Members of the Ways and Means Subcommittee on Oversight argued over a proposed Department of Labor rule that would redefine the definition of a fiduciary, expanding the scope of regulations placed on financial advisers and potentially limiting how financial advice can be received.
The DOL rule opposes in-person retirement advice provided by commission-based financial brokers, instead offering the options of using either an automated robo-adviser for investments, the option favored by the Obama administration, or using fee-based services.
Proponents of the rule say it will remove conflicts of interest by eliminating the incentive for advisers to suggest options with higher commission percentages for personal gain. Critics fear the high fees will limit or prevent small businesses and low- and middle-income families from seeking financial guidance to plan for their futures.
“One grave concern I have heard over and over again from my constituents is that the administration’s objective is to force Americans out of private sector IRAs and 401Ks, which are generally working very well under current law, and into retirement controlled by the government,” said chairman Peter Roskam. “This administration’s own regulations, as well as public comments, have made it clear that they don’t want Americans to have control over how much to invest, which investments to choose, and when to draw down their accounts in retirement.”
Currently 95 percent of investors with $25,000 or less in savings work with brokers on planning for retirement, which often goes into 401s and IRAs. If the regulations are implemented, some lawmakers fear high fees will deter the demographic most in need of seeking advice from a knowledgeable source, saying a computer-based system can’t substitute an adviser’s ability to gauge a clients personal needs.
The president’s recommendations are based on a study put out by the White House Economic Council of Advisors, which suggests investors annually lose 1 percent in earnings due to compromised retirement advice, a number many economists dispute.
According to the Investment Company Institute, if the rule is implemented, increased fees and lower returns will result in a net loss of $100 billion over the course of a decade.
AFL-CIO Policy Director Damon Silvers told the panel he believes the rule is necessary because most Americans don’t have the expertise to manage their own money, leaving room for money managers to take advantage of their clients’ lack of knowledge.
“Mr. Silvers, are you a cynical guy by nature?” asked Rep. Patrick Meehan. “Do you really think every investment adviser starts with the premise of how can I rip off this client versus those who often have relationships with people .. where the objective is I do this for a living, I get enjoyment out of helping people.”
Meehan went on to express his concern that the Departing of Labor doesn’t have the capacity to oversee the rule, leading to an outsource of oversight to lawyers in the private sector, leaving financial advisers to face higher liabilities and a higher risk lawsuits.
Silvers rebutted, saying wage stagnation exists because the “winners in the systemically rigged rules corrupt the system and make it impossible to ensure the pubic processing is working for Americans and not for Wall Street.”
Rep. Charlie Rangel agreed with Silvers, advocating for even stronger standards for not just financial advisers, but those who are already consider fiduciaries.
“When you know the tremendous change we have has with defined benefits, everyone would say, when I retire, this is what I expect every month; now they say, when I retire, depends on the markets, and they have no idea whether the advice is good or bad,” the New York Democrat said.
Republican lawmakers argued Americans shouldn’t be limited in their investment options and are capable of doing a better job of making personal financial decisions than the government.
“Nobody ever questions Social Security to find out if they’re operating in the best interest of the people they represent and the funds that they sit on,” said Rep. Mike Kelly. “When I look at a model that is $19 trillion in the red, I don’t think I would go to the United States government and ask to be their business consultant and how they would save their business, are you kidding me?”
Concerns arose over whether taking investments out of the private sector and moving them into a state-based Secure Choice retirement plan is less safe in the long run. Roskam, an Illinois Republican, cited the state’s pension crisis as an example of the government mishandling retirement plans.
Under the rule, while the private sector will face more regulations, they will be loosened for state administered plans.
“If we told clients they had to go into a state program that were not state employees, they would move,” said Illinois financial adviser Judy VanArsdale, a witness at the hearing. “It’s slightly embarrassing.”
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