRA accounts, and from incentives to steer savers into higher cost products within the IRA market."

Many firms have organized themselves on the basis of capturing "conflicted payments rather than the delivery of high-quality financial advice," the memo states. "With brokers advising on approximately $2.8 trillion of IRA assets — even more if employer retirement plan assets are included — the scope for harm to investors is large."

Conflicted advice results in losses of roughly $6 billion to $8 billion per year (35 to 50 basis points) for IRA investors, the memo states.

An investor receiving conflicted advice who expects to retire in 30 years loses at least 5 to 10 percent of his or her potential retirement savings due to conflicts, the memo states, or approximately one to three years' worth of withdrawals during retirement.

The current regulatory environment, they say, also allows fund sponsors and advisory firms "to create incentives for their advisors to recommend excessive churning (repeated buying and selling) of retirement assets and to steer savers into higher cost products with financial payoffs for the advisor."

But Jon Henschen of the broker-dealer recruiting firm Henschen & Associates states that "you just don't see [churning] anymore" because "these reps largely have been weeded out of the industry." Reps who still do so, he says, "are using fee accounts and only get the flat fee." Churning "is an issue from five to 10 years ago, not today."

The memo also states that advisors are steering clients into variable annuities and other "complex" products that charge higher fees. "Some reps put client funds in variable annuities for the living benefits, which protect clients' downside risk," argues Henschen. "In other words, sometimes added expenses are a good thing, if they give clients insurance in the form of downside protection."

Of course, the DOL redraft, which is said to reach the Office of Management and Budget any day now, still must go through a 90-day review by OMB. DOL will seek public comment on the measure and has said it will conduct a hearing on it.

Senate Majority Leader Orrin Hatch, R-Utah, has already vowed to torpedo DOL's fiduciary efforts for IRAs via his Secure Annuities for Employee (SAFE) Retirement Act, which he said Congress will take up this year. But DOL fiduciary rule advocates maintain that challenges to kill DOL's fiduciary redraft in Congress will not survive a presidential veto.

– Janet Levaux contributed reporting.

White House memo offers a peek at DOL fiduciary strategy

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White House memo offers a peek at DOL fiduciary strategy

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