D.C. Pension Geeks
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D.C. Pension Geeks
Tim Hauser - The Final Fiduciary Rule’s Myths and Controversies
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Department of Labor Chief Operating Officer and senior staff member Tim Hauser joins American Retirement Association CEO Brian Graff for a comprehensive discussion of the myths, controversies and questions surrounding the final fiduciary rule, officially called the Retirement Security Rule.
This frank and factual conversation between two fiduciary rule veterans tackles any questions or criticisms about the rule head-on.
Retirement Security Rule Update Discussion
Tim Hauserinvestor people who are themselves advisors . If you're giving advice to the advisor , that advisor is a fiduciary , but the one level up from that person isn't .
Matt IntroDC Pension Geeks brings you exclusive conversations with top retirement policymakers and regulators in and around Washington DC , hosted by Brian Graff , an attorney , accountant , former Capitol Hill staffer and CEO of the American Retirement Association . If you're looking for an insider's view of all the twists and turns that Washington takes on the road to ensuring a secure retirement for millions of Americans , you're in the right place . Welcome to DC Pension Geeks .
Brian GraffHello everyone , welcome to yet another edition of the DC Pension Geeks podcast series , and we've got a big one . Today we're welcoming back none other than Tim Hauser , who is the senior chief staff officer for the Department of Labor Employee Benefit Security Administration . Everyone knows who you are , tim , so we can dispense with the introductions and we're here to once again talk about a Department of Labor regulation , this time around the final regulation for what the department's been calling the retirement security rule . So , tim , thanks for being here . Once again , we want to kind of address some of the myths , some of the controversies around this rule . We've gotten lots of questions from members across the ARA spectrum because this rule , in many respects , becomes effective in five months and people are actually starting to think about how to implement and comply with the regulation , which , of course , I'm sure Tim , the department is glad to hear .
Brian GraffSo let's start with some . I'm going to start generally . We're going to focus primarily on the definition of investment advice , the regulatory definition of investment advice under ERISA , as well as the privet transaction exemption , the updates and the new final 2020-02 . So , starting with the regulatory definition of investment advice , one of the major criticisms that you're hearing by those who oppose . The rule talked about a little bit in the press is the fact that you guys proposed this in October . It's now the end of April . How could you have possibly responded to the 20,000 some odd comment letters or comments , if you will that were received by the department , and I wanted to give you an opportunity to talk about how the department sort of processes all that information and what you've done to take a look at all those comments to take a look at all those comments .
Tim HauserWell , so the way I'm taking that in . I think I heard two questions . One was how you know this seems fast to you , and the second is how quickly we process the documents . I mean , first I just say that a 60-day comment period is pretty normal for a notice and comment rulemaking . In the context of this rulemaking in particular , this is a rulemaking we have a lot of experience with .
Tim HauserWe've been at this particular set of issues for quite some time . We've had multiple hearings on it at this point . We've been through multiple rounds of comments which obviously informed our work and meant that when we were considering the most recent round of comments , we were in a position to really move . You know , we have quite a bit of familiarity with issues and the people who are submitting the comments have quite a bit of familiarity with our way of looking at it . But , that said , 60 days is a fairly normal period . I think we got about 400 , I don't know the exact number , it was a little more than 400 , say 425 or so 400 , say 425 or so substantive comments . We got another just shy of 20,000 petitions and you know that I think were grouped into like three or four different groups of or no , it was like 14 groups of petitions and you know , and we go through all of them . I mean we and we also had a hearing during the comment period and the hearing worked the way it was intended , in the sense that we got comments as part of the notice and comment process . That reflected people's response to what people said at the hearing , which we also thought was helpful . But when we looked at the comments , we got comments that seemed to cover the entire range of issues that the rule presented .
Tim HauserIt is not .
