House Ways and Means Subcommittee Hearing on DOL ‘s Proposed Fiduciary Rule
House Committee on Ways and Means Subcommittee on Oversight
“Department of Labor’s Proposed Fiduciary Rule”
Wednesday, September 30, 2015
Key Topics & Takeaways
- A Legislative Fix: Rep. Neal (D-Mass.) and Chairman Roskam (R-Ill.) agreed to work on bipartisan legislation. Rep. Larson (D-Conn.) also declared his support for working on legislation.
- State Run Retirement: ICI’s Stevens noted his concern that state run retirement plans would “erode” the private sector retirement system by prompting employers who offer 401k plans to drop them in place of the state plan.
- Favoring Large Businesses: Rep. Noem (R-S.D.) noted that the rule targets small businesses. Drinker Biddle & Reath’s Campbell explained that the large plan carve out is discriminatory and according to the DOL, size is a “proxy” for financial sophistication, which is not necessarily true.
- Robo Advisors: enrich Private Wealth Management’s VanArsdale explained that while robo advisors work for some people, she wants investors to have a choice, and worries about reactions to market fluctuations without access to an advisor. New York Life Insurance Company’s Specht added that robo advisors are not a replacement for a person.
Witnesses
- Bradford Campbell, Counsel, Drinker Biddle & Reath LLP
- Paul Schott Stevens, President and CEO, Investment Company Institute
- Judy VanArsdale, LPL Financial Advisor, enRich Private Wealth Management
- Kenneth Specht, Financial Services Professional, Agent, New York Life Insurance Company
- Patricia Owen, President, FACES DaySpa
- Damon Silvers, Director of Policy and Special Counsel, AFL-CIO
Opening Statements
In his opening statement, Chairman Peter Roskam (R-Ill.) stated that the Department of Labor’s (DOL) proposed rule would “drastically expand” the definition of fiduciary and prevent low- to middle-income families from receiving investment advice. He stressed that the robo advisor option the DOL has offered is a “poor substitute” for a qualified financial advisor, and that smaller accounts will face higher fees in the fee-based model. While the White House has relied on a study that declares investors have lost $17 billion due to bad investment advice, Roskam explained that experts have found the study “fundamentally flawed.” He concluded that the current rule is “unworkable” and that there is a need to “pump the breaks a little on this rule.”
In his opening statement, Ranking Member John Lewis (D-Ga.) stated the importance of Americans savings for retirement and his interest in hearing about how the rule can work as intended.
Witness Testimony
Bradford Campbell, Counsel, Drinker Biddle & Reath LLP
In his testimony, Bradford Campbell noted that there are misconceptions about the proposal, as well as technical and policy flaws that would “harm the people it is intended to protect.” He noted that the proposed rule would reduce investor choices and the availability of advice for small plans, while increasing the cost to small businesses and investors. Campbell explained that the rule does not create a new best interest standard, and instead could prevent advice that is in savers’ best interest. He continued that the best interest contract exemption (BICE) does not address problems; rather, it contains provisions beyond the DOL’s authority to regulate.
Paul Schott Stevens, President and CEO, Investment Company Institute
In his testimony, Paul Stevens stressed that while he supports the principle, the proposal is “deeply flawed” and the claims that conflicted advice is costing savers $17 billion is false, as it relies on studies with outdated statistics and misapplied findings in the studies. He noted that the DOL has “ignored” the harm that the proposed rule would cost investors and small businesses, which he estimated would result in $109 billion over 10 years in increased fees and costs. Stevens continued that the proposed rule may undermine the employment-based retirement system. He noted his concern that state run retirement plans would “erode” the private sector retirement system by prompting employers who offer 401k plans to drop them in place of the state plan, and asked what investor protections will be in place for state-run plans if they are exempted from Employee Retirement Income Security Act (ERISA) law.
Judy VanArsdale, LPL Financial Advisor, enRich Private Wealth Management
In her testimony, Judy VanArsdale explained that the proposed rule would create “unintended consequences” that will make it harder for advisors to provide services and advice to clients. She noted that the BICE would be “challenging and create problematic liabilities,” eliminating the ability to provide personal assistance to small accounts. VanArsdale continued that she may not be able to service small account clients if the rule is implemented in “anything close to the current form.” She explained her concern with robo advisors, as computers do not understand the complexities of an individual’s situation. VanArsdale stated her support for a best interest standard and concluded that challenges with the rule can be resolved through legislation or revision.
