Retirement savings are a constant concern for Americans navigating challenging economic times. Americans desperately need increased access and options for savings and investments. Instead, far too many policymakers are promoting legally dubious policies that are proven failures.
Perhaps the best example is the approach taken by Department of Labor bureaucrats, who are dogmatic in their commitment to heavy-handed government power over actual results for real people.
For 14 years, the department has been fixated on pushing the fiduciary rule. The rule purportedly helps consumers by legally ensuring financial advisors act in their customers’ best interest.
Good intentions? Perhaps superficially. But it doesn’t take a financial guru to see how it all unravels and harms the same people the rule is supposed to help.
There are two ways that Americans receive investment advice. First is the brokerage model: Assistance is provided for a commission on sales and purchases. Second is the advisory model: Advice is provided for a fee.
The Labor Department does not like the brokerage model, believing that commissions automatically create conflicts of interest. But by that standard, the sales of tens of millions of products and services have conflicts of interest — including vital services such as medical care.
It is stunning how poorly understood this topic is in the media. Multiple articles paint the current market as flagrantly allowing advisors to provide advice that puts their own interests ahead of their customers.
This ignores that advisor advice to consumers regarding securities is already legally required to be in the client’s best interest under existing federal regulation from the U.S. Securities and Exchange Commission — a rule called "Regulation Best Interest."
The SEC, of course, is the government agency charged with regulating the securities industry and protecting investors by promoting fair and competitive capital markets.
Additionally, advice to individuals regarding annuity products is required by state law to be in the client’s best interest in 45 states. A key official from the Insured Retirement Institute expects the remaining states to follow suit — welcome news.
The media ignore this existing legal framework all too often. While attempting to portray all advisory firms negatively, the media also fails to state that the SEC’s Regulation Best Interest and the state annuity rules have virtually no opposition from the financial services industry.
The harm done by the Department of Labor’s fiduciary rule goes beyond matters of law and perception. Low- and middle-income Americans will suffer financially, should the fiduciary rule be realized.
How do we know? Because it already happened in 2016, when a nearly identical rule too effect under Obama for about nine months before it was invalidated by a federal court.
The reality is that low and middle-income individuals receive investment assistance through the brokerage model. The costs of providing advice through the advisory model is that customers need to meet high asset minimums, often in the mid-six-figures.
So, in its zeal to kill the brokerage model, the Labor Department effectively cut off less affluent people from receiving professional financial advice.
In 2017, accounting giant Deloitte studied the effect of the 2016 fiduciary rule. Deloitte found that in its wake, 53 percent of advisors reported limiting or eliminating access to brokerage advice for smaller retirement accounts, affecting an estimated 10.2 million accounts and $900 billion in aggregate savings.
Also, in 2021, my organization published an in-depth analysis of the effects of resurrecting the 2016 fiduciary rule, which is what the 2024 rule does. Our study showed that reinstating the 2016 fiduciary rule would reduce the accumulated retirement savings of 2.7 million individuals with incomes below $100,000 by approximately $140 billion over 10 years based on accumulated IRA savings alone, This would contribute to a roughly 20 percent increase in the wealth gap for Black and Hispanic Americans behind non-Hispanic whites.
Subsequently, the Department of Labor admitted that millions of low- and middle-income individuals lost access to investment assistance in 2017 but claimed the number was not quite as high as Deloitte found. To date, neither the Labor Department nor anyone else has provided a substantive counter to the Hispanic Leadership Fund’s analysis.
Last month, two U.S. District Courts ruled that the 2024 definition of a fiduciary issued by the Department of Labor in April was an illegal resurrection of the invalidated 2016 fiduciary rule. Both courts were so confident of this that before issuing a final judgment in the cases, the courts stayed the effective date of the rule to ensure that no one would be forced to comply with an illegal rule.
While the appeals process will take many months, the Department of Labor's latest attempt at bureaucratic overreach will likely meet the same fate as before.
Policymakers who are genuinely interested in helping everyday American families would do well to focus on supporting the expansion of access to financial opportunities, so that more Americans can benefit from the enormous power of our capital markets.
What should be glaringly obvious by now to anyone who wants to promote financial empowerment for more Americans is that supporting any regulation that effectively cuts off less affluent individuals and families from receiving all possible advice and information is clearly wrong.
Mario H. Lopez is the president of the Hispanic Leadership Fund.