Tim HauserWhile I've read a lot of the comments , it does not necessarily fall on me to read all of the comments . We have quite a team of people who together have collectively read every one of them and we have a pretty formal process for going through those comments , digesting them , having conversations about what was said , conversations about what was said and addressing them in the rulemaking and the preamble to the rules and the exemptions . So I think it was a pretty robust process and I think we benefited from just an enormous amount of input that , at least from my perspective and judging from the comments we got , was quite complete and enormously helpful and , as I'm sure we'll talk about we ended up making . You know , we thought that in any of a number of instances some of the commenters had the they made points that merited change . I mean , we had . There were a number of instances where I think we went in maybe thinking one thing was the best approach and we went out thinking now we need to make some changes here based on what we heard . We did that .
Brian GraffYeah , if you read the preamble , obviously there's a lot of notations to what comments have been saying , of notations to what comments have been saying and , as you point out , there were a number of changes in response to those comments , including some changes based on comments that we submitted , which we appreciated , and so maybe let's talk about that At a high level . Tim , focusing again first on the regulatory definition of investment advice , can you highlight what some of those changes were versus the proposed rule ?
Tim HauserYeah , so let's . I tried both to answer your questions and to answer the question I wish you'd asked Brian , that's okay . So let's start there . Before I say what's changed , let me tell you what stayed the same , just to kind of set .
Tim HauserAnd what's mainly stayed the same is there were three broad principles that I think were important to us , and you see them in the proposal and the final , and those principles are you know , one , if you're holding yourself out to retirement investors as a person who's giving individualized advice intended to advance their best interest and making a recommendation kind of on , you know , as in the context of somebody's professional best interest advisor , that you ought to be held to that . That's kind of notion number one , which , as an ERISA matter , generally means you're a fiduciary . The second thing is well , if somebody is a fiduciary and they're either a fiduciary to a Title I plan or they have conflicts of interest that require a prohibited transaction exemption , what should their core obligations be ? And they should be , in our view , that they're going to be prudent , you know , adhere to an expert standard of care . They're going to be loyal , which means they're going to put the customer first . They should not overcharge them . They need to charge no more than reasonable compensation and they shouldn't mislead the investor . That , coupled with policies and procedures to make sure those things happen , and a fiduciary acknowledgement and the exemption big picture , that's pretty much what this project boils down to . If you hold yourself out , isn't it a best interest advisor that's acting in the customer's interest ? You should be that . And what does that mean ? That means you should be prudent , loyal , not overcharge and not mislead people . And then the third premise of the project was that the retirement investors are going to best be served if it's a uniform compliance framework for retirement investors . If you're giving advice in the retirement space , where you're actually acting in this kind of position of trust and confidence with respect to the investor , really you should play by the same rules , regardless of what product you're recommending . People are just as deserving of advice that's prudent , loyal , doesn't involve overcharges or misleading them if they're selling insurance as if they're selling securities or if they're selling commodities . It really shouldn't matter . Those core obligations , which is what this project mainly requires those should apply across the board and all retirement investors deserve that if they're in this relationship of trust and confidence . So , big picture , those things stayed the same , but a lot else changed quite a bit , and just starting with the basic definition .
Tim HauserSo we really were trying , when we wrote the definition of who's a fiduciary advisor , to capture these relationships of trust and confidence . But in the proposal one of the ways we did that was we set up three different contexts in which we said if you're in one of these contexts you're going to be a fiduciary . And all were , in our view , circumstances where somebody is in this kind of relationship of trust and confidence . But one of them was if the customer is an entrusted discretionary investment authority with respect to any of your assets , you should , you know to you or your affiliates , you should be treated as a fiduciary . We got lots of comments back that said you know , we can hypothesize for you any of a number of circumstances where that would not be the case . Parties would not really have that kind of trust and confidence relationship . No reasonable person would have thought they were in that kind of relationship just because an affiliate or you know , a different account involve that kind of relationship and that we think you're overbroad in that sense . And so we struck that provision from the definition . So that's gone , that's no longer there . We modified .
