House Committee on Education and the Workforce Subcommittee on Health, Education, Labor, and Pensions: Protecting American Savers and Retirees from DOL’s Regulatory Overreach
House Committee on Education and the Workforce
Subcommittee on Health, Education, Labor, and Pensions
Protecting American Savers and Retirees from DOL’s Regulatory Overreach
Thursday, February 15, 2024
Topline
- Democrats showed support for the Retirement Security Rule and asked whether the new fiduciary rule would help small businesses and low- and middle-income Americans.
- Republicans criticized the DOL for its new rule and voiced concerns on the DOL’s authority.
Witnesses
- Mr. Doug Ommen, Insurance Commissioner, Iowa Insurance Division
- Mr. Thomas Roberts, Principal, Groom Law Group
- Mr. Joseph C. Peiffer, President, Public Investors Advocate Bar Association
- Mr. Jason Berkowitz, Chief Legal and Regulatory Affairs Officer, Insured Retirement Institute
Opening Statements
Subcommittee Chairman Bob Good (R-Va.)
In his opening statement, Good said Americans should be able to seek out investment advice from the investment professionals of their choosing, assess the wide variety of options in today’s marketplace, and then make their own decisions on the best options. He criticized the Biden Administration and Department of Labor (DOL) for overregulating American retirement savings by imposing a costly, burdensome new rule. Good said the so-called Retirement Security Rule expands the definition of fiduciary which could have far-reaching implications for retirement savings and affect critical access to retirement products for millions of Americans.
Good said that DOL overstepped their authority on this issue, as the new rule regulates retirement accounts far beyond the authorities given to DOL by ERISA. He called the new rule a blatant power grab by DOL to bring more financial professionals under their control and noted that other state and federal regulators already exercise authority over the retirement products and services DOL is attempting to capture under this rule. Good highlighted the SEC’s Regulation Best Interest and the NAIC best interest rules as examples of regulations that already require financial professionals to act in their client’s best interest. He recalled that the last time the government tried to issue a similar rule, which led financial institutions to be forced to eliminate or limit brokerage advice services. Good added that the short comment period for the rule was inconsistent with rulemaking norms. He closed by saying rules that will restrict access to financial advice and hurt American seniors planning for retirement is already challenging enough, but the Biden Administration’s overreach will make that process much worse.
Subcommittee Ranking Member Mark DeSaulnier (D-Calif.)
In his opening statement, DeSaulnier said in today’s retirement savings world, it’s up to the workers to ensure that they do not outlive what they saved. He noted that many retirement advisors do right by their clients, but unfortunately there are those who do not. DeSaulnier said that bad actors get away with providing conflicted advice because the primary DOL regulation, which dates to 1975, is riddled with loopholes. He continued saying that according to the Obama Administration, conflicted advice costs retirement savers up to $17 billion in losses each year. DeSaulnier applauded the Biden Administration and the DOL on their work and said the Retirement Security Rule levels the playing field and will ensure that workers, retirees, and retirement plan sponsors receive advice that is in their best interest. He closed by expressing his support for the rule as it will particularly help those with small account balances, since those small savers are most vulnerable to conflicted advice.
Testimony
Mr. Doug Ommen, Insurance Commissioner, Iowa Insurance Division
In his testimony, Ommen said he is concerned about the DOL fiduciary proposal. He said that the proposal could have significant repercussions for the insurance regulatory framework and negatively impact consumers. He noted that given the retirement savings gap, the Department of Labor should be encouraging, not limiting, access to well-regulated retirement guidance and products, such as annuities. Ommen also continually expressed his disappointment with the DOL’s lack of engagement with state insurance regulators. He said he fundamentally disagrees with the Administration’s characterization of state consumer protections around annuity sales being inadequate. He closed by suggesting that consumer protection is best achieved through consistent enforcement of the requirement that financial recommendations must closely align with the consumer’s best interest, not by limiting access to well-regulated retirement guidance.