Kenneth Specht, Financial Services Professional, Agent, New York Life Insurance Company
In his testimony, Kenneth Specht noted his support for a best interest standard but said that the proposed rule hurts the middle class by eliminating affordable advice. He explained three concerns he has with the proposal: (1) The rule equates best interest with lowest cost, assuming that the cheapest products are the safest products; (2) It prohibits offering proprietary products, even if the product may be in the client’s best interest; and (3) There is a bias against commissions which is typically the lowest cost for a client to receive advice. He concluded that while advice can be purchased online, many investors want to work with an advisor and company that they can trust.
Patricia Owen, President, FACES DaySpa
In her testimony, Patricia Owen explained that she owns a company with 25 employees, most of which are Millenials that do not consider saving for retirement a priority. She continued that an advisor helped her create a 401(k) plan for her employees and wants to offer a 50 percent employer match, but is delaying the implementation due to the increased costs the rule would impose on her. Owen discussed three issues for small businesses: (1) The seller’s carve out discriminates against small businesses and decreases access to advice; (2) Changes to the education carve out restricts “critical” investment education to employees; and (3) The BICE increases the cost of services to small businesses, possibly eliminating access for them.
Damon Silvers, Director of Policy and Special Counsel, AFL-CIO
In his testimony, Damon Silvers explained that protections for moving money from ERISA funds to individual retirement account (IRA) rollovers “is essential.” He noted that there is not currently a “level playing field” in the capital markets and that advice is only good if it is in the best interest of the investor, as mistakes can “cripple” a retiree’s future.
Questions and Answer
Authority to Create the Rule
Rep. Pat Meehan (R-Pa.) stated his concern that the DOL is creating rules without the capacity to police the rules, but instead outsource oversight to private attorneys, and asked if this is appropriate. Campbell agreed that the DOL does not have the authority to create the rule and that outsourcing oversight is a “troubling aspect” of the proposal.
Best Interest Contract Exemption
Lewis asked the panel to explain the criticism the BICE has received. Silvers noted the issue of whether a plan has a limited menu of options, as part of education is showing the full range of options available in each asset category. He continued that in an IRA, options are limitless, and pointing out an option is sales, not education, and should not be allowed. Stevens explained that “tremendous” advice and education is given by advisors that will be disrupted because the BICE “does not work.”
Rep. Joseph Crowley (D-N.Y.) stated that he put together a package of savings ideas called “Building Better Savings, Building Better Futures,” and added that he looks forward to the DOL’s response to the letter of concern he signed on with 95 other House Democrats, as there is “too much ambiguity” in the BICE. Stevens replied that the analysis of BICE is “freighted with requirements, voluminous disclosures, a tri-party contract…it is as if the DOL never thought the BICE would be utilized.”
Small Businesses and Investors
Rep. Kristi Noem (R-S.D.) asked Owen how the proposed rule will hurt her employees. Owen explained that having an advisor come in to speak to her employees gets them to start saving for retirement. She noted that the rule hurts small business owners because they have to compete against major corporations that have “deep pockets” for retirement plans.
Noem noted that the rule targets small businesses and asked if the rule favors large businesses. Campbell explained that the large plan carve out is discriminatory and according to the DOL, size is a “proxy” for financial sophistication, which is not necessarily true.
Support for the Rule
Rep. Lloyd Doggett (D-Texas) expressed his concern over the $17 billion the White House Council of Economic Advisors (CEA) states Americans lose annually due to conflicted advice and noted his support for a final “reasonable rule” that takes into account the objections raised.
Protecting Investors
Rep. Mike Kelly (R-Pa.) asked if there is an upside to the federal government getting involved in retirement planning and if the government could keep investors safe from conflicted advice. Stevens answered that if the rule was pursued in the right way “we would not have this problem.”
Rep. Charles Rangel (D-N.Y.) asked the panel if advice should have a fiduciary standard to avoid a conflict of interest. Stevens explained that a fiduciary standard is the “highest one known to law,” as the relationship “grows” on trust and confidence, but noted that not all relationships arise to that level.
Rep. George Holding (R-N.C.) stressed that the Administration is “ignoring facts in favor of ideology” and that the CEA study ignores that advisors may provide good advice. Stevens agreed, adding that the rule would limit choices and services for investors. He added that the rule would require investors to pay twice, the first time with the commission on their accounts and the second when it becomes a fee-based account. Campbell noted that the rule forces advisors into a fee-based model that may not be in the best interest of some investors and is contrary to the reverse churning investigations the Securities and Exchange Commission (SEC) has prioritized.
