At an elaborate White House ceremony on October 31, President Biden unveiled the Department of Labor’s long-awaited proposed retirement security rule. The proposal is, among other things, another attempt by the Employee Benefits Security Administration (EBSA) to update the 1975 regulatory definition of investment advice under ERISA. The American Retirement Association has a long history of advocating for and supporting a legislative and regulatory framework that protects both retirement plan sponsors and participants through clear, thoughtful, and impactful fiduciary standards of care and duty.
We have already expressed publicly, and to EBSA, our support for modernizing the definition of investment advice, particularly as it applies to such investment advice given to plan sponsors establishing and maintaining retirement savings plans for their employees. To that end, as an organization we look forward to carefully reviewing this comprehensive proposal and providing constructive comments both positive and those addressing concerns that we will almost certainly identify given the breadth of the regulation.
We nonetheless feel compelled to opine in advance of our eventual formal comment letter given that, prior to the pomp and circumstance of the new rule’s unveiling at a White House ceremony, the National Council of Economic Advisors released an online blog post earlier in the day that was questionable at best, incomplete in its analysis, and unfair at worst.
We find it unacceptable that at the same time the retirement plan and insurance industry is being encouraged to develop and refine guaranteed lifetime income products to enhance retirement security by addressing longevity risk, the administration chose to infer the suitability of a specific annuity product type in Fixed Index Annuities (FIAs) was questionable and by inference, impugn the reputation of a specific insurance company and its product.
As of the date of this publication, the name of the company and its product has since been deleted from the online blog. We see no reason to mention the name of the company, or the product now and potentially unnecessarily add to the reputational harm of a company that, in our view, has always conducted itself in an exemplary way respecting its products and services.
While we believe there will always be room for improvement in transparency, disclosure, and the application and enforcement of fiduciary standards that ensure advice is provided in the best interest of investors, we feel the rhetoric of “junk fees” by President Biden based upon arguably questionable analysis by the Council of Economic Advisors was ill-advised, unwarranted, and lacking in perspective and the inclusion of differences of opinions.
Annuities come in various flavors but most all have a common theme, the opportunity for asset protection, income security or both. These features are appropriately favored by a significant cohort of retirees and investors over traditional investments without such assurances. Many investors, especially pre-retirees and retirees, have a greater fear of investment market losses, living too long and having more days than dollars, or both, than they fear missing the full capture of the upside of their chosen investments.
Fixed Index Annuities offering both upside investment opportunities, even if capped, and downside protection to avoid deep losses of capital are naturally going to cost more than a product just offering one or the other. To label these increased fees as being “junk” infers the increased fees bring no value and are only meant to enrich the product manufacturer or the product distributor at the expense of the investor, and further fails to acknowledge the goals and objectives of the typical annuity buyer profile.
We believe this positioning and not-so-veiled threat by President Biden that “…I just want you to know we’re watching,” is a bridge too far for us to stay silent and not defend the integrity of the company identified and the vast majority of the other retirement plan and insurance industry institutions serving American workers and retirees.
We are not naïve and realize that with respect to some products in the marketplace it could, depending on the facts and circumstances, be fair to question whether “fees are fair and reasonable for services provided.” That being said, such an assertion is certainly not limited to products like a Fixed Index Annuity, which pays a one-time front-end commission to the person who recommended it.
It can also apply to a registered investment advisor charging an annual asset-based fee for managing mutual funds, ETFs, stocks, or bonds. In a fair and detailed analysis, one could easily find situations where the one-time payment of the 6.5% commission cited in the White House release titled, “The Retirement Security Rule – Strengthening Protections for Americans Saving for Retirement” was a better value to the consumer than paying an investment advisor 1% annually for the life of the account.
Ultimately, it is not just the product or service provided that is the issue. It is whether the “fees are fair and reasonable for the services provided” for the life of the product or advisory relationship and whether said product or services were aligned with the unique goals and objectives of the investor. This analysis must also factor in certain behavioral finance principles that demonstrate some investors prefer an annuity, with all its inherit implicit and explicit fees, as they want some degree of upside investment return potential, protection against investment market downturns, and perhaps, guaranteed income.
Thus, the fees associated with the product cited in the Council of Economic Advisors blog post may very well be perfectly reasonable depending on the needs of the retirement investor and the performance of the product compared to similar products in the marketplace. The suggestion otherwise in the blog post, in our view, is simply wrong.
The stated purposes of the proposed rule is to protect the interests of retirement investors and ensure that investment advice given to them is in their best interest. As an organization generally supportive of this proposition, we would encourage the Administration, and in particular the Council of Economic Advisors, to focus on the refinement and execution of a workable ERISA fiduciary standard that serves the best interest of working Americans and retirees. Unfairly attacking a particular set of financial services products based on what appears to be an entirely misinformed premise only serves to needlessly distract from this important mission.
Jeffrey Acheson is President-Elect of the American Retirement Association. Brian Graff is the Chief Executive Officer of the American Retirement Association.