Mr. Thomas Roberts, Principal, Groom Law Group
In his testimony, Roberts said the DOL proposal exemplifies the proverbial warning that even when an action is undertaken with the very best of intentions, it may nonetheless lead to harmful results. He added that the DOL’s motivation and advancing of the proposal undoubtedly was with the best of intentions and with the objective of improving retirement savings outcomes. He added that the effects of implementing this proposal would be disastrous. Roberts continued by suggesting that the proposal would impose numerous additional regulatory compliance burdens on investment professionals who serve the needs of retirement investors, and on those who serve the needs of lower and moderate-income investors.
He also added that ERISA disallows fiduciaries from acting in transactions where they have a financial interest and from receiving compensation from third parties in connection with the transaction unless an exemption is available, and the fiduciary complies with the conditions of that exemption. Roberts noted that under the DOL proposal, otherwise ordinary sales commissions, and other traditional forms of transaction-based compensation earned by insurance agents and broker dealer representatives, would automatically be transformed by the prohibited transaction rules. He closed by saying federal securities and state insurance regulators have separately adopted best interest standards for sales conduct for their respective industries.
Mr. Joseph C. Peiffer, President, Public Investors Advocate Bar Association
In his testimony, Peiffer said investors do not know the duties their financial professionals owe them. He showed support for the DOL rule and added that it would go a long way towards holding firms accountable in the retirement accounts for the duty they already say they have and that investors already believe they have. Peiffer added that the rule doesn’t just help advisors, it also helps ethical advisors by clarifying that when advising folks on their retirement money, investors must always come first. He closed by saying the rule evens the playing field for advisors who are already doing the right thing.
Mr. Jason Berkowitz, Chief Legal and Regulatory Affairs Officer, Insured Retirement Institute
In his testimony, Berkowitz said he opposes the DOL’s proposal, which goes far beyond the best interest standard and would harm those who need guidance and assistance of financial professionals the most. He noted that best interest rules adopted by the SEC and 42 states and counting are working to protect consumers without putting unnecessary roadblocks between consumers and products and services. Berkowitz criticized the DOL by saying the Department has hypothesized that regulatory gaps exist and are being exploited to harm retirement savers but has produced no evidence to support that theory.
Berkowitz added that under ERISA, the Department can only regulate the conduct of those who trigger fiduciary status, so the proposal would shoehorn nearly all financial professionals into that status. He said that the DOL has tried to circumvent that decision by asserting that sort of relationship exists whenever a financial professional makes a recommendation to a retirement saver and recommended that the DOL recognize the limits of its jurisdiction and let the SEC and the state insurance departments do their jobs as Congress intended.
Question & Answer
Effects on Everyday Americans
Rep. Rick Allen (R-Ga.) asked Ommen if he thinks the proposal will decrease access to retirement savings. Ommen agreed and said the numbers show that from now until 2027, 4.1 million Americans will be turning 65 every year and that the median income among annuities owners is more than $10,000 higher than the median American. He said that he would like to work with Congress to close the retirement gap, but that DOL’s rule goes in the opposite direction.
Allen asked Berkowitz who would profit or benefit from the rule. Berkowitz said the consumer will suffer the most and that he doesn’t know of anyone who would benefit.
Rep. Susan Wild (D-Pa.) asked Peiffer what the ramifications of keeping the status quo are for people who are not born into wealth. Peiffer said small savers are the most susceptible to conflicted advice and said many of the studies against the proposal are industry funded and that claims that lower- and middle-income Americans would lose access to retirement advice when the last fiduciary was finalized turned out not to be true.
Rep. Jim Banks (R-Ind.) asked why the Biden Administration has brought back this regulation which, according to retirement advisors when the 2016 rule was finalized, will harm investors with low amounts of assets. Berkowitz said he does not know and noted that the status quo since the previous rule has changed significantly with a variety of best interest provisions being enforced on a state and federal level. Banks then asked if this rule is targeting small businesses and working-class families. Berkowitz said he likes to think they are not targeting these families, but that they will ultimately be the victims of this rule.