Rep. Jim Renacci (R-Ohio) asked if investors are better off with fee-based accounts. Specht replied that fee-based accounts will take money “out of pockets” upfront while a commission-based account will spread the costs and reduce them over time.
Rep. Jason Smith (R-Mo.) noted that the Administration is trying to create a “one size fits all” approach to guidance and advice, and asked the panel how the rule will affect Millenials. Specht, Stevens and Owen agreed that the rule will have an impact. Owen explained that her Millenial employees have “no interest in savings of any kind” and the rule will “greatly affect” them.
Robo Advisors
Crowley asked VanArsdale how financial advisors differ from robo advisors. VanArsdale explained that while robo advisors work for some people, she wants investors to have a choice, and worries about reactions to market fluctuations without access to an advisor. Specht added that robo advisors are not a replacement for a person.
Renacci expressed his concern that the rule will take good advisors away from small accounts, adding that Rep. Moore’s letter outlines bipartisan concerns. Campbell noted that it is questionable if the BICE can be used as proposed. Stevens questioned how the DOL can support robo advisors while they are opposed to electronic delivery of documents.
Rep. John Larson (D-Conn.) recognized how important a human transaction is, noting his resistance to robo advisors. He added that financial literacy is important and that education is better distributed when advisors speak to investors.
Rep. Diane Black (R-Tenn.) noted her concern with blue collar workers relying on robo advisors in rural areas where internet connectivity is not good, as well as cybersecurity issues. Stevens agreed with her concern.
A Legislative Fix
Rep. Richard Neal (D-Mass.) noted that Democrats and Republicans agree that “we need to get this right” and asked Roskam if they can work on a legislative solution together. Roskam declared his support for working on bipartisan legislation. Larson also declared his support for working on a legislative fix.
Roskam stressed that the rule would push investors into state “secure choice” plans, which are not necessarily secure. Stevens agreed and explained that the DOL would de-regulate state administrative plans so they do not have the same degree of ERISA protections. He added that if there is a “patchwork quilt” of state run plans, the retirement system “will be put at risk.” VanArsdale voiced her concern that investors would move out of state if they had to participate in their state run plan. Campbell explained that while states may have good intentions, there are issues Congress should consider prior to allowing the DOL to eliminate ERISA preemption that protects workers.
For more information on this event, please click here.
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House Committee on Ways and Means Subcommittee on Oversight
“Department of Labor’s Proposed Fiduciary Rule”
Wednesday, September 30, 2015
Key Topics & Takeaways
- A Legislative Fix: Rep. Neal (D-Mass.) and Chairman Roskam (R-Ill.) agreed to work on bipartisan legislation. Rep. Larson (D-Conn.) also declared his support for working on legislation.
- State Run Retirement: ICI’s Stevens noted his concern that state run retirement plans would “erode” the private sector retirement system by prompting employers who offer 401k plans to drop them in place of the state plan.
- Favoring Large Businesses: Rep. Noem (R-S.D.) noted that the rule targets small businesses. Drinker Biddle & Reath’s Campbell explained that the large plan carve out is discriminatory and according to the DOL, size is a “proxy” for financial sophistication, which is not necessarily true.
- Robo Advisors: enrich Private Wealth Management’s VanArsdale explained that while robo advisors work for some people, she wants investors to have a choice, and worries about reactions to market fluctuations without access to an advisor. New York Life Insurance Company’s Specht added that robo advisors are not a replacement for a person.
Witnesses
- Bradford Campbell, Counsel, Drinker Biddle & Reath LLP
- Paul Schott Stevens, President and CEO, Investment Company Institute
- Judy VanArsdale, LPL Financial Advisor, enRich Private Wealth Management
- Kenneth Specht, Financial Services Professional, Agent, New York Life Insurance Company
- Patricia Owen, President, FACES DaySpa
- Damon Silvers, Director of Policy and Special Counsel, AFL-CIO
Opening Statements
In his opening statement, Chairman Peter Roskam (R-Ill.) stated that the Department of Labor’s (DOL) proposed rule would “drastically expand” the definition of fiduciary and prevent low- to middle-income families from receiving investment advice. He stressed that the robo advisor option the DOL has offered is a “poor substitute” for a qualified financial advisor, and that smaller accounts will face higher fees in the fee-based model. While the White House has relied on a study that declares investors have lost $17 billion due to bad investment advice, Roskam explained that experts have found the study “fundamentally flawed.” He concluded that the current rule is “unworkable” and that there is a need to “pump the breaks a little on this rule.”
