WASHINGTON -- When the Department of Labor produces its controversial proposal to extend fiduciary responsibilities to certain advisors to retirement plans later this year, the plan will come with a robust economic analysis making the case for new regulations, along with targeted exemptions to the rules, the senior official who is leading the effort said on Tuesday.
Phyllis Borzi, the Labor Department's assistant secretary for the Employee Benefits Security Administration, would not say precisely when the department plans to release its proposal, though she suggested that it might be forthcoming in "a couple months."
"I'll tell you what I can, but we're getting very close to radio silence time," Borzi said here at the Insured Retirement Institute's Government, Legal and Regulatory Conference.
Many industry observers are anticipating the release in September, which could put the final rulemaking toward the end of the year or soon into 2014, at the earliest.
That Labor Department's initial proposal to expand fiduciary duties to retirement plan advisors met with strong opposition from industry groups and members of Congress on both sides of the aisle, who complained that the department had produced insufficient economic analysis to support the new rules, which they warned would create undue regulatory burdens on the industry. Labor withdrew its fiduciary proposal in 2011 and said it would conduct further economic analysis before reintroducing a new framework.
Borzi acknowledged that the economic justification behind the Labor Department's initial proposal was not as clear as it should have been, but vowed that the forthcoming rulemaking will be supported by a rigorous and detailed analysis.
"What you will see when this rule is reproposed is an extremely robust economic analysis in which we document what the cost of conflicted advice is in terms of long-term retirement savings," she said. "It turns out that there's a lot more data and research in this area than we thought when we started the project. But our economic analysis will be fully transparent. We will not be giving you conclusions and aggregates. You will be able to go and read yourself every single bit of research that we cite in our economic analysis."
Borzi has long argued that reforms are needed to the 1974 Employee Retirement Income Security Act (ERISA) to ensure that individual investors and plan sponsors receive the best available advice from their advisors. Too often, she argues, financial professionals have been pushing products in pursuit of their own compensation rather than the best interest of their clients, a condition the new fiduciary rules would aim to remedy.
"The problem we are trying to solve here is that many, many individuals who seek investment advice and plan sponsors who seek advice in connection with their plan design and investment in the 401(k) area are not getting the best quality advice that they can. Why? Because the people who hold themselves out as experts are not always accountable in terms of a legal standard of care that they have to observe, but most importantly because there are strong marketplace forces in which there are tremendous incentives for people to be giving conflicted advice rather than unbiased advice," she said.
The proposal that Labor releases will consist of three parts, each to be made public at the same time. One will be the proposed regulations. Those will be accompanied by the economic analysis Borzi described, as well as a list of proposed exemptions to the types of transactions prohibited under the new fiduciary rules.
Unlike the fiduciary rules maintained by the SEC, FINRA and many state regulators, ERISA has a blanket prohibition on conflicted transactions that cannot be circumvented through disclosures. But the statute does give the Secretary of Labor the authority to enumerate exemptions to the statute, which Borzi, without elaborating, said will factor into the forthcoming rulemaking to limit the scope of the regulations.
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