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Retirement Security Is the Least ‘Helped’ by the DOL Proposal

The Department of Labor’s new fiduciary rule means something different to each of the many stakeholders encompassed by the proposal. 
» For insurance agents, it can mean a confusing entanglement in the fiduciary standard in the normal course of business.
» For fee-only advisors, it may level the playing field, so that some advisors are not operating under what they would call “lesser” rules of engagement.
» For the federal versus state systems of insurance and financial regulation, the rule perhaps presages a larger federal expansion in the states’ traditional realm of regulation. (But for some reason, the National Association of Insurance Commissioners is not too worried about this prospect.)
» For consumers, the meaning is far more difficult to gauge. In many ways, the central player in all of this has been lost in the dust and smoke of battle. The most unsettling aspect in this debate is the real-world harm that can come to ordinary Americans.
The rule affects many more players not on this list, such as insurance and financial companies, which stand to lose and gain significantly. That impact, of course, reverberates throughout the American economy and ripples back to consumers.
The central scope of InsuranceNewsNet’s coverage comprises the sales channel and consumers, so we’ll be focusing on them in this column.
Most likely you have heard the clang of alarms from advocates on all sides of this debate. But you might have thought, “Aren’t people always yelling about some section of the sky about to collapse?”
The clamor might be appropriate this time because of the fundamental change the rule might usher into insurance agents’ lives. 
After all, more annuity dollars are coming from qualified retirement funds, such as individual retirement accounts and 401(k)s. LIMRA reported late last year that 62 percent of the money purchasing fixed index annuities came from qualified funds. That number will grow substantially as baby boomers wade into their retirement years. 
Just how big is the retirement market? It holds $24.9 trillion as of the first quarter of this year, according to the Investment Company Institute. That includes IRAs, private defined benefit (DB) programs, government DBs, defined contribution plans and annuities. 
Given all the regulatory attention and criticism paid to annuities, it might be surprising to learn that those products (outside of retirement accounts) occupy less than 1 percent of retirement assets, making up $2.1 trillion in reserves.  
Not only might the anti-annuity outcry be somewhat misaligned, but it is also manipulative, because the noise draws the public gaze away from the less-than-stellar performance of the other retirement investment options. 
The aggregate retirement asset value was $23.5 trillion in the first quarter of 2014, which is an increase of about 0.6 percent between last year and 2015. That is better than flatlining or dropping, but it is hardly a dramatic boost in an era of robust growth for equities and company profits.
The plain fact is that all the industries revolving around retirements are not making America safe for retirement. However, the industry was more successful in increasing one particularly salient statistic — the number of Americans who are scared of outliving their money.
The 16th Annual Transamerica Retirement Survey of Workers showed that “outliving my savings and investments” was American workers’ No. 1 fear. This year, 44 percent shared that fear, up from 23 percent the previous year. 
Put that in the context of the discussion around the Labor Department’s proposal. People who support the new rule say the broader application of the fiduciary standard would protect vulnerable Americans and their limited retirement resources. 
That goal, by the way, is irresistible. Of course we want to protect Americans and the money they worked so hard for. But that is the right banner on the wrong crusade.
The Labor Department calls its proposal the “Conflict of Interest” rule. The “conflict” is commissions, plain and simple. The rule-backers say that advisors who receive commissions are conflicted because their interest in the higher commission will shred their concern for the client.
Sure, advisors like these exist across the spectrum of finance. If they did not operate in the fiduciary realm, the Securities and Exchange Commission wouldn’t need to bother with enforcement. We all know that’s not the case — SEC cops are plenty busy.
Advisors who do not take commissions need to get paid in some way, so that would be from fees. Not to sound too basic here, but a majority of American families are struggling with saving any money. They don’t have the few extra hundred or thousand dollars to spend on advice.
Place that in the context of the discussion around the Labor Department’s proposal in the first day of its four-day public hearing on the rule. 
The department arranged 75 witnesses in 25 panels, most of which featured pro- and anti-proposal representatives on the same panel. Except for the first panel — that was all pro-rule. 
Those witnesses stuck with the standbys in opposing commission-based advisors operating under the suitability standard. They didn’t have any actual evidence, though.  
The first speaker was David Certner, American Association for Retired Persons (AARP) legislative counsel, who explored the precarious state of American retirees. He discussed the sorry state of retirement funds and the growing number of IRA rollovers. 
This is all true, but neither he nor anyone else on the panel made a case showing that the current state-based suitability system had anything to do with creating that problem. They also did not describe how this proposal will solve it. 
Another speaker on the first panel described how his business has it both ways. V. Raymond Ferrara, CEO of ProVise Management Group, said wealthier clients are guided along the fee-based track and lower-asset clients are served by commission-based advisors. But even the commission advisors operate under fiduciary principles, he said, so his business would not have difficulty adjusting to the new regime.
He is, in effect, saying his commission-based advisors are not “conflicted” by the way they are paid because they ascribe to the fiduciary standard. By extension, he is intimating that other firms under the suitability standard would not have the ethical fortitude to withstand the temptation of commissions.
Well, you don’t have to have religion to be a good person. Ferrara might be shocked to know that he is among a sinner or two within the Church of Fiduciary. As we noted earlier, the SEC has a large roster of fiduciary violators. 
A later witness illustrated the overall fundamental misunderstanding of the issues. That came in one retort from Barbara Roper of the Consumer Federation of America when she responded to another witness’s comment that the proposal would decrease consumer access to annuities at a time when Americans most need guaranteed income.
“It’s not like there’s just one option to get you (guaranteed income),” she said. “There’s a wide array of products available.”
She did not offer what this wide array of products that can guarantee income would be, but that would have been interesting. As far as we know, only annuities can make that guarantee. If she knows of other products that can deliver a guaranteed amount of money every month until the client dies, I am sure many advisors out there would like to learn about them.
I suspect she would not be able to find something that replicates what an annuity does. That’s the point. Nothing else does that. And what was the No. 1 fear of working Americans? Ah, yes, outliving their savings and investments. 
As the federal government pushes more advisors into the fee-only sector, fewer advisors are likely to focus on insurance-based products. Instead, Americans likely will be more exposed to volatile equities markets with no protection or to poorly performing bonds and certificates of deposit. That’s what securities advisors sell.
In the end, more consumers will be tethered to the capricious stock or leaden bond markets. We can reasonably predict that. But no one can offer a vision of how this new system will increase real retirement security. 
Unscrupulous advisors will still exist, and fewer clients will have guaranteed insurance products. Is that the outcome anyone wants? 

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. Steve may be reached at [email protected] Follow him on Twitter @INNSteveM. [email protected].

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