In his opening statement, Ranking Member John Lewis (D-Ga.) stated the importance of Americans savings for retirement and his interest in hearing about how the rule can work as intended.
Witness Testimony
Bradford Campbell, Counsel, Drinker Biddle & Reath LLP
In his testimony, Bradford Campbell noted that there are misconceptions about the proposal, as well as technical and policy flaws that would “harm the people it is intended to protect.” He noted that the proposed rule would reduce investor choices and the availability of advice for small plans, while increasing the cost to small businesses and investors. Campbell explained that the rule does not create a new best interest standard, and instead could prevent advice that is in savers’ best interest. He continued that the best interest contract exemption (BICE) does not address problems; rather, it contains provisions beyond the DOL’s authority to regulate.
Paul Schott Stevens, President and CEO, Investment Company Institute
In his testimony, Paul Stevens stressed that while he supports the principle, the proposal is “deeply flawed” and the claims that conflicted advice is costing savers $17 billion is false, as it relies on studies with outdated statistics and misapplied findings in the studies. He noted that the DOL has “ignored” the harm that the proposed rule would cost investors and small businesses, which he estimated would result in $109 billion over 10 years in increased fees and costs. Stevens continued that the proposed rule may undermine the employment-based retirement system. He noted his concern that state run retirement plans would “erode” the private sector retirement system by prompting employers who offer 401k plans to drop them in place of the state plan, and asked what investor protections will be in place for state-run plans if they are exempted from Employee Retirement Income Security Act (ERISA) law.
Judy VanArsdale, LPL Financial Advisor, enRich Private Wealth Management
In her testimony, Judy VanArsdale explained that the proposed rule would create “unintended consequences” that will make it harder for advisors to provide services and advice to clients. She noted that the BICE would be “challenging and create problematic liabilities,” eliminating the ability to provide personal assistance to small accounts. VanArsdale continued that she may not be able to service small account clients if the rule is implemented in “anything close to the current form.” She explained her concern with robo advisors, as computers do not understand the complexities of an individual’s situation. VanArsdale stated her support for a best interest standard and concluded that challenges with the rule can be resolved through legislation or revision.
Kenneth Specht, Financial Services Professional, Agent, New York Life Insurance Company
In his testimony, Kenneth Specht noted his support for a best interest standard but said that the proposed rule hurts the middle class by eliminating affordable advice. He explained three concerns he has with the proposal: (1) The rule equates best interest with lowest cost, assuming that the cheapest products are the safest products; (2) It prohibits offering proprietary products, even if the product may be in the client’s best interest; and (3) There is a bias against commissions which is typically the lowest cost for a client to receive advice. He concluded that while advice can be purchased online, many investors want to work with an advisor and company that they can trust.
Patricia Owen, President, FACES DaySpa
In her testimony, Patricia Owen explained that she owns a company with 25 employees, most of which are Millenials that do not consider saving for retirement a priority. She continued that an advisor helped her create a 401(k) plan for her employees and wants to offer a 50 percent employer match, but is delaying the implementation due to the increased costs the rule would impose on her. Owen discussed three issues for small businesses: (1) The seller’s carve out discriminates against small businesses and decreases access to advice; (2) Changes to the education carve out restricts “critical” investment education to employees; and (3) The BICE increases the cost of services to small businesses, possibly eliminating access for them.
Damon Silvers, Director of Policy and Special Counsel, AFL-CIO
In his testimony, Damon Silvers explained that protections for moving money from ERISA funds to individual retirement account (IRA) rollovers “is essential.” He noted that there is not currently a “level playing field” in the capital markets and that advice is only good if it is in the best interest of the investor, as mistakes can “cripple” a retiree’s future.
Questions and Answer
Authority to Create the Rule
Rep. Pat Meehan (R-Pa.) stated his concern that the DOL is creating rules without the capacity to police the rules, but instead outsource oversight to private attorneys, and asked if this is appropriate. Campbell agreed that the DOL does not have the authority to create the rule and that outsourcing oversight is a “troubling aspect” of the proposal.
Best Interest Contract Exemption
Lewis asked the panel to explain the criticism the BICE has received. Silvers noted the issue of whether a plan has a limited menu of options, as part of education is showing the full range of options available in each asset category. He continued that in an IRA, options are limitless, and pointing out an option is sales, not education, and should not be allowed. Stevens explained that “tremendous” advice and education is given by advisors that will be disrupted because the BICE “does not work.”
