Mary Jo White’s Support Nudges Fiduciary Standard Forward

The SEC Chief says she favors a standard that covers all retirement plan advisers. Plan sponsors are hopeful, despite the difficult politics.


Last week U.S. retirement income security reached a milestone: Securities and Exchange Commission chair Mary Jo White came out with her long-awaited opinion on whether all retirement fund advisers should be held to the same standard of fiduciary duty. “My personal view is that the SEC should ... implement a uniform standard of fiduciary duty for broker-dealers and investment advisers where the standard is to act in the best interests of the [retail] investor,” said White on March 17 at a regional meeting of financial services professionals in Phoenix.

Those words could not have reached a more receptive audience than corporate pension and retirement plan sponsors across the U.S.

Over the past decade retirement plan sponsors have watched as plan participants moved 401(k) savings and defined benefit lump-sum payments into often more costly individual retirement accounts, or IRAs. These participants, usually recently retired or separated from their employer, often transfer their money at the cold-call coaxing of a mutual fund salesperson, broker-dealer representative or insurance agent. Individual retirement accounts, which hold a total $7.2 trillion in assets, now dwarf the $5.3 trillion in 401(k)-type plans and $3.1 trillion in traditional pensions, according to the latest figures from the Department of Labor. In response, a group of retirement plan sponsors has been mobilizing to push back on this trend.

Plan sponsors at some of the largest U.S. corporations have spent years enhancing plan offerings with lower fees, more suitable fund options and investment advice. They became increasingly alarmed as employees were solicited to hand their old 401(k)s — as several television commercials frame it — over to IRA providers that do not come under the purview of federal pension law. The Department of Labor notes the lack of regulation over IRA providers on its web site, concluding, “This means individuals increasingly need to make complicated decisions to secure their financial futures and their savings have fewer protections under the law.”

To counter this perceived threat, in recent years members of the Committee on Investment of Employee Benefit Assets, or CIEBA, an affinity group of more than 100 large U.S. plan sponsors, began making regular trips to Washington to speak with officials at the Department of Labor and the White House’s Council of Economic Advisers about their employees’ retirement income security.

This advocacy effort has had some effect. Whereas White’s statement is the most recent sign, it was preceded in February by a paper from the Council of Economic Advisers titled “The Effects of Conflicted Investment Advice on Retirement Savings.” Among its conclusions was the finding that middle-class families that receive conflicted advice have on average a 1 percent lower annual return on retirement savings, for a cumulative $17 billion in losses each year. President Barack Obama has also weighed in in favor of a new fiduciary standard.


Now that White has offered her support, the next step is a second attempt by the Department of Labor to post a regulatory proposal that would extend the long-held definition of “fiduciary” to include those who invest retirement assets for retail investors. The Department of Labor’s first rulemaking in 2010 was met by protests from the financial services industry and their political supporters. The financial services industry remains opposed to any new regulation of mutual fund salespeople and others holding themselves out as financial or retirement plan advisers. They argue that these professionals are already held to a suitability rule that requires that the products they sell meet clients’ needs. The other common assertion is that more regulation will increase costs for broker-dealers, thereby limiting their ability to advise low-income investors. This concern was voiced by White when she spoke at the Securities Industry and Financial Markets Association annual meeting last November in New York. John Kline, a Republican congressman from Minnesota and chair of the House Education and the Workforce Committee, told Institutional Investor last fall that his primary concern is a lack of access to stockbrokers and other less-regulated advisers caused by any attempt to apply fiduciary standards of registered investment advisers to salespeople. Longtime industry players believe the money management industry will find ways to make money even if they are held to a higher standard of care.

For their part, CIEBA members believe that terminated participants will have better retirement outcomes if they leave their assets in plans under the umbrella of the Employee Retirement Income Security Act, or ERISA, which tend to be low cost and include investment advice from a fiduciary — the plan sponsor. In his testimony before the ERISA Advisory Council of the Department of Labor last June, Robert Hunkeler, director of investments for $11 billion in defined benefit and $5 billion in defined contribution plans at International Paper Co. in Stamford, Connecticut, noted ongoing efforts made by fellow CIEBA members in ensuring that employees saved as much — and as efficiently — as possible for retirement. These efforts include adopting automatic enrollment, automatic fund escalation and offering high-quality low-cost funds.

Yet, explained Hunkeler, plan sponsors are no match for the marketing and sales muscle of financial services firms. Rollovers to IRAs constitute a majority of distributions from CIEBA member plans, with the plans’ recordkeepers receiving about 40 percent of all participant rollover dollars, he added.

Donald Butt, who retired in 2010 as head of operations and defined contribution plans after 40 years at Qwest Communications (later acquired by CenturyLink) in Denver — 30 of them in the retirement arena — says he supports the CIEBA initiative. Butt, a former vice chairman of CIEBA, makes clear he is not opposed to the mutual fund industry and other fund providers. “But participants need full information on what they’re getting when they move money out of a 401(k),” says Butt, who is also the plan sponsor advisory committee representative on the board of the Defined Contribution Institutional Investment Association, an industry organization. “They need to understand how the provider makes money and if they’re getting a sales commission.”

White acknowledged in her recent statement “the complexities and challenges to implementing” a new fiduciary rule. One is that the SEC is underresourced. She is calling for a program of third-party compliance examiners to fill the gaps, should more regulation be required. Another potential roadblock is that only two of the four SEC commissioners — both Democrats — are siding with White on fiduciary standards. The election of a new president before a new fiduciary standard can be put into place could upend its chances.

Still, some in favor of holding all advisers to the same standard are sanguine about an eventual change. Says Butt: “I am hopeful and think it will pass.”

Follow Frances Denmark on Twitter at @francesdenmark .

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