U.S. Secretary of Labor Perez Defends Fiduciary Proposal
Commentary by Steven Lofchie
United States Secretary of Labor Thomas Perez argued that in an era of "huge shifts" to the "retirement paradigm," the implementation of a best-interest standard is critical to helping American families avoid "spend[ing] their golden years burdened by economic anxiety."
Mr. Perez talked about how benefit pension plans have been replaced by Individual Retirement Accounts and 401(k)s. He argued that unless a person has a "finance degree," it is difficult to navigate the system effectively in order to save for retirement. Without a best-interest standard, he said, it is "too easy" for advisers to benefit from the fees and indirect payments that are hidden in the fine print.
Mr. Perez explained that the difference between receiving "suitable" financial advice and advice in someone else's best interest can determine the future of an entire family's savings. Although no one-size-fits-all template for implementation exists, he observed, the best-interest standard would include various carve-outs and exemptions to account for "unique attributes" of businesses.
Finally, Mr. Perez addressed various concerns about potential burdens that are associated with the point-of-sale disclosure, data retention and other specific mechanics of the implementation. He assured his audience that changes would be made to clarify and improve the proposal.
Mr. Perez delivered his speech at the Brookings Institution Public Meeting in Washington, D.C.
Commentary
According to Secretary Perez, the DOL's proposed rule is nothing more than "common sense." But rules that are based on mere common sense do not take hundreds of pages to explain, nor do they cost hundreds of millions of dollars to implement. Still, the fact of the rule's complexity does not mean that it is inherently flawed, even if there is a great deal of opinion to that effect. It does mean that a meaningful defense of the law should be based on real economic analysis.
Secretary Perez's references to the views of SEC Chair Mary Jo White make clear that even his fellow regulators disagree significantly on whether the DOL's proposal makes good sense, let alone exemplifies common sense. For example, he paraphrases SEC Chair White as stating that the DOL is within its authority to adopt the proposed rule, and also as conceding that the SEC and the DOL have somewhat different statutory missions (though both are very much concerned with protecting investors). Obviously, that falls short of an endorsement of Secretary Perez's position, and easily could be read to suggest that Chair White disagrees with the substance of the Secretary's position. The other major securities regulator, FINRA, likewise has expressed its opposition to the DOL's proposal.
It is true, as the Secretary argues, that segments of the securities business have found ways to deal with the operational requirements of the DOL proposal. Securities firms that do not give advice may have little trouble complying with the DOL's proposal. The fundamental question, however, is whether it is good public policy to drive plan investors toward financial professionals that either do not provide any investment advice or charge assets under management fees that likely will be prohibitive for smaller investors. (A reasonable case can be made for this position, but it is not an open-and-shut case by any means. What's disappointing is the government's unwillingness to confront the intellectual arguments of its critics directly.)
In short, the case for the Secretary's proposal is not an easy one to make. Doing so means conceding that there will be very material costs even if the proposal brings some benefits. It would be helpful if the Secretary recognized that DOL's critics are making reasonable arguments. The DOL should engage in a real discussion and not merely dismiss its critics as lacking common sense.