Rep. Joseph Crowley (D-N.Y.) stated that he put together a package of savings ideas called “Building Better Savings, Building Better Futures,” and added that he looks forward to the DOL’s response to the letter of concern he signed on with 95 other House Democrats, as there is “too much ambiguity” in the BICE. Stevens replied that the analysis of BICE is “freighted with requirements, voluminous disclosures, a tri-party contract…it is as if the DOL never thought the BICE would be utilized.”
Small Businesses and Investors
Rep. Kristi Noem (R-S.D.) asked Owen how the proposed rule will hurt her employees. Owen explained that having an advisor come in to speak to her employees gets them to start saving for retirement. She noted that the rule hurts small business owners because they have to compete against major corporations that have “deep pockets” for retirement plans.
Noem noted that the rule targets small businesses and asked if the rule favors large businesses. Campbell explained that the large plan carve out is discriminatory and according to the DOL, size is a “proxy” for financial sophistication, which is not necessarily true.
Support for the Rule
Rep. Lloyd Doggett (D-Texas) expressed his concern over the $17 billion the White House Council of Economic Advisors (CEA) states Americans lose annually due to conflicted advice and noted his support for a final “reasonable rule” that takes into account the objections raised.
Protecting Investors
Rep. Mike Kelly (R-Pa.) asked if there is an upside to the federal government getting involved in retirement planning and if the government could keep investors safe from conflicted advice. Stevens answered that if the rule was pursued in the right way “we would not have this problem.”
Rep. Charles Rangel (D-N.Y.) asked the panel if advice should have a fiduciary standard to avoid a conflict of interest. Stevens explained that a fiduciary standard is the “highest one known to law,” as the relationship “grows” on trust and confidence, but noted that not all relationships arise to that level.
Rep. George Holding (R-N.C.) stressed that the Administration is “ignoring facts in favor of ideology” and that the CEA study ignores that advisors may provide good advice. Stevens agreed, adding that the rule would limit choices and services for investors. He added that the rule would require investors to pay twice, the first time with the commission on their accounts and the second when it becomes a fee-based account. Campbell noted that the rule forces advisors into a fee-based model that may not be in the best interest of some investors and is contrary to the reverse churning investigations the Securities and Exchange Commission (SEC) has prioritized.
Rep. Jim Renacci (R-Ohio) asked if investors are better off with fee-based accounts. Specht replied that fee-based accounts will take money “out of pockets” upfront while a commission-based account will spread the costs and reduce them over time.
Rep. Jason Smith (R-Mo.) noted that the Administration is trying to create a “one size fits all” approach to guidance and advice, and asked the panel how the rule will affect Millenials. Specht, Stevens and Owen agreed that the rule will have an impact. Owen explained that her Millenial employees have “no interest in savings of any kind” and the rule will “greatly affect” them.
Robo Advisors
Crowley asked VanArsdale how financial advisors differ from robo advisors. VanArsdale explained that while robo advisors work for some people, she wants investors to have a choice, and worries about reactions to market fluctuations without access to an advisor. Specht added that robo advisors are not a replacement for a person.
Renacci expressed his concern that the rule will take good advisors away from small accounts, adding that Rep. Moore’s letter outlines bipartisan concerns. Campbell noted that it is questionable if the BICE can be used as proposed. Stevens questioned how the DOL can support robo advisors while they are opposed to electronic delivery of documents.
Rep. John Larson (D-Conn.) recognized how important a human transaction is, noting his resistance to robo advisors. He added that financial literacy is important and that education is better distributed when advisors speak to investors.
Rep. Diane Black (R-Tenn.) noted her concern with blue collar workers relying on robo advisors in rural areas where internet connectivity is not good, as well as cybersecurity issues. Stevens agreed with her concern.
A Legislative Fix
Rep. Richard Neal (D-Mass.) noted that Democrats and Republicans agree that “we need to get this right” and asked Roskam if they can work on a legislative solution together. Roskam declared his support for working on bipartisan legislation. Larson also declared his support for working on a legislative fix.
Roskam stressed that the rule would push investors into state “secure choice” plans, which are not necessarily secure. Stevens agreed and explained that the DOL would de-regulate state administrative plans so they do not have the same degree of ERISA protections. He added that if there is a “patchwork quilt” of state run plans, the retirement system “will be put at risk.” VanArsdale voiced her concern that investors would move out of state if they had to participate in their state run plan. Campbell explained that while states may have good intentions, there are issues Congress should consider prior to allowing the DOL to eliminate ERISA preemption that protects workers.
For more information on this event, please click here.