Tim HauserThe second context was focused on this notion of individualized advice and from somebody acting in your best interest . We changed that in a number of ways . The new test I will read it to you because I think it's important , but it's the person makes professional investment recommendations to investors on a regular basis as part of its business . The word professional there is new . We added it . We wanted to stress that we're not talking about an HR guy , you know , making a recommendation . We're really talking about somebody who regularly makes investment recommendations to people as part of their business . So that's one . And we said that that person has to make a recommendation and the recommendation has to be made under circumstances and this language is all now new . That would indicate to a reasonable investor in like circumstances that the recommendation is based on review of the retirement investor's particular needs or individual circumstances , reflects the application of professional or expert judgment to the investor's particular needs or individual circumstances , and that it may be relied upon by the retirement investor as intended to advance a retirement investor's best interest . That's a lot of words because there's a lot packed in there , but basically what we're trying to get at is this needs to be somebody who regularly makes investment recommendations as part of their business , it's their profession , it's what they do and it's an objective test . A reasonable investor , looking at the circumstances , would conclude that this person is giving individualized advice , they're applying their professional judgment to the customer's individual circumstances and they're holding themselves out as acting in the investor's best interest . We think if you do all of those things , you really are in a relationship of trust and confidence in the investor , and the investor has a right to inspect that you're going to be prudent , loyal , not materially mislead them and not overcharge them . So that's the second test and , as I said , it's been revised in significant ways
Clarifying ERISA Fiduciary Definition
Tim Hauser.
Tim HauserThe third revision to the definition was as before . There's a provision that says if you specifically say I'm a fiduciary , you are . But we narrowed it because the fact is , who is or isn't a fiduciary ? The question of whether somebody is a fiduciary kind of depends on , well , what legal regime are you talking about ? Different legal regimes use the word fiduciary to cover different kinds of conduct and different relationships . So we weren't trying to pick up every time somebody said they are a fiduciary in one of those other capacities . So we amended it to say if you've represented to the investor that you're a fiduciary under Title I or Title II of ERISA . So the idea is are you holding yourself out literally as an ERISA fiduciary , so that's it ? Are you doing this individualized best interest advice or did you tell the person you're their ERISA fiduciary ? If you did , you're picked up . Now . Please interrupt me if I'm going on too long , Brian .
Brian GraffNo , it's okay . I think this is important .
Tim Hauserinformation people should hear Are there other changes and I want to again this is one of the criticisms . This is in response to a variety of comments , but one of the critiques we got is we're not sure if you guys have an objective test or a subjective test here , and it's important to us that it be objective because we need you know . We shouldn't be governed by the unreasonable expectations of an investor who maybe thought we were in a certain kind of relationship , even though nobody else would have thought that , and so we fix that . The rule , as before , says that you can have disclaimers , but you have to make sure that they're consistent with the way you're holding yourself out , otherwise you can't have a boiler plate disclaimer , say , look , I'm not your best interest advisor , but then have all your other communications , your advertisements , your every interaction with the customer point in the exact opposite direction . If you don't want to be somebody's best interest advisor , then don't be it , but be consistent .
Tim HauserThere's a new provision that we added that underlines the point that a sales pitch that doesn't meet the test above is out , and we thought that was important because it really is the case that you can make a recommendation under this rule and if you fail the test I described . You know you neither said you were a best you , neither said you were an ERISA fiduciary , nor you held yourself out as giving individualized best interest advice . You can make a recommendation and if you fail those tests you're not going to be a fiduciary and you're not going to be subject to these provisions . That's implicit in the statement of the rule itself , but it deserved being brought out , partly because it's different than the way that the securities law work .
Tim HauserUnder Reg BI , if you make a recommendation to a retail investor and you're a broker dealer , you're subject to the best interest standard . You know kind of period . It doesn't matter whether you're in this kind of trust and confidence relationship . We felt under the Fifth Circuit test that's not an option . I mean we wanted to stay within the Fifth Circuit's opinion . We didn't do that . It is possible to make a recommendation and fall short of meeting this test and we do make the point that if that's the case you're not a fiduciary Do you mind if I interject that Because you said something that I think is a nuance that I believe most people don't appreciate .
