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Gruber's Disciples Gunning for Your IRA and 401(k)

Is Jonathan Gruber, the MIT economist who seemingly dropped out of public view after he was caught on camera bragging how he and other Obamacare architects misled the American public, now advising the Department of Labor?

No evidence indicates that he is, but the authors of sweeping new 444-page DOL regulation that would sharply curtail choices of assets and investment strategies in 401(k)s, IRAs and other savings plans appear to share Gruber’s mindset on the “stupidity of the American voter” (a revelation National Review editor Rich Lowry aptly described as “us an unvarnished look into the progressive mind, which … favors indirect taxes and impositions on the American public so their costs can be hidden, and has a dim view of the average American”).

Now, President Obama and Secretary of Labor Tom Perez are advancing a new regulatory and hidden-tax scheme while claiming to protect average Americans’ retirement savings from unscrupulous financial professionals. The proposed “fiduciary rule” would restrict the investment choices of holders of 401(k)s, IRAs, health savings accounts, and Coverdell education accounts.

In a speech to AARP, Obama proclaimed:

If you are working hard, if you're putting away money, if you’re sacrificing that new car or that vacation so that you can build a nest egg for later, you should have the peace of mind of knowing that the advice you’re getting for investing those dollars is sound, that your investments are protected.

Similarly, a DOL “fact sheet” describes the rule as “protecting investors from backdoor payments and hidden fees in retirement investment advice.”

Yet in practice, the rule seems premised on the Gruberite notion that American investors need protection from is their own stupidity. According to the DOL rule:

[I]ndividual retirement investors have much greater responsibility for directing their own investments, but they seldom have the training or specialized expertise necessary to prudently manage retirement assets on their own. (page 8)

Therefore, they “need guidance on how to manage their savings to achieve a secure retirement.”

Can’t savers who feel they need this guidance seek it out under a variety of investment professionals under a system with strong disclosure and anti-fraud rules? Absolutely not, says the Obama administration.

“Disclosure alone has proven ineffective,” states the rule. “Most consumers generally cannot distinguish good advice, or even good investment results, from bad” (page 91). In fact, proclaims the DOL, “recent research suggests that even if disclosure about conflicts could be made simple and clear, it would be ineffective—or even harmful.”

So, in the administration’s view, the only solution is to tax these dimwitted investors—for their own good, of course—and expose financial professionals to a flurry of lawsuits and penalties, if administration officials deem their advice not to be in savers’ “best interests.”

Worse, the rule is legally dubious and a major case of executive branch overreach. At Obama’s direction, the DOL is massively stretching its limited authority over pensions under the Employee Retirement Income Security Act (ERISA) of 1974 to bypass the Securities and Exchange Commission, which has primary jurisdiction over investments, to reshape the retirement savings industry.

The DOL claims authority by reclassifying a broad swath of investment professionals as “fiduciaries” with a government-imposed “best interest” standard, which subjects them to heavy penalties and lawsuits if the DOL or a court determines they deviated from this standard. This is true even for financial professionals whose clients manage their own 401(k) or hold self-directed IRAs.

This means investment professionals dealing with 401(k)s, IRAs, HSAs and Coverdell accounts (the DOL rule claims jurisdiction over the latter two under the rationale that they are subsets of IRAs and pensions) will either look to the government for permission to offer certain types of investments or get out of the business altogether. A study by the consulting firm Oliver Wyman and the Securities Industry and Financial Markets Association concluded that 12 million to 17 million investors could lose access to their current service providers under a similar “fiduciary” mandate.

“This sea change in the law would force all brokers to move to the more expensive ‘Registered Investment Adviser’ role or charge their clients more money,” conclude American Action Forum analysts Sam Batkins and Andy Winkler.

Noting that the DOL itself estimates that the regulation will cost $5.7 billion over 10 years, Batkins and Winkler write that “the proposal easily qualifies as both ‘economically significant’ and major,” and therefore should be subject to heightened scrutiny. Instead, the Obama administration is truncating the comment period from the normal 90 days to just 75 from today.

The new rule is essentially a rehash of a previous proposed regulation that proved highly unpopular. The previous DOL regulation withdrawn in 2011 after massive bipartisan opposition—including from Vermont’s self-proclaimed socialist Sen. Bernie Sanders, who protested that it was too restrictive on his state’s businesses offering employee-sponsored ownership plans.

As with the 2011 rule, the new regulation would also make it extreme difficult for holders of IRAs to hold specific assets. Many self-directed IRAs contain, by the individual investor’s design, everything from precious metals like gold and silver to peer-to-peer loans from platforms like Prosper and Lending Club. Whether inclusion of these alternative assets is a good investment strategy is a matter of opinion, but it should be a choice for the investor to make.

The Retirement Industry Trust Association, a trade group for custodians of self-directed IRAs, warned in 2011 that imposing a fiduciary standard on IRA service providers “would result in higher costs and potentially fewer service providers to self-directed IRAs,” which “in turn, could result in fewer investment choices.” And the new rule is full of phrases such as “generally accepted investment strategies” that could cause heightened liability for those who assist investors in buying nontraditional assets for their IRAs.

Even if an investor could find such a service provider willing to take this heightened risk, that investor could face a tax on investments deemed to be not in his or her “best interest.” The DOL fact sheet, under a section entitled “Strengthening Enforcement of Consumer Protections,” explains that to protect consumers, “the IRS can impose an excise tax on transactions based on conflicted advice” and “can require correction of such transactions involving plan sponsors, plan participants and beneficiaries, and IRA owners.”

We should learn from Gruber’s other admonition that “lack of transparency is a huge political advantage.” Sunshine, conversely, is the best political disinfectant. Earlier this year, when the Obama administration tried to sneak through a tax on 529 college savings plans, in the name of “middle class economics,” public dissection of the tax by Americans for Tax Reform helped build bipartisan opposition that defeated the tax.

Those who do not wish to be subject to the financial equivalent of Obamacare for their 401(k)s, IRAs and other savings plans must do everything they can to expose the true paternalistic and redistributive agendas behind the DOL “fiduciary rule.” As noted, the DOL rule is based on the Gruberite notion that “most consumers generally cannot distinguish good advice, or even good investment results, from bad.” So the government, presumably, has to do it for them. It’s time for the American people to prove Gruber, and his fans at DOL, wrong.