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The Threat to Retirement Security

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May 6 Briefing: The Threat to Retirement Security

When Salespeople Call Themselves “Advisers”

This event, held on May 6, 2014, was organized by AARP, Americans for Financial Reform, and the Consumer Federation of America. Presenters were BARBARA ROPER, Director of Investor Protection, Consumer Federation of America; DAVID CERTNER, Legislative Counsel and Legislative  Policy Director for Government Affairs, AARP; SHAUN O’BRIEN, Assistant Policy Director for Health & Retirement, AFL-CIO; and SHERYL GARRETT, founder of the Garrett Planning Network. LISA DONNER, Executive Director of Americans for Financial Reform, moderated.

Listen to Audio Recording

Speaker Bios

Framing the question

Lisa Donner: “It has gotten more and more difficult for most people to save for retirement… [O]ne key issue – the one that we’re focusing on today – is that more and more of the financial decisions that determine how well the savings someone is able to put away actually perform – and so how well somebody will be able to live and what kind of scarcity they might face if they retire – fall on each individual’s shoulders. And because these are very complicated decisions involving specialized knowledge, most of us are therefore more and more dependent on the advice we get from professionals. But it turns out that some of the professionals we turn to for advice don’t have to give us the advice that’s best for us. They can recommend something that pays them more, even if it’ll leave us poorer because of fees or poor performance or greater risk than our financial situation can possibly tolerate. While some professionals do owe their clients a fiduciary duty – a legal obligation to look out for their best interests – others don’t, and it’s very hard to tell the difference.”

Two agencies – the Securities and Exchange Commission and the Department of Labor – are considering new rules to address different, though overlapping, areas of this problem.

Barbara Roper: “Both the SEC and the DOL are in their own way attempting to close regulatory loopholes that allow individuals or entities to offer advice without being subject to the standard that is appropriate for advice. One thing you have to keep in mind is: advice that isn’t in the best interests of the individual isn’t advice – it’s a sales pitch. So the question is whether we’re going to have advice as opposed to a sales pitch dressed up as advice. The evidence suggests that investors can’t distinguish between the different types of individuals who are offering so-called ‘advice,’ and they have a strong expectation that whether they’re getting advice from a broker about their securities account or from a call center about an IRA rollover – they have a strong expectation that that advice will be designed to serve their best interests… Most investors either rely exclusively or very heavily on those recommendations, and this makes them extraordinarily vulnerable…”

Whats at stake

Shaun O’Brien: “When we think about Americans and their engagement with financial professionals, it’s largely a story about retirement money. While only one in six American households own individual stocks, about half have a retirement account of some kind, whether it’s a defined contribution account at work like a 401(k) or 403(b) or some other kind of Defined Contribution plan, or an IRA that they hold individually. And when you look at the financial assets of American households overall, it’s retirement accounts that make up the biggest share…”

Over the past several decades, employers have moved from defined-benefit to a heavy reliance on defined-contribution plans. There are 88 million people in defined contribution plans today in the private sector – 8 times as many as there were in 1974, when the Employee Retirement Income Security Act (ERISA) was signed into law. Individual Retirement Accounts (IRAs) have also grown exponentially. In 1980, Americans had about $25 billion in such plans; today the figure is $6.5 trillion, and some $300 billion moves (is “rolled over”) from defined-contribution plans to IRAs every year. As a result, “workers and retirees have to make complex and crucially important decisions about what’s the right asset allocation strategy, how to update that over the course of their lifetimes… how much capital-market risk to bear, how much inflation risk, how much longevity risk.” And because workers now change jobs on average every 4.4 years, they will typically be called on to make these types of decisions multiple times.

David Certner: “This individual management of money is absolutely critical in maintaining people’s standard of living or at least getting them above a poverty level in what is increasingly a longer and longer time of retirement… If the stock market drops 25 percent or so, as it roughly did in the last crash, the whole nation is in turmoil. But when you have a 1 percentage point additional fee over a lifetime, that’s essentially equivalent to a 25 percent drop in your value; and we don’t seem to react the same way, even though this is really a similar reduction in your retirement benefit. It’s more of a termite effect as opposed to an earthquake, but the losses are huge.”