Brian GraffI think what I heard you say is that your definition of what constitutes a covered recommendation for purposes of ERISA is actually in many cases narrower than SEC Reg BI because of that expectation that it's reasonable for the investor to believe this is a relationship of trust and confidence . Is that accurate ?
Tim HauserYeah . So I assume all your listeners this isn't a RISA geek program know that we lost in the Fifth Circuit in 2016 when we tried a fiduciary advice rule . The Fifth Circuit had many , many criticisms of that 2016 rule and we did our level best in this rulemaking to heed what they told us . And one of the things they told us is this isn't it's not enough that you just made a direct recommendation , for example , to a retail investor . There has to be the right kind of relationship . That's not true of Reg BI , reg BI . You'd make a recommendation to a retail investor , you're picked up and our rule it's gotta be more than that . You have to make the recommendation and there has to be this kind of relationship .
Brian GraffAnd if you're a broker dealer and you're using you know . One of the concerns that broker dealers have , understandably , is do I have to have different practices and procedures and policies in place to evaluate what's covered under this definition versus what I've been using now for several years for Reg BI ? And what I'm hearing is no , but in fact you may end up having more things being treated as covered by the final rule than might be necessary because of the fact that Reg BI is broader in terms of what constitutes a covered recommendation .
Tim HauserReg BI is broader in terms of what constitutes a covered recommendation , right , I mean . So the SEC rule is both broader and narrower . Right , it's broader , as in the sense of picking up every recommendation to a retail investor about a security is broader than our rule . But obviously we pick up recommendations that don't involve securities . We pick up recommendations to people who aren't retail investors the small business person constructing a 401k lineup , the planned fiduciaries of all sizes . So what I would say is we are broader in that sense and we pick up all investment product recommendations and we are more uniform with respect to retirement investors , in that everybody is subject to what's essentially the same rules , but there are ways in which the SEC , you know , when it comes to recommendations to retail investors , is broader , and I think that's right .
Brian GraffAnything else you want to cover in terms of changes ?
Tim HauserYeah . So other changes . We also don't go into great detail about how to distinguish . Something that's important is that for advice , for a communication , to count as fiduciary advice , there has to be a recommendation . And a recommendation really is a call to action . It's you know , you're telling the investor essentially you should do this or don't do that . Or you know , leave your money where it is , move it , pursue this investment strategy . It's a call to action in that sense . So we follow the SEC guidance in that sense we also reaffirm in the preamble but in the reg text as well , we reaffirm that mere information or education doesn't count as advice . So before we said that in the preamble .
Tim HauserSo I don't think this is a huge change in position , but we added to the text of the reg that you know mere information or education isn't advice .
Tim HauserSo if you're just telling people here's , you know , here's the performance history of this investment , here's what the fees and expenses are , here's what your fund lineup is , here are the attributes of those investments , if you're doing some very basic giving people some very basic investment principles , if you're giving them some of the conventional wisdom about you know taking advantage of your employer match and you know making contributions to the plan and the like .
Tim HauserThat's not what we're talking about as an investment recommendation . And if you again , since this is a RISA geek audience , I'll use shorthand , but if you think about IBE 96.1 , which is the education information guidance document as well , for that matter is our 2016 rulemaking , where we described quite a few things that we thought were information or education rather than advice . Well , we didn't just take all that stuff and put it in the text of this rule . Those principles still apply . So if you're looking for guidance on the line between education , on the one hand , or information on the one hand and the advice on the other , you should look to those sources . We also , in the preamble , invite comment about whether we shouldn't update those documents and issue separate guidance on , to get more detail on what counts as mere education or information , as opposed to fiduciary advice .
