Note: This column was coauthored by Pamela Villarreal, senior fellow at the Dallas-based National Center for Policy Analysis.
Access to financial advice and a variety of suitable investment options is crucial for America’s middle class savers. But this access is in jeopardy from a sweeping Obama administration regulation set to go into effect early next year.
Fortunately, the U.S. District Court for the Northern District of Texas has a chance this week to remedy this problem. On Thursday, November 17, at the Earle Cabell Federal Building and Courthouse in downtown Dallas, regional and national business groups will argue their lawsuit against the “fiduciary rule,” which both supporters and critics say could have as much impact on Americans as the Affordable Care Act, aka Obamacare. It is, according to the American Action Forum, the most expensive regulation of 2016, estimated by the government to cost $31.5 billion.
Often referred to as “Obamacare for your IRA and 401(k),” the Department of Labor’s (DOL) fiduciary rule imposes numerous mandates on financial professionals who service retirement plans and certain tax-favored savings accounts. The rule requires financial professionals who receive third-party commissions from the funds and annuities they sell to sign a contract with their client stating that they will act in the client’s “best interest.”
While this sounds like it protects the investor, the standard is arbitrary and vague, because “best interest” will be defined in different ways by DOL bureaucrats and the trial lawyers empowered to sue under this rule. Thus, there will likely be a shift to fee-based accounts less burdened by the rule.
Fee-based accounts are more expensive for savers and often not profitable for low-balance retirement portfolios. So investors with small account balances may simply be dropped by those now servicing them. Similar rules in Great Britain have led to a well-known “guidance gap” in which many savers with less than $240,000 cannot find brokers or advisers to service their retirement accounts.
Just as Obamacare has limited access to doctors and insurance policies that patients prefer, this rule will limit investors’ choices and access to many of the brokers and insurance agents they favor. Bank of America Merrill Lynch recently announced that, due to this rule, it will no longer allow customers of its brokerage to put mutual funds in their IRAs. Many independent insurance agents have already stopped selling annuities to their customers due to the complexities of the rule.
Yet there is one major difference between the fiduciary rule and regulations that stem from Obamacare. Unlike agencies implementing the health care law, the DOL is attempting to transform an entire industry without authority from any recent legislation to do so. In fact, Congress has written a series of laws explicitly making another government entity — the Securities and Exchange Commission (SEC) —the primary regulator of the brokerage industry.
The DOL claims to have found the powers to implement this rule from a 42-year-old law giving the DOL limited authority over some employee benefit plans: the Employee Retirement Income Security Act of 1974. But the DOL has stretched this law like the proverbial rubber band to assert control over not just traditional pensions and 401(k)s, but individual retirement accounts (IRAs), health savings accounts, and Coverdell education savings accounts.
Assistant Secretary of Labor Phyllis Borzi admitted in a speech that DOL had to “be creative” in pushing through the rule. And she seems to view the executive branch interpreting laws as written as a quaint notion indeed.
“Back in the day, when people wanted to make changes, they passed legislation,” Borzi was quoted as saying in Bloomberg BNA (subscription needed). But with the fiduciary rule, she continued, “we’ve shifted from the way that social change and legal change and financial change is accomplished through congressional action to … different avenues for making changes: the main one being regulation.”
But this new avenue faces a major roadblock in the form of the U.S. Constitution, which clearly states that Congress — not regulatory agencies in the Executive Branch — makes our nation’s laws. On November 17, those filing the lawsuit — including the Chambers of Commerce of Irving, Humble and Lubbock and many other plaintiffs from the Lone Star State — will argue before Judge Barbara M.G. Lynn that the DOL exceeded its authority and acted “in a manner that was arbitrary, capricious, and otherwise not in accordance with law.” The lawsuit also argues that the rule violates the First Amendment by punishing financial professionals for truthful speech to customers about investment options.
As the case heads to court, it’s also worth recalling that the DOL had another, more telling explanation for why the administration thought the rule was needed. In the text of the proposed fiduciary rule it issued last year, the DOL proclaimed that individuals cannot “prudently manage retirement assets on their own” and that they “generally cannot distinguish good advice, or even good investment results, from bad.”
Clearly, regulators at the DOL hold Congress and Americans themselves in contempt. The District Court must restore the people’s sovereignty by overturning this terrible rule.
Originally posted to Forbes.