NAIFA Leaders Meet With White House Officials on the DOL Proposed Rule

On May 4, NAIFA President Juli McNeely, Past President Terry Headley, Acting CEO Michael Gerber and several staff members met with officials from the White House and Department of Labor to discuss NAIFA’s concerns about DOL’s proposed “best interest” rule for retirement plan advice. We asked Juli and Terry to tell us about the meeting.
 
 
How would you describe your meeting with Department of Labor and White House officials?
 
Juli McNeely: I felt like it was a productive meeting. The questions the DOL and White House officials asked us led me to believe that they didn't truly understand how we get compensated. I felt like there were light bulbs going on as they listened to us and took notes. We let the administration know that we want to work with them and help in any way we can during this comment and evaluation period for the proposed rule.
 
Terry Headley: Overall, it was very positive. It is important that NAIFA be a part of this process.  Only 16 percent of retirement plan participants currently receive any type of investment advice on how to allocate their contributions from retirement plans. The DOL rule will put even more daylight between the advisor and the plan participants. Just defaulting to a Target Date Fund is not always the best answer – plan participants need to know their risk tolerance and time horizon, and establish retirement plan goals to replace no less than 80 percent of their pre-retirement earned income.
 
NAIFA members are on the front lines, working with retirement investors every day. We are uniquely positioned to know how this rule would impact our clients and how we are allowed to advise them. This is information we are able to share with regulators.
 
J.M.: And NAIFA has already been invited to a follow-up meeting with the DOL and we will submit formal comments on the proposed rule as well. This meeting was just the first step in an ongoing dialog.
 
 
What did you tell the administration about your relationships with clients, how you help them prepare for retirement and and how this proposed rule would impact those things?
 
J.M.: One major point that we made is that we are not conflicted when we give advice to clients. Our success depends on building long, trusting relationships with clients. It is in our best interests to work in their best interests. The DOL seems to believe that reps struggle with their compensation model and therefore don't put clients’ best interests first. We were able to let them know that is not something that exists for reps like it may have in the past. We also made the point that lowest fees are not always in a client’s best interest. Other details, like risk tolerance, returns, the level of service, and the client’s long- and short-term goals need to be considered. Flat-fee arrangements are certainly not always in a client’s best interest. The point of building relationships with our clients is to truly understand their needs and reduce or eliminate their risk. A variety of products exist so we can utilize the right product for the right situation. 
 
T.H.:  The goal for retirement planning has not changed for consumers. However, the DOL rule as it is proposed would make “retirement readiness” much more difficult. The DOL has focused its efforts on the accumulation phase of retirement. The more serious challenge as a country is the distribution phase – how do we guarantee an income for life when life expectancies continue to increase? The greatest financial risk for America is that people will outlive their retirement nest eggs. It is referred to as “longevity risk,” and it is the greatest fear of those in their golden years.
 
Only annuities can provide the lifetime guarantee of an income that cannot be outlived, and only an insurance company understands and has the experience and the data for the actuarial calculations to issue guaranteed income for life annuities. Only the life insurance industry, along with the advisors working within the industry, is equipped to meet this serious challenge. When a worker retires he or she quickly transitions from an “asset world” to an “income world.” The DOL rule only focuses on one-half of the equation – the accumulation phase. The restrictions the rule would create would in many cases deprive consumers of advice on the more critical phase, meaning fewer would likely consider options to provide the peace of mind that comes with sustainable income for a lifetime or joint lifetimes.
 
 
What specific parts of the proposed rule did you express concerns over during your meeting?
 
T.H.: The best interest contract (BIC) exemption is a concern. By changing the current rules to ERISA’s prohibited transaction exemptions (PTEs), DOL will effectively funnel the vast majority of advisors into a BIC exemption, whereby the advisor will enter into a legal contract with the consumer. The contract carries a number of difficult terms and conditions that must be adhered to, as well as potentially costly record-keeping and disclosure requirements. Additionally, the BIC exemption will give rise to a private state cause of action for breach of contract, which translates into open-ended liability for advisors. ERISA plans are subject to the federal cause of action for engaging in a non-exempt transaction. These potential lawsuits will present increased liability risks for advisors.
 
J.M.: We are in the risk-assessment business and from what I can tell the BIC exemption is a risk that may not be worth taking for smaller accounts. The risk-reward is not great enough. Advisors would be forced to place minimums on the sizes of the accounts they would work with due to the added liability they would face with a best-interest contract. This doesn't include the added cost for agents’ errors & omissions insurance coverage, whose premiums are likely to go up as a result of this new rule.
 
The proposed rule’s education exemption is murky in many ways and could pose problems for advisors and consumers. When you're with a client or prospect, oftentimes your general conversation switches to recommendations quickly and to halt the conversation and have them sign a contract would not be well received by a client or prospect. It is particularly counterproductive during a conversation that requires us to allow the client to open up about their situation. Additional paperwork isn't always perceived as more protection. Oftentimes added paperwork shuts the client down.
 
T.H.: We also told the DOL and White House that it is not out of the question that we could end up with two best interest standards for advisors – one from the DOL for ERISA plans and IRAs and the other from the Securities and Exchange Commission for retail investment advice. This is a huge concern, because the regulations could be duplicative, overlapping or even contradictory. Several SEC commissioners are now on the record saying that there was no collaboration or no meetings with the DOL prior to the release of its re-proposed best interest rule on April 14.
 
 
You mentioned liability costs. Were you able to elaborate with administration officials about how the rule would increase costs for advisors and clients?
 
T.H.: It’s pretty clear the proposed rule would do grave harm to middle-income investors, the very consumers that the DOL believes they are protecting. Increasing regulatory costs, removing choices and options in the marketplace, and curtailing access to sound advice is a recipe for disaster.
 
We are still collecting data from NAIFA members and will be able to give more details on how the proposed rule would raise costs in our written comments to DOL. However, several large broker-dealers have performed a preliminary cost analysis on the additional liability exposure, reporting, and disclosure requirements and estimated at the BD level, the cost per advisor would range from $2,400 to $4,800 per year (about a 2 percent drag on returns). These costs will need to be passed through to the plan participants and IRA owners.
 
 
What Are NAIFA’s Next Steps?
 
J.M.: We will continue our dialog with the DOL. We are eager to provide our experiences and expertise any way we can, through individual meetings, written comments or at a public hearing. As Terry mentioned, we are collecting data and stories from our members so that we may give the DOL real-world examples of how the proposed rule would potentially harm retirement investors.
 
We are also talking to members of Congress. Representatives and senators from both sides of the aisle have expressed concerns about the DOL proposal and we will work to ensure lawmakers understand how the proposed rule would impact their constituents. At NAIFA’s Congressional Conference next week, the DOL proposal will be a top agenda item as approximately 800 NAIFA members go to Capitol Hill to discuss advocacy issues with their members of Congress.
 
We will also continue to update NAIFA members on the status and potential impacts of the proposed rule, and what they can do to help, through NAIFA’s web site, our government relations e-communications, and the NAIFA Blog.
  • Posted May 14, 2015 IN


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