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Lawmakers Grill Perez on DOL Fiduciary Rule

A June 17 Capitol Hill hearing on the DOL’s proposed fiduciary rule featured pointed attacks by members of Congress and a defense of the rule by DOL Secretary Thomas E. Perez — providing ample illustration that the debate over the increasingly controversial proposal is far from over.

Rep. David Roe (R-Tenn.), Chairman of the Health, Employment, Labor and Pensions Subcommittee of the House Education and the Workforce Committee, set the tone in his opening remarks. “Our goal as policymakers should be to advance bold, bipartisan solutions that will help more Americans play, invest and save for retirement. Regretfully, the department’s fiduciary regulation would move our country in the opposite direction. It would cut off a vital source of support that many low and middle income families and small business owners rely on — and that is the help of a trusted financial advisor.”

Perez, however, argued that the proposal’s time has come. “ERISA is over four decades old. Times have changed. Defined benefit plans have given way to defined contribution plans. Now, consumers are in control making their own investment decisions through 401(k)s and IRAs. We can still count on a commemorative pen at retirement, he said, “but a secure retirement is less predictable. For the majority of Americans without a finance degree, the market is at best a confusing place.”

While Perez acknowledged that there are many retirement professionals who are doing the right thing, he believes that others are not. “Many of them are fiduciaries already,” he said, “yet, many more are not fiduciaries and despite marketing that might suggest otherwise, they operate under no such commitment to do what’s in the best interest of their clients.

“The playing field is not level,” said Perez, adding, “The challenge is that the system is flawed.” His remedy? “Simply put, we want to create an enforceable best interest standard so that you can have certainty that your financial advisor is working for you first and foremost.”

In response to a question from Roe, Perez said that the rule would make it easier, rather than harder, for small businessmen to provide retirement benefits. Roe pressed further: “This is going to be thousands of things you have to do. Does this sound like it’s easier?” Perez’s rather indirect response was that “this rule is very straightforward. You have an obligation if you’re providing advice in your customer’s best interest.” He indicated that in his view, it isn’t the rule, but the current system of providing advice, that is opaque. And he indicated that he considers the rule beneficial to small investors. Small savers are those that can least afford bad advice, he told Rep. Ruben Hinojosa (D-Texas).

Perez dismissed some concerns over the proposed rule. He told Rep. Virginia Foxx (R-N.C.) that under the rule, it will not be necessary to sign a contract before engaging in a conversation concerning an IRA. Still, he seemed to acknowledge that the language may be taken as making such a requirement, telling her that it is “an issue I’m confident we’ll clarify.”

Perez gave conflicting signals regarding commissions. In response to Rep. Suzanne Bonamici (D-Ore.), Perez said that the rule does not ban them; however, as in his response to Foxx, he said that this is an area the DOL is willing to work on. And he told Rep. Joe Heck (R-Nev.) that advisors need to make sure they are putting their clients’ best interest first and not pick options for them that will garner the highest commissions.

Perez also touched on IRA rollovers. “The rollover market is a huge market. That is where you really need the right advice,” he said.

And Perez had a pointed disagreement with Rep. Earl Carter (R-Ga.), who said that the premise behind the rule seems to be that conflicts of interest have resulted in higher fees associated with IRAs than with 401(k)s. “Many people in the industry say we need a best interest standard,” Perez responded, adding that the system is “misaligned.”

Other witnesses argued that the proposed rule is flawed and would accomplish the opposite of what Perez says it will do. Fidelity Investments’ Jack Haley suggested that the proposal turns the concept of “best interest” on its head: “Under the DOL proposal, access to affordable financial help will effectively be prohibited — even when it is in the investor’s best interest.”

Dean Harman of Harman Wealth Management and Brian Reid, Ph.D., Chief Economist at the Investment Company Institute, emphasized that the proposal is “based on flawed assumptions” and is unworkable as currently drafted.

And attorney Kent Mason, a partner at Davis & Harman LLP, zeroed in on the DOL’s use of the ERISA prohibited transaction rules in the proposed rule. “The problem with the [department’s] proposal is not the best interest standard; the problem is the ‘prohibited transaction rules’ that cut off low- and middle-income individuals and small businesses from access to personal investment assistance,” he said.

A video of the hearing — all 3 hours and 27 minutes of it — is available here.

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