Brian GraffSo let me drill down a little bit on that , if you don't mind me interrupting , because I think that's an important point that you just made , that you believe professionals in the industry , because there's lots of questions obviously coming up in terms of where that line is drawn and people's perceptions of . Maybe you've changed that line . You keep on reiterating that that's not really what the intent of the rule was . Rule per se , there's information in there from a contextual standpoint that will give people a sense of the fact you know what is and what is not education , because one example it sounds like you agree with that , correct ?
Tim HauserYeah , I mean the way I would put it probably is
Fiduciary Advice and Recommendations Clarified
Tim Hauserabsent . Some further guidance here . One thing I can tell you for sure is the department is not going to be taking the position that something that we would have treated as information or education in 2016 or under 96.1 , we're not going to say that that stuff is fiduciary advice without , like , a new rule or new guidance or something . You should be confident that we're not trying , as part of this project , to move any of those lines .
Brian GraffI believe in 2016, . There was a specific exception , because we've gotten this question More and more providers , advisors , record keepers are sending individualized emails to participants . Hey , you're only saving this percentage of your pay . It's less than the match rate . You should consider going up to the match rate and under the 2016 proposal , that was not considered advice . And what you're saying is it's not considered advice here .
Tim HauserYes , and I cannot even imagine a scenario in which we're going to tell somebody you're in trouble for telling people to take advantage of that .
Brian GraffThat's right Good , I'm glad .
Tim HauserWe support savings .
Brian GraffWe share that with you . And then and I guess kind of related to this , to that question is what I would just . I mean a fairly common scenario where you've got a plan advisor , you know their job is to be the plan advisor , they do an enrollment meeting and you know somebody comes up to them and they are asked you know some questions . Hey , what should I do ? Here's a little bit of my situation . And the advisor , or someone on the advisor's team off the cuff kind of suggests hey , you might want to consider this .
Brian GraffYou know target advice given to that . You know one or two participants that might come up at the end of an enrollment meeting . I guess the question is is that you know it is somewhat more individualized , but there's also a provision in the rule that says that you have to get paid for the advice in order for it to be covered and you've got this sort of but for standard and so you're not . The advice is not in this instance , being given in a way that they're being paid because of that particular incidental advice , if you follow what I'm saying .
Tim HauserWell , not for sure I mean . So I think I would need of the arrangement here . Is there's an expectation that the guy's going to field these questions , and that is part of the arrangement . From time to time he's giving kind of individualized advice and you know it's kind of part of his service arrangement with the plan . Then I would say , well , if he tripped through all the elements of the test and he made a specific recommendation , it's going to count .
Brian GraffI don't know from your hypothetical that I exactly heard a recommendation there , and the context I think matters a lot too about whether he's really holding himself out as giving kind of you know best interest , thoroughly , thorough advice that would be a reasonable person , would think is is is the relationship of trust and confidence , as opposed to sort of hey , what do you think about this ?
Brian GraffAnd that you know I , you know there's always going to be some facts and circumstances here and in general people have been hesitant , based on 96.1 , to kind of cross over that line . I just wanted to see you know the degree of softness that exists when you know these situations fairly typically happen .
Tim HauserYeah . I just yes , I mean , there is it's . If you want to be absolutely sure you're not a fiduciary , then I think you want to . You want to shoot for a lot of clarity on whether you're giving individualized advice and whether you're acting in the customer's best interest .
Brian GraffYou want to be awfully careful about holding yourself out , as you know , in a way that the world that individualization , you know , based on the professional review of an investor's particular needs or circumstances , is really key to your approach here . And you know we have been getting lots of questions related to hire me situations and you know you were asked by a lot of commentators for a hire me exclusion specifically . Do you want to talk a little bit ? Why you didn't , why did you not , why did you choose not to do that ?
Tim HauserWell , there is . I wouldn't say we chose not to . I wouldn't call it an exception , but if you look at the definitions , I've covered what counts as investment advice . In the first place , we say recommendations of other people to serve in an investment role , including in an investment advice role , but not touting yourself . You can tout your own services to somebody . You can negotiate for your own compensation in a non-fiduciary capacity .
