Joining a president’s cabinet is one of the most exciting and rewarding adventures in public life, which the Labor Department’s new secretary, Alex Acosta, will find.
The opportunities to help people abound.
One of those opportunities relates to the department’s fiduciary regulation, which is doing more harm than good to America’s retirement savers. Among many things, it attacks simple and successful “buy-and-hold” investment and retirement income strategies employed by millions of Americans.
The regulation’s bias in favor of fee-based advisory services, which tend to be the preference of the wealthy, is already having a chilling effect. It has greatly diminished retirement savers’ access to annuities, the only financial products in the private marketplace guaranteeing lifetime income.
Study after study and article after article have documented the harm the regulation is doing to people saving for retirement. Sales of variable annuities, which help people grow their money over the long term while also offering a lifetime income option, are down dramatically.
Meanwhile, other firms may actually increase commissions to annuity distributors to cover increased costs they will face as a result of the regulation, a move that results in lower credited interest rates on annuities – in effect, less income for retirees.
Under the Department of Labor’s regulation, the commissioned-based buy-and-hold sales model is fraught with new litigation risks – an open invitation for trial lawyers to sue financial firms and locally based financial professionals. It is no surprise that many large financial service firms have shifted to advisory services that charge fees based on assets under management with high minimum account value requirements. Low- and middle-income savers are now left to fend for themselves at the very time they need more access to education and information about retirement savings and guaranteed lifetime income options.
Suggestions from the department that computer-generated asset allocations from “robo-advisers” will help fill the void don’t make sense, especially for retirement savers with small- to mid-sized account values. The department itself has conceded that automated advice likely does not offer the same benefits as financial professionals — benefits that include encouraging greater savings, responding to client-specific questions and dissuading emotional investing, such as liquidating assets during a downturn like the 2008 market crash. Thus, the department has failed to explain how computer-generated asset allocation platforms, given these crucial limitations, can serve as an adequate substitute for a financial professional.
Over the past 40 years, the retirement landscape has changed. Few employers now provide “defined benefit” pension plans that offer lifetime income in retirement. Today, employees are more likely to participate in 401(k) plans, and are largely responsible for saving and investing decisions, along with ensuring their savings last a lifetime. With lifespans increasing, many retirees will need to secure enough income to last 30 years or longer. Hence, the importance of annuities.
The White House made clear in a Feb. 3 memorandum that the fiduciary regulation required another look. It instructed the department to analyze and determine if the regulation: harms investors by reducing Americans’ access to retirement products or advice; disrupts the retirement services industry that may adversely affect investors or retirees; or causes increased litigation risk and higher prices for retirement products for investors and retirees.
If the department answers any of the statements affirmatively, it is instructed to issue a proposal to rescind or revise the regulation.
Any objective analysis would conclude that all three statements are true. But, while the department conducts its required review to determine whether to keep, repeal or revise the regulation, it plans to put key aspects of the regulation into effect on June 9. This is not acceptable. The secretary of Labor must delay the fiduciary regulation until the department has completed its examination to the satisfaction of the president.
The path forward for Acosta is clear. Any proposal that makes it harder for Americans to obtain the financial products and services they want and need should return to the drawing board.
Life insurers strongly support a workable rule and appropriately tailored regulations requiring financial professionals to act in their customers’ best interest.
Government rules should encourage private sector efforts to help people obtain what the department itself found is possible: a more satisfying retirement thanks to a steady stream of lifetime income. The current regulation does just the opposite.
Dirk Kempthorne is the president and CEO of the American Council of Life Insurers. He was the 49th U.S. Secretary of the Interior, and has also served as a governor of Idaho, a U.S. senator from Idaho and mayor of Boise.
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