Obamacare for your IRA
Is Jonathan Gruber — the MIT economist who seemingly dropped out of public view after he was caught on camera bragging about 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 DOL’s sweeping new seven-part group of regulations 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 that Rich Lowry aptly described as “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.” The sinister-sounding “backdoor payments” actually refers to a longstanding practice of compensation to brokers from many mutual funds and annuities. This practice is disclosed to investors and enables brokers to charge them less because of the additional compensation that brokers receive.
Yet upon further reading, the DOL rule seems premised on the Gruberite notion that American investors need protection from their own stupidity. According to page 4 of the 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.
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 from 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 36). 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.” Besides being unnecessary and intrusive, the rule is legally dubious and a major case of executive-branch overreach.
So, in the administration’s view, the only solution is to tax these dim-witted 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.”
Besides being unnecessary and intrusive, 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, and 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 that they deviated from this standard. This is true even for financial professionals whose clients manage their own 401(k) portfolios or hold self-directed IRAs.
In the 40 years since ERISA was first enacted, DOL regulations have for the most part strictly applied the term “fiduciary” to managers of defined-benefit plans and those who provided individualized investment advice on a regular basis, such as registered investment advisers. Under the new rule, financial professionals who provide even one-time guidance or appraisal of investments could find themselves classified as “fiduciaries.” Because most of the exemptions in the new rule are vaguely written, the rule could enable cronyism for certain types of financial-service providers and companies offering investments.
This means investment professionals dealing with 401(k)s, IRAs, HSAs, and Coverdell accounts (the DOL rule claims jurisdiction over the last two under the rationale that they are subsets of IRAs and pensions) will have to 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 could 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 — and longer for a rule having this large an economic impact — to just 75 from the issuing of the rule. The deadline for public comments for this liberty-stealing rule is, ironically, the first business day after July 4.
The new rule is essentially a rehash of a previous proposed regulation that proved highly unpopular. That measure was withdrawn in 2011 after massive bipartisan opposition — including from Vermont’s self-proclaimed socialist senator Bernie Sanders, who protested that it was too restrictive on his state’s businesses that offered employee-sponsored ownership plans (ESOPs). ESOPs are exempt from the new version, but pretty much every other mandate is intact, and some new ones have been added.
As with the 2011 rule, the new regulation would also make it extremely difficult for owners of IRAs to hold specific nontraditional investments. Many self-directed IRAs contain, by the individual investor’s design, everything from precious metals such as gold and silver to peer-to-peer loans from platforms such as 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. Wealth redistribution may be a hidden motive for this rule. As the Obama administration showed earlier this year when it tried to sneak through a tax on 529 college savings plans, it doesn’t necessarily think the middle class isn’t “rich” enough to be taxed a bit more.
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.”
And wealth redistribution may be a hidden motive for this rule. As the Obama administration showed earlier this year when it tried to sneak through a tax on 529 college savings plans, it doesn’t necessarily think the middle class isn’t “rich” enough to be taxed a bit more.
We should learn from Gruber’s other admonition that “lack of transparency is a huge political advantage.” Sunshine, conversely, is the best political disinfectant. Public dissection of the 529 tax by Ryan Ellis of Americans for Tax Reform helped build bipartisan opposition that defeated it.
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’s “fiduciary rule.”