The Corner

Obamacare for Your IRA Is Here

This administration can’t see a private market transaction it can keep its hands off. The latest example is a new regulation with the snooze-inducing title of “the fiduciary rule.” This new rule, from those well-known financial experts at the Department of Labor, broadens the legal definition of who is a fiduciary, mandating a broad swath of financial professionals who service 401(k) plans and individual retirement accounts to only serve the “best interest” of savers when providing investment guidance—with the definition of “best interest” to be decided by regulators.

While at first sight this may sound perfectly reasonable, the rule will put middle class investors at risk of losing access to investment advice. That’s what happened when the UK introduced its version of the rule – since some portfolios were too small to justify the cost of even a management fee, brokers stopped servicing them. A June 2013 study by the Cass Business School at City University London found that brokers had largely stopped serving British savers with portfolios below £150,000 ($240,000), because the fees alone would not pay for servicing the accounts. This study and other research estimates that this “guidance gap” will see 85 percent of British savers lose their brokers or get reduced services for their retirement accounts.

Center-Left economists Robert Litan and Hal Singer argue that similar effects would take place here if the mandates of the proposed rule, virtually unchanged by the final rule, take effect. They estimate that savers could lose $80 billion over 10 years because of it. Of course, they were excoriated by Senator Elizabeth Warren for pointing this out, who attacked their integrity rather than their methods.

Why is the Labor Department proposing this rule? Because of our old friend, the computer model. The Department put together a model that suggested that American savers could be losing $8 billion to $17 billion a year because of bad advice. However, according to Politico,

when pressed for specific families who’ve lost savings due to the conflict of interest that the fiduciary rule is designed to eliminate, the Labor Department can cite only a handful. That $8 billion to $17 billion in annual losses is a statistical estimate, not a tally of observed financial losses.

When pressed on this by Senator Johnny Isakson (R.-Ga.), the Department said that, “a major hurdle to retirement research is the lack of data on how people make these decisions.”

Isakson issued a statement in response that said, “It is appalling that, by its own admission, the Department of Labor does not know enough about how individuals and families make retirement decisions. Yet the Obama administration is still willing to move forward with implementation of a fiduciary rule making.”

In other words, this is standard operating procedure for the administration: conjecture a problem, get a computer model to show would happens as a result of this conjecture, and then issue an onerous rule that expands the power of the bureaucrat over free market transactions.

Some other points to make about the rule:

  • The rule is extremely paternalistic. As justification for the rule, DOL argues savers are not smart enough to make what DOL considers the correct investment decisions for their retirement. 
  • The rule will restrict choices and lead to government-favored investment decisions.
  • The rule will harm Fintech and startups.
  • The rule broadens the definition of “fiduciary” in a way that directly conflicts with the definition of the term under both federal securities laws and common law precedent of state courts.
  • DOL is bypassing the SEC to reshape the investment industry by massively, and probably illegally, stretching the very limited authority DOL has over some types of retirement plans from the Employee Retirement Income Security Act (ERISA) of 1974. 
  • Congress has a variety of options to block or delay implementation of the DOL rule, including defunding, voting the measure down, and rewriting the law. 

For more information, see CEI’s FAQ on the fiduciary rule: The Department of Labor’s Fiduciary Rule for Dummies 

As a final note, imagine if this rule were to be applied to the Social Security Administration…

 

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