Conflicted IRA Advice Widespread as Fiduciaries Lack Oversight, Watchdog Finds

What You Need to Know

Lawmakers asked the Government Accountability Office to assess current issues around conflicts of interest and investment advice.
Conflicts abound among recommedations to retirement investors, the watchdog found.
IRS needs to implement an audit process for IRA fiduciaries so it can more effectively assess excise taxes for prohibited transactions, GAO suggests.

Fiduciary oversight of individual retirement accounts is lacking, and conflicts of interest abound when it comes to advising retirement investors, according to a new report by the Government Accountability Office.

The report, Agencies Can Better Oversee Conflicts of Interest between Fiduciaries and Investors, also found that required disclosures may not fully explain the risks and challenges posed by those conflicts, and that investors fail to review or understand them.

The report was commissioned by members of Congress and released Wednesday by Rep. Bobby Scott, D-Va., ranking member on the House Education and Workforce Committee, as well as Senate Health, Education, Labor, and Pensions (HELP) Committee Chairman Bernie Sanders, I-Vt., and Sen. Patty Murray, D-Wash.

Lawmakers asked GAO to assess where issues around conflicts of interest and investment advice stand today, after the Labor Department’s 2016 fiduciary rule, which was vacated by a Texas court in 2018.

“Wall Street is taking advantage of working people by exploiting loopholes that allow financial professionals to steer retirement savers into more expensive, underperforming products,” Sanders said Wednesday in a statement. “Thankfully, the Department of Labor’s new Retirement Security Rule puts an end to this unscrupulous behavior, and it’s my hope that the 5^th circuit quickly removes the stay on its implementation.”

“The interests of financial professionals and firms often conflict with the interests of retirement investors,” the report states. “This could create risks for millions of investors with over $18 trillion dollars in retirement savings in 401(k) plans and IRAs.”

The report covers potential conflicts involving annuities as well as conflicts involving other retirement investment vehicles, because the authors’ definition of “individual retirement account” includes individual retirement annuities.

The report is dated July; however, members of Congress can hold public release of a GAO report for up to 30 days after issuance.

Excise Taxes

GAO recommended that the IRS develop and implement “a proactive process to identify prohibited transactions between IRA fiduciaries and IRAs, and assess any associated excise tax.”

Only the IRS can enforce excise tax to safeguard retirement savings, the report states. “However, the IRS does not have a process to do so.”

Self-Reporting

IRS’s approach “to protect IRA investors from the conflicts of interest of IRA fiduciaries who engage in prohibited transactions relies on the IRA fiduciary self-reporting to IRS and paying the applicable excise tax,” the report states.

The agency agreed to “develop and implement a process independent of DOL referrals for identifying non-exempt prohibited transactions involving firms and financial professionals that are fiduciaries to IRAs and assessing the applicable excise tax.”

IRS stated it will examine the processes and consider implementing additional measures to identify prohibited transactions as appropriate.

IRS also agreed that its commissioner should coordinate with Labor “through a formal means, such as a memorandum of understanding, on non-exempt prohibited transactions involving firms and financial professionals who are IRA fiduciaries and owe excise tax,” according to the report.

IRS agreed to also “explore opportunities to develop more formal means for coordination between IRS and DOL for prohibited transactions related to investment advice provided to IRA owners from financial services firms,” the report said.