It seems to be an issue on which everyone agrees: financial professionals should be required to handle our retirement money with the utmost care, while putting the interests of investors first.
But this kind of care comes in varying degrees, and deciding how far advisers should go has been at the center of heated debates for nearly 15 years, pitting financial industry stakeholders who argue that their existing regulatory framework is sufficient against the U.S -Labor Department takes on The pensions regulator says there are gaping loopholes.
The issue has resurfaced as the department prepares to release a final rule that would require more financial professionals to serve as fiduciaries — meaning they would be held to the highest standards when advising on retirement savings across the investment landscape than those for tax-deferred accounts held or intended for use, such as individual retirement accounts.
Most retirement plan administrators who manage the trillions of dollars held in 401(k) plans are already subject to this standard. This is part of a 1974 law called ERISA, which was enacted to oversee private retirement plans before 401(k)s existed. However, this generally does not apply, for example, when employees roll their pile of cash into an IRA when they leave their jobs or retire from the workforce. According to the most recent data from the Internal Revenue Service, nearly 5.7 million people contributed $620 billion to IRAs in 2020.
The Biden administration’s final regulation, to be released this spring, is expected to change that and close additional loopholes: Investment professionals who sell retirement plans and recommend investment menus to companies would also be bound by the fiduciary standards, as would professionals who sell pensions in the Sell retirement accounts.
“It shouldn’t matter whether you’re getting advice about a pension, any type of pension or security – if it’s advice about your retirement it should be of a high standard that applies to everyone,” Ali said Khawar of the Labor Party Deputy Principal Secretary, Department of the Employee Benefits Security Administration.
The evolution of brokers’ and advisors’ duties to American investors goes back decades. But the path to stricter protection of investors’ retirement money began during the Obama administration, which issued a rule in 2016 that was halted shortly after President Donald J. Trump took office and never fully enacted: it was overturned in 2018 by an appeals court in the Fifth District. That regulation went further than the current one – it required financial firms to enter into contracts with customers that allowed them to sue, which the court found went too far.
The Biden administration’s plan — and the final rule could differ from the original October proposal — would require more financial professionals to serve as gold standard fiduciaries when making an investment recommendation or providing compensation advice, at least if they identify themselves as trusted professionals .
The standard also comes into play when advisors describe themselves as fiduciaries or when they control or manage another person’s money.
Currently, under ERISA retirement law, it is much easier to avoid fiduciary status. Investment professionals must pass a five-part test before they can meet this standard. One component states that professionals must provide advice on a regular basis. That means if an investment professional makes a one-time recommendation, that person is off responsibility — even if the advice was to transfer a person’s lifelong savings.
Although investor protection has improved in recent years, there is no universal standard for all advisors, investment products and accounts.
The different “best interest” standards can be dizzying: Registered investment advisers are fiduciaries under the 1940 law that regulates them, but even their duties are not considered quite as stringent as those of an ERISA fiduciary. Professionals at brokerage firms may be registered investment advisors, to whom the 1940 Fiduciary Standard applies—or registered representatives, to whom it does not apply. In this case, they are generally subject to the Securities and Exchange Commission’s best interest standard. Confused? There is more.
Annuity sellers are largely regulated by state insurance commissioners, but legal experts say their code of best interest conduct, adopted in 45 states, is a weaker version than that for investment brokers. However, variable annuities and other products fall under the jurisdiction of both the SEC and the states.
Interest groups in the financial services and pensions industries believe that current standards are sufficient. This includes Regulation Best Interest issued by the SEC in 2019, which requires brokers to act in the best interests of their customers when making securities recommendations to retail clients. They argue that the stricter ERISA standard would result in clients losing access to advice (although comprehensive, lower-cost advice from fiduciaries has become more accessible in recent years).
The SEC’s adoption of Regulation Best Interest “requires all financial professionals subject to the SEC’s jurisdiction to put the interests of their clients first – and not to make recommendations that burden their own pockets at the expense of their clients,” said Jason Berkowitz, director of legal and regulatory affairs official for the Insured Retirement Institute, an industry group, during a House hearing on the rule in January.