Barbara Roper:  “When investors are steered into products that have higher costs, that expose them to unnecessary risks, or that simply don’t fit their personal situation but are highly lucrative for the person making the recommendation, investors suffer very real, material, financial harm. It is harm that is pervasive and it is harm that has a material impact on their ability to save for an adequate, decent retirement.”

Sheryl Garrett cited the example of two broker-dealers who advised an estimated 1100 Pacific Bell Telephone workers on whether to take early retirement and what to do with their existing retirement funds (divided between defined-benefit and defined-contribution plans). Garrett had appeared as an expert witness on behalf of several dozen of these Pacific Bell workers. All but one, she said, took the early-retirement offer, and rolled their funds over into variable annuity accounts based on advice they received. In many cases, they cashed in defined-benefit plans, without hearing any assessment of the pros and cons of staying with a plan that “actually was excellent [and] fully guaranteed.”

“This was a major life decision.” It was “irrevocable.” “Cashing in a defined benefit pension plan that was in great shape is unbelievable – I mean close to insanity.”

As a consequence, “Every one of these individuals is broke. They’re 65 years old and going to work for the rest of their lives” because of bad advice.”

Potential SEC rulemaking

David Certner: “Under the law, broker-dealers are defined and regulated as salespeople, whereas investment advisers are defined and regulated as advisers. [But] over the years the line between brokers and investment advisers has become quite blurred…  And quite frankly, the broker-dealers have encouraged the blurring of the lines… [T]hey call themselves financial advisors, or they may call their services investment planning or retirement planning. They market their services as if the advice they’re giving is really their primary service, as opposed to the selling of products, but [they continue to be] regulated as salespeople… And for the most part, clients really don’t distinguish between these two types of professionals. They don’t understand the regulatory differences and they turn basically to both types of financial professionals for advice. And they expect advice from either to be in their best interests…”

If you’re a broker, however, you have only a looser duty to make “suitable” recommendations, “which allows for other considerations. So, for example, you can push your own products even if they have higher costs or they’re under-performing.”

The SEC is in the process of deciding whether to close “this regulatory loophole that has developed over the years…” ”The goal should really be that all those who provide individualized financial advice are held to the same high fiduciary standard – in other words, managing conflicts of interest and acting in the best interests of those they’re serving.”

Department of Labor rulemaking

Shaun O’Brien: With ERISA, Congress decided to set a higher standard for all those engaged in conduct that puts them into a position of trust with respect to the management of retirement money or a retirement plan. At the time, the Department of Labor decided to limit the higher standard to “ongoing” advice, and to advice that would be the “primary” basis for a worker or retiree’s decisions. Those conditions have allowed broker-dealers to escape the DOL’s tougher rules even when they are giving one-time advice with potentially huge impact. The DOL’s rulemaking is an effort to “claim back its statutory authority,” since neither the “ongoing” nor “primary” conditions were dictated by the statute.

Industry arguments against action by DOL

Objection No. 1: DOL should defer to the SEC

Shaun O’Brien: The updating of DOL’s rules is “long long long overdue,” given the enormous changes that have occurred since those rules were first issued.

Barbara Roper: Broker-dealers and mutual fund companies are trying to keep the DOL rulemaking “bottled up” because “they think they are more likely to get a rule to their liking” from the SEC. “Never mind that the DOL is ready to re-propose and the SEC is [only] ready to decide whether it should move forward with a rulemaking it has had in the works since 1999!”

Both agencies have statutory authority, and “it is absurd to suggest that an agency with clear jurisdiction and authority and responsibility… should step aside.”

Objection No. 2: Moderate-income investors will lose access to financial advice

Barbara Roper: This argument rests on the premise that a DOL fiduciary standard would bar broker-dealers from receiving commissions in connection with retirement-planning products. But the Department has explicitly and repeatedly said that its rule will permit commission payments.

Sheryl Garrett: Hundreds of providers have already found it possible to serve middle-income investors despite being governed by a fiduciary standard.  The financial advice business can also develop new business models


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