MADISON, Wis. — An Obama administration’s hastily implemented retirement investment rule, sold as a middle-class white knight to greedy Wall Street brokers, could cost U.S. retirement savings as much as $80 billion a year, according to a congressional report released this week.
“The Labor Department’s rule threatens to harm low- and middle-income Americans by increasing the cost of investment advice,” U.S. Sen. Ron Johnson, chairman of the Senate Homeland Security and Governmental Affairs Committee, said in a statement Tuesday.
Johnson’s committee released, “The Labor Department’s Fiduciary Rule: How a Flawed Process Could Hurt Retirement Savers,” detailing the Labor Department’s “flawed process in handing down its fiduciary rule.”
A year ago, President Barack Obama directed the U.S. Department of Labor to move forward with its fiduciary rule, painted as the means to rein in conflicts of interest among Wall Street advisers who guide clients on retirement investments.
The change sets a so-called “fiduciary standard” to put clients’ interests first, the administration proclaimed.
Many Republicans and financial firms opposed the government regulations because it artificially limits broker compensation and curtails investment advice options to consumers.
Johnson’s investigation revealed the Labor Department “disregarded concerns and recommendations” from a long line of experts, including staff at the Securities and Exchange Commission, regulatory experts at the Office of Information and Regulatory Affairs within the Office of Management and Budget, and Treasury Department officials.
Experts warn the rules are not only overkill, but they will also drive up the price of investment advice, ultimately decreasing investment guidance for low- and middle-income investors, the report notes.
The administration insisted the rule is designed to limit “hidden fees” from financial advisers who persuade their clients into higher-priced products. Those practices cost low- and middle-income earners $17 billion a year, the White House said.
But the committee report projects the rule would “cause a loss of retirement savings of $68–80 billion per year, and would jeopardize retirement readiness for 11.9 million IRA and retirement participants.”
More so, the report shows how the Labor Department pushed to issue the regulation at the expense of thoughtful deliberation, Johnson said. It also uncovers signs that White House political appointees drove the rule-making process.
Despite public assurances the Labor Department had collaborated with the SEC, emails obtained by the committee show discord between the agencies about the rulemaking. A Labor Department employee wrote to his SEC counterpart:
“We have now gone far beyond the point where your input was helpful to me. . . . If you have nothing new to bring up, please stop emailing me.” The SEC staffer responded: “I am now also utterly confused as to what the purpose of the proposed DOL rule is.”
Other details of the report include:
- Career, nonpartisan SEC staff identified at least 26 items of concern related to the substantive content of the proposed rule, and the Labor Department declined to fully resolve all of the concerns.
- After the Labor Department sought to address the SEC’s stated items of concern, a senior SEC official emphasized to the Labor Department that concerns remained:
[W]e continue to believe that commentators are likely to raise concerns that the proposal may result in reduced pricing options, rising costs and limited access to retirement advice, particularly for retail investors. Commentators also may express concerns that broker-dealers, as a practical matter, may be unlikely to use the exemptions provided and may stop providing services because of the number of conditions imposed, likely compliance costs, and lack of clarity around several provisions.
- The Labor Department rejected the SEC’s recommendation and ignored requirements set in executive orders to quantify the costs and benefits of alternative approaches. As a Labor Department employee explained, “We think this would be extraordinarily difficult and would appreciably delay the project for very little return.”
- Treasury officials voiced concerns that the Labor Department’s proposal, by attempting to regulate IRAs, “fl[ies] in the face of logic” and was contrary to congressional intent. The Labor Department promulgated the proposed rule less than two weeks after circulating this draft, undoubtedly limiting the extent to which the department considered the comments it received from the Treasury Department.
- The administration was predetermined to regulate the industry and sought evidence to justify its action. In emails to senior White House advisers, a Labor Department official wrote of the need to find literature and data that “can be woven together to demonstrate that there is a market failure and to monetize the potential benefits of fixing it.” In another email, a Labor Department official discussed “building the case for why the rule is necessary.”
“Saving for retirement is important, and investing can be a complex process. Ensuring Americans’ access to investment advice will help them plan for retirement. Americans saving their hard-earned money shouldn’t face additional hurdles imposed by Washington,” Johnson said.