However, there are so many differences between the various best interest standards and ERISA fiduciary status that companies go out of their way to disclose on their websites that they are not this type of fiduciary.
Janney Montgomery Scott, a Philadelphia-based financial services firm, said on its website that fiduciary status with respect to retirement and other qualified accounts is “very technical” and depends on the services chosen. “Unless we agree in writing, we will not act as a ‘fiduciary’ under the pension laws,” the company said, referring to ERISA, “including if we have a ‘fiduciary’ or ‘fiduciary’ obligation under other federal or state laws.” “Laws.”
“It would be unreasonable to expect ordinary retirement investors to understand the implications of these disclosures,” said Micah Hauptman, director of the Consumer Federation of America, a nonprofit consumer advocacy group.
Under the latest proposal, trustees must avoid conflicts of interest. This means they cannot provide advice that impacts their remuneration unless they meet certain conditions to ensure investor protection – including putting policies in place to mitigate these conflicts. Mere disclosure of conflicts is not enough, ministry officials said.
“Our statutes are very anti-conflict in their DNA,” said Mr. Khawar of the Labor Department. “We expect you to behave in such a way that the conflict does not influence the decision you make.”
Kamila Elliott, founder and chief executive of Collective Wealth Partners, a financial planning firm in Atlanta whose clients include middle- to high-income Black households, testified at a congressional hearing in favor of the so-called retirement plan rule. Ms Elliott, who is also a certified financial planner, said she had seen the impact of inappropriate advice from her clients who came to her after working with pension and insurance brokers.
A customer aged 48 was sold a fixed annuity in a one-off transaction. She invested most of her retirement money in the product, which had an interest rate of less than 2.5 percent and a repayment period of seven years. If she wanted to distribute some of that money in the market, which Ms. Elliott deemed more appropriate for her age and circumstances, she would owe a penalty of more than 60 percent of her retirement savings.
“A one-time and irrevocable decision about whether and how to roll over employer-sponsored retirement savings could be the single most important decision a retirement investor will ever make,” she told a House committee in January.
Another customer who only had $10,000 in an individual retirement account was sold life insurance with a $20,000 annual premium – something most average investors can’t keep up with, causing them to lose the policies , before they can benefit from it.
“For many investors, it wouldn’t make sense to put their entire retirement portfolio into one insurance product,” she said.
Jason C. Roberts, chief executive of the Pension Resource Institute, a consulting firm for banks, brokerages and consulting firms, said he expects financial services providers will have to change certain policies to comply with the new rule, such as increasing compensation. that consultants will no longer be paid for certain recommendations and certain sales incentives and competitions will be restricted.
“It will really hit the broker-dealers,” he said, adding that parts of the annuity industry may be hit harder.
Labor Department officials said they considered comments from industry stakeholders and others when drafting the final rule, but declined to provide details.
After the White House Office of Management and Budget completes its review of the final rule, it could be released as early as next month.
Given the history of the rule, this may not be the end of the road. Legal challenges are expected, but fiduciary experts say regulators developed the rule with this in mind.
Arthur B. Laby, associate dean and professor at Rutgers Law School, said the court that struck down the Obama-era rule failed to recognize the societal changes that have affected the retirement advice market.
In her opinion on behalf of the majority, the judge argued that when Congress passed ERISA in 1974, it was aware of the differences between investment advisers, who are fiduciaries, and stock brokers and insurance agents, who “generally did not assume such status.” Selling products to customers.” For this reason, the court reasoned, in part, that fiduciary status should not now apply to brokers.
But the times have changed. “Today,” Mr. Laby said, “many brokers function as advisors through and through.”
The latest proposal recognizes that if a professional making a recommendation can be viewed as someone with whom an investor has a relationship of trust – be it a broker or an insurance agent – that person would be considered a fiduciary.
“A relationship of trust, vulnerability and trust,” Mr. Laby said, “requires the protection that a fiduciary duty provides.”
Source link
2024-03-26 09:02:21
www.nytimes.com
