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May 30, 2014

The Latest Attack on the DOL’s Rulemaking to Protect Retirees From Conflicts of Interest: “Bad Advice Is Better Than None.”

The Department of Labor will soon propose a rule that will go a long way toward limiting the conflicts of interests and exposing the hidden fees that are draining the savings of millions of American workers and retirees every day.  It’s known as the “fiduciary duty” rule, but it’s really a simple idea: requiring those who give advice for retirement investing to put the interests of their clients before their own.

Opponents of the rule—largely the brokers and insurance agents who are not yet subject to a fiduciary standard of conduct—are ramping up their fight to make sure that the DOL’s rule is delayed or weakened as much as possible.  One of their favorite arguments is that if those financial service providers are subject to a rule that puts the client first, they’ll stop giving advice to low and middle income workers and retirees.  As a result, they say, those people will be left without any guidance at all as they plan for retirement.  (This laudable concern about “low and middle income workers and retirees” fails to mention that unfortunately, many low and middle income workers have difficulty just making ends meet and therefore have little use for investment advice.)

Nevertheless, in an attempt to support this claim, the broker industry recently rolled out a new “study” by “Quantria Strategies LLC,” a so-called policy consulting firm based in Washington, D.C.  The thrust of the “study” is that if the DOL applies the clients-first fiduciary standard to brokers, then those brokers will shut down their call centers, and workers leaving their jobs will lose access to advice about what to do with their retirement funds.  As a result, claims the “study,” workers will be more likely to simply cash out their retirement plans, the worst possible option from a retirement planning standpoint.

The “study” is, however, seriously flawed and should be given no weight by anyone considering the merits of the DOL’s client-first fiduciary duty rule.

First, the “study” was bought and paid for by the very industry fighting against the DOL’s rule, the industry that profits from conflicts of interest and hidden fees.  While the study doesn’t reveal much about its origins, it does disclose that it was commissioned “on behalf of a coalition of financial services organizations that provide retirement services to millions of Americans,” i.e., the industry fighting DOL.

Second, the “study” isn’t much of a study.  For example, one of the key “findings” is based on interviews with several large financial services firms about the supposedly favorable impact that their own call centers have on workers.  So that part of the “study” was to call up the firms (presumably some of those that paid for the “study”) and ask if they provide beneficial education and guidance to employees.  Surprise, the firms said, yes, indeed they do provide such services.  However, the “study” provides little evidence that these services actually have a favorable impact on workers.  And, it even fails to quantify the extent to which employees look to brokers for assistance in the first place.

Third, the “study” assumes a false premise, namely that the DOL rule won’t include the types of exemptions—including one for commissions—that the brokers say they would need to continue offering retirement planning advice to employees leaving their jobs.  Yet public statements from the DOL clearly indicate that an exemption allowing commission-based compensation will be in the rule.

Most important, however, and quite startling, is the core message in the “study”:  Conflicted advice is better than none at all.  The “study” in effect admits that what workers leaving a job typically receive from brokers is not advice in their best interest, but “guidance and marketing” that steers them toward IRA rollovers—rollovers that enrich the firms but may prove far worse for workers than leaving their assets in an employer’s plan or rolling them into a new 401(k).  But this is OK, according to the “study,” supposedly because at least it’s better than cashing out a retirement plan altogether.

Thus, opponents of reform have been reduced to arguing that for hungry or malnourished people, spoiled food that makes them sick but doesn’t kill them is better than none at all, so let’s not set food quality standards too high.

This is an outrageous and unacceptable justification for setting standards of conduct in the financial services industry.  And it’s baseless.  In reality, even if some brokers refuse to put the interests of their clients first and decide to withhold their tainted advice once the new rule goes into effect, other advisers who are subject to the fiduciary standard will fill the gap.  What’s more, those fiduciaries will not only caution workers about cashing out retirement accounts, but also provide financial guidance that really does serve the best interest of the worker.

The fate of millions of baby boomers now entering retirement—10,000 reach age 65 every day now—rests largely on eliminating the type of self-serving advice that the Quantria “study” tries to defend.  The DOL must remain firm in its resolve to issue a broad and strong clients-first fiduciary duty rule.

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