Banks also asked what Berkowitz thinks this rule will result in small brokerage firms having to cut their services and making it harder for them to work. Berkowitz said it would and clarified the difference between a sole interest and best interest standard. He said that small brokerage firms typically provide advice on a commission basis and get paid only if they complete a transaction and explained that their interest in completing the transaction does not prevent them from acting in the client’s best interest but does mean they can’t realistically meet a sole interest standard. He closed by saying this would force small brokerage firms to become fiduciaries and raise their account minimums, therefore reducing access to advice.
Rep. Kathy Manning (D-N.C.) asked had the fiduciary rule been implemented earlier, if it would have spared people harm when they were investing their retirement savings. Peiffer agreed. Manning noted that gaps still exist, which makes the DOL’s retirement security rule essential to fully protect workers and small businesses.
Rep. Virginia Foxx (R-N.C.) asked if the rule undermines the bipartisan efforts of the Education and the Workforce Committee by reducing access to retirement investment products for low- and middle-income Americans. Berkowitz agreed with the statement and said that this rule would undermine the efforts of the SECURE and SECURE 2.0 regimes. Berkowitz noted that the SECURE Acts have numerous provisions to increase access to annuities and other protected lifetime income products, but that the fiduciary rule will reduce access to advice on how to effectively use these products.
Rep. Jahana Hayes (D-Conn.) asked what the rule does for investors with limited access to professional financial advice. Peiffer said the rule ensures that investors can only receive good advice.
Regulatory Landscape and Prior Proposal Iterations
Rep. Tim Walberg (R-Ohio) asked how new regulations by the SEC, DOL, and NAIC affected the regulatory landscape and whether the new framework is working. Roberts said there has been tremendous progress in enacting appropriate standards of conduct for investment professionals, including investment professionals who are compensated on a transaction basis and who work for broker dealers as well as those that work as insurance agents. He said that both industries are subject to a best interest standard of conduct which represents a significant step forward in the consumer protections that are available today.
Walberg asked Ommen if he had concerns with the way the DOL has handled the development and roll out of the proposed fiduciary rule. Ommen said support for DOL’s rulemaking in large part was to discredit the work that was done at the state level and said that line of thinking was based on unsupported speculation because the DOL never spoke to state regulators.
Allen asked if the current rule being proposed complies with the Fifth Circuit’s decision, which vacated a previous iteration of the fiduciary proposal. Roberts said he does not see how DOL’s current proposal is compliant with the Fifth Circuit’s decision and that the decision was clear that Congress’s intent was not to impose fiduciary standards on persons like stockbrokers or insurance agents who are professional salespeople and distinguished sales conduct from fiduciary conduct.
Rep. Joe Courtney (D-Conn.) asked Peiffer how this rule is different from the DOL’s 2011 proposal. Peiffer said it’s a completely different rule with a narrower focus to decipher who is a fiduciary. He added that the new rule has a much narrower scope and defines a fiduciary as someone who has discretionary authority over an account, someone who calls themselves a fiduciary, and someone who as a regular part of their business provides advice based on the particular needs or individual circumstances of a retirement investor and gives advice that may be relied upon by the retirement investor as the basis for investment decisions. Peiffer reiterated that that is a narrow standard, where the previous rule had a very broad standard and a contract requirement.
Manning said her Republican colleagues believe that the current regulatory landscape contains sufficient protections, but said she sees one big gap citing advice to retirement plan sponsors and asked Peiffer to speak to that. Peiffer said that with regard to retirement plan sponsors, in the example of electricians hiring electricians or accountants hiring accountants, advice to employers on what their workers can choose from for a retirement plan is not covered by a fiduciary duty.
Foxx asked if there are any gaps in the regulatory framework that are currently being exploited. Ommen said that there is no data or actual evidence that there are gaps in the NAIC rules because they’re relatively new and that it would be premature to suggest that there is any data that the NAIC rules are inadequate.
Foxx then asked Roberts how the DOL shifting positions with the rule has impacted costs and compliance for retirement products and services. Roberts said that the DOL shifting positions on this has sent compliance costs skyrocketing, and that financial institutions are being asked to regularly re-engineer their business models to comply with exceedingly complex regulations that seemingly come out of nowhere.