Tim HauserWhat tends to be challenging in this marketplace , this um , in this marketplace , is the two things tend to move hand in hand . An awful lot . You get people at the same time that they're touting their own services , um and and recommending that you use them , which is not fiduciary in our view . They're also making investment recommendations about pursue this kind of account , pursue this investment strategy , invest in these things . Don't invest in that hold , don't hold rollover . Those things are all fiduciary and the communications tend to be mixed a bit . But you absolutely can say there is no one better than Brian Graff for advice . Come to Brian , I'm worth extra and that's not going to get you in fiduciary and again , I think what you're saying is similar almost to some degree , like the whole education advice line .
Brian GraffAs long as the degree to which you are avoiding those individualized recommendations that are based on the particular needs of the retirement investor , the more likely you're not going to be seen as quote providing fiduciary advice and it's only being viewed as a hire me or sales conversation .
Tim HauserYeah , I mean . Well , the recommendation does . This needs to be individualized advice , and obviously I mean none of these concepts . We're all lawyers probably on the call .
Brian GraffWell , no , not on this .
Tim HauserThere's lots of non-lawyers here on the call on the , on the , not on this . There's lots of non-lawyers here . Well , we're all in the business , but . But everybody is capable of finding ambiguities at the margins . But but that's but . This is a requirement for individualized recommendations . So , so that you're not going to be a fiduciary unless you said I'm , I'm .
Brian GraffThis is a fiduciary communication Under Title I of the code . So you mentioned other persons recommending somebody else . That's not a sales transaction , that's not a hire me conversation . So just to clarify , if I'm recommending another advisor in an affiliated organization , you know , let's say I'm a plant advisor , I'm recommending another advisor in the same firm that is going to do your .
Tim HauserIf you're , if you're recommending your firm , that's , that's that's covered .
Brian GraffThat's covered . That's right . Okay , and this rule shouldn't , and , consequently , based on what you just said , the fact that you have I'm sorry , when you said that's covered , I mean that's not fiduciary . Correct , per se .
Tim HauserWe are communicating on this .
Brian GraffYes , unless of course you then drift into the individualized recommendation and similarly , if the fact that you have an existing fiduciary relationship shouldn't matter either . So I'm a planned fiduciary advisor , I'm recommending . A participant says , hey , I need to give , I'm interested in giving advice . I say , you know I don't do that , it's not part of my arrangement . But I'd like to recommend Advisor X if you're interested . And once again that's a hire me conversation and then that's not viewed as another person .
Tim HauserI'm following you , you're recommending , you're , you're , you're actually recommending now another firm or another .
Brian GraffNo , no , same firm , I'm just it's . I already have , I'm a plan fiduciary , I'm a participant . Comes to me .
Tim HauserYou're saying , you're saying you should go , you should , you should we're . We're good for this advice , not me personally , but my firm is Correct , same thing .
Brian GraffIt's a . It's a hire me conversation . You also mentioned disclaimers and just to clarify there , you know , once again , hinging on this individualized recommendation , if I'm a plan advisor and I'm my plan investment committee is interested in a managed account solution , I want to suggest our firm to do it myself to do it I can provide examples of what I've done for other plans . But as long as it's not an individualized recommendation based on the particular needs and circumstances of that particular plan client , then it's again , you can make a disclaimer and it's just a hire me conversation .
Tim HauserBut you're saying now that the examples you're giving are of like portfolio allocations .
Brian GraffYeah , exactly , here's how I've constructed managed accounts for other plans , as an example of what I would do for your plan .
Tim HauserSo I think it's very facts and circumstances . I mean , it really is this kind of objective test . What would a reasonable person think you're doing ? I mean there is kind of a wink , wink , nod , nod sort of way . I could be imagining your hypothetical where you're really suggesting to the customer and the reasonable customer is going to say , no , this guy's telling me this is what I should be doing . On the other hand , there's the facts and circumstances test where you said this is the