Labor Department proposes retirement insecurity

The Labor Department is back again with another attempt at a fiduciary-only regulation, what it has named a “retirement security proposal.”

The proposal is a follow-up to the department’s 2016 fiduciary regulation, which was rejected by a federal appellate court. It goes further in the wrong direction of that ill-conceived regulation.

A Deloitte LLP study found the 2016 rule resulted in more than 10 million small retirement account owners with more than $900 billion in savings losing access to their financial professionals in 2017. This new proposed regulation is likely to cause more restrictions to access. The department should call it a “retirement insecurity proposal.”

Middle-income Americans — retirement savers — would be severely harmed once again if their proposal is adopted. What the department and President Biden himself ignore is that while the wealthy can afford to hire fiduciaries and pay them on an ongoing basis, not everyone can. 

Fiduciaries typically manage customers’ investments over a long period of time, for a fee that typically starts at 1 percent of a customer’s assets. Fiduciaries also usually require their clients to have a minimum of $100,000 to invest. The median retirement savings in the United States in 2022 was $87,000.

The department and the president also ignore a fundamental desire of middle-income Americans in this time of economic uncertainty — certainty. They want the certainty traditional pensions used to provide many retirees that annuities today can mimic with their lifetime income guarantees.

A recent Morning Consult survey found 54 percent of pre-retiree savers with a household income of $100,000 or less who are age 45-65 report today’s economy has them considering “a guaranteed lifetime income product that pays out like a pension.” That is what annuities, which the department and the president also have attacked, provide.

Fiduciaries have little incentive to recommend an annuity. An annuity recommendation typically would remove assets from under their management, which is the basis of a fiduciary’s ongoing compensation.

In the United States from 2019 to 2021, the amount of money annuity owners saved in annuities increased by 8.7 percent. But in New York, the only individual state that had a fiduciary requirement in place during this period (and now), the amount of money annuity owners saved declined 4.3 percent.

An alternative to a fiduciary-only approach is a financial professional who is required to work in a client’s “best interest” and is compensated by a one-time commission instead of ongoing management fees. Best interest standards are laid out by the Securities and Exchange Commission (SEC) in its “Regulation Best Interest” (Reg BI) and by the states in laws and regulations patterned after the SEC’s “Reg BI” and the National Association of Insurance Commissioners’s model regulation on annuity sales.

Among many protections for retirement savers, a best interest standard ensures diligence, care and skill in the sales process and significant disclosures about compensation a financial professional receives in connection with an annuity sale. In addition, financial professionals must mitigate conflicts, such as financial rewards for sales, that might put the seller’s interest above the buyer’s. They also must keep a full record of their activities to ensure compliance with the best interest standard.

Forty states covering more than two-thirds of the U.S. population have adopted best interest laws or regulations in the wake of a federal court in 2018 vacating the Labor Department’s regulation. Both the SEC and state laws and regulations ensure retirement savers’ interests come first in the annuity sales process. In sharp contrast to the Labor Department’s earlier regulation and new proposal, however, these laws and regulations also ensure savers maintain access to retirement options, including the ability to turn savings into a lifetime income stream the way traditional pensions would.

Traditional pensions are declining, leaving people on their own to financially secure their retirements. Annuities — with their lifetime income guarantees — offer a solution that many anxious retirement savers want and need. Resurrecting a failed regulation would be detrimental to their best interest.

James Szostek is vice president and deputy of retirement security at The American Council of Life Insurers (ACLI), the leading trade association of the life insurance industry.