Rep. Bobby Scott (D-Va.) asked how the best interest standard differs from the Biden rule in terms of being able to provide conflicted advice. Ommen said that he believes that compensation of any structure will present conflicts and that a fee-based structure would still present conflicts. He said it was important to ensure that there was good and accurate disclosure with regard to compensation.
Good asked Roberts to explain the distinction between standards and whether the best interest standard is sufficiently protective. Roberts said that a fiduciary has a conflict whenever they have a financial interest and that none of DOL’s exemptions relieve fiduciaries of their duty to act solely in the interest of their client. He then noted that this is separate from a best interest standard, which allows advisors to receive some compensation without being at conflict with their best interest obligation. He continued saying that these advisors are still duty bound to make the best decision for their clients and is in his opinion the best standard to hold a professional salesperson to.
DeSaulnier asked Peiffer to expand on hisexperience and how DOL is trying to address the problem of bad actor advisors in a manner that is very targeted and efficient with the fiduciary rule. Peiffer said the rule is extremely narrow and targeted rule that gets at people that call themselves fiduciaries who have control over accounts or give advice specifically on retirement.
DeSaulnier asked Peiffer to speak to the idea that this proposal is very mindful of the Fifth Circuit’s decision and does not make the same mistakes the prior rule did. Peiffer said the rulemaking is intended to address a serious problem in a serious way that considers the Fifth Circuit’s problems with the previous rule. He said that DOL succeeded as the new rule does not have a contract requirement and has a much narrower definition of who is considered a fiduciary.
State Involvement and DOL Communication
Walberg asked if the DOL worked with states to develop the proposed fiduciary rule. Ommen said the DOL had minimal contact with some full-time staff, but that nothing substantive was ever discussed. He continued saying that he believes it would have been important to have those discussions to ensure that the regulation that moves forward would be complementary to what happened at the SEC and on a state level.
Rep. Eric Burlison (R-Mo.) asked Ommen what he sees as the biggest concern with the way the DOL has developed this new proposal. Ommen said that in his view, the DOL has had no meaningful communication with states regarding the development of the rule. He said DOL is overreaching with their view that there should be a fiduciary mandate.
Burlison asked about the states’ role in protecting retirement savers. Ommen said that his state began their process of revising their standard to a best interest standard before the Fifth Circuit struck down the previous rule. He noted that they looked at a fiduciary only approach, and that the NAIC’s best interest standard will likely be adopted by all 50 states very soon.
Good asked Roberts if he believes that the SEC’s Regulation Best Interest as well as state rules are effectively protecting retirement investors. Roberts said he did and that bad actors are currently investigated and punished by both the SEC and state regulators. He closed by noting that fiduciaries are not immune from bad actors, noting Bernie Madoff as one fiduciary that violated their duty.
Fiduciary Status
Walberg asked Berkowitz to discuss the cost and confusion felt by industry and investors from DOL’s shifting stance on fiduciary status. Berkowitz explained that after the adoption of Regulation Best Interest by the SEC and best interest rules by the NAIC, DOL is effectively just moving the goal post again which is not allowing for the situation to settle. Berkowitz said that with how quickly DOL has proposed its fiduciary rule, there has not been enough time to properly study the effects of the rules that have been adopted in the last few years, which he feels have been working to protect investors.
Rep. Donald Norcross (D-N.J.) spoke about his background working at the IBEW where he would at times have to relay financial information to union members. He then asked Berkowitz where he thought annuities fell when it comes to the fiduciary proposal, and whether he would fall under the definition of fiduciary if he were a business agent today. Berkowitz said there is a risk that under this rule he would have fallen under fiduciary status and said that annuities if properly used can help secure retirement, but that the current rule would make lower access to that product.
Norcross asked Peiffer for his perspective on the same topic. Peiffer said that he is not advocating banning the sale of annuities, but that the sale of annuities should be governed by a good, solid fiduciary standard rather than the model rule which does not even count compensation as a conflict.
Hayes asked Peiffer how the behavior of unscrupulous advisors can make it more difficult for all professionals to offer the best advice to investors. Peiffer noted that if someone is living up to a fiduciary standard and has someone else down the street that can put their interest in making a huge commission over the interest of the retiree, they are on an uneven playing field.
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