When I was little, my mom told me that snow storms happened because the angels were having a pillow fight. And, yes, later on, science was never a strong subject for me in school. But the analogy is apt today to describe a fight that is taking place way, way above the heads of people trying to sock away money for retirement.
The disputatious angels in this fight are, on one side, financial regulators who work for the U.S. Department of Labor, and on the other, an enormous cadre of investment company executives, securities brokers, financial advisers and others. At stake are the rules the government uses to define who is a fiduciary when it comes to the nation's key private retirement programs - defined contribution plans like 401(k)s and 403(b)s, and individual retirement accounts.
It turns out that whether or not financial professionals involved in retirement investments are fiduciaries is a hugely important topic. Critics of the status quo say Wall Street lines its pockets with excessive fees and charges paid by unsuspecting consumers who mistakenly think the advice they receive is unbiased and in their best interest. Defenders say the current system has worked well and allows consumers to receive an expanding menu of solid investment help and advice that is crucial to their successful retirements.
Because fiduciary sounds a lot like a science term to me, I am on shaky ground even thinking about it, let alone describing its significance. But I'm going to give it a try, emboldened by many Google searches and background interviews with senior Labor Department experts.
In broad terms, the online Merriam-Webster Dictionary says, a fiduciary is "a person in a position of authority whom the law obligates to act solely on behalf of the person he or she represents and in good faith."
As applied to employees and other consumers with 401(k)s and IRAs, being a fiduciary means a financial professional can't provide investment advice or recommendations that aren't in the sole interest of the person receiving the information. This is an exacting standard. It also means the advice must be prudent, which means in practical terms that the advice must be based on a reasonable and informed review of investment options.
These might seem like basic requirements for any retirement investment advice, but this has not been the case in the nearly 40 years since the landmark Employee Retirement Investment Security Act, or ERISA, was enacted in 1974.
When ERISA was created, there were really no 401(k)s or other defined contribution retirement plans. Workplace retirement benefits were conferred upon employees in the form of defined benefit pensions. ERISA did address the conditions under which an adviser was considered a fiduciary, but its five-part test defines relatively few advisers as fiduciaries. That was not considered a problem because employees had no role in how defined benefit monies were invested.
Pension managers did have such a role, of course, and they were aggressively courted and advised by investment managers and brokers. But unlike general consumers, pension managers were considered investment professionals who were able to fend for themselves. In short, they did not require the protection that occurs when investment managers are required to follow fiduciary standards.
Today, of course, consumers must make major decisions about their retirement plans. And they receive enormous amounts of advice from investment and fund managers and brokers. Very little of this advice is provided by professionals who are defined as fiduciaries under current ERISA rules.
"If you're not a fiduciary," a Department of Labor expert says on background, "you can go right ahead and steer someone to an investment that is not in their interest but may be in your interest." For example, an adviser not subject to fiduciary standards can recommend an investment that provides him higher fees than other comparable investment choices. If he were a fiduciary, he could not legally do this.
"In both 401(k) plans and IRAs," the Labor Department expert added, "we have people who are not really sophisticated [investors]. They are really dependent on the people who give them advice. And those people, by and large, while they may appear to the customer to be impartial, in fact aren't subject to these fiduciary standards."
In addition to substantially broadening the definition under ERISA of who is considered a fiduciary, the Department of Labor wants to change the regulations to apply fiduciary standards to advisers to IRA holders that are comparable to those for 401(k) plan owners. Right now, IRA owners receive substantially weaker protection, Labor Department experts say.
The department proposed a substantial broadening of fiduciary standards in 2011, held public hearings and was inundated with industry and public comments. The investment industry raised enormous objections to the rule changes, including citing some important impacts that had not been effectively considered by the department. The department pulled the change off the table and has taken the better part of two years to renew its efforts.
One constant theme of opponents to the changes is that providing advice under broader fiduciary standards exposes investment professionals to such daunting conflict-of-interest concerns that many firms will be forced to stop or sharply curtail such advice. With consumers needing more help than ever, they note, is this really sound public policy?
There also is a complex issue of how to grant waivers from expanded fiduciary standards to reflect worthwhile exceptions. When the department issues new proposed fiduciary rules this fall, the experts said, it will make sure to include the sensitive topic of waivers in the rulemaking process.
Publication of the new rules has been put on the calendar for October but that timetable easily could slip, the experts say. In any event, it will take many months, if not years, for the second round of rulemaking to be completed.
Meanwhile, the U.S. Securities and Exchange Commission has embarked on a similar overhaul process for investment adviser rules outside of ERISA. Legislation has been introduced to require the two agencies to coordinate their efforts. The Labor Department experts say that's exactly what they have been doing and will continue.
"We're going to make sure these two regulatory regimes work together," one expert says. "But it has to be remembered that ERISA regulates a very important part of the market, and has a higher duty ... There really isn't a more important category of investment advice than helping people have a secure retirement."
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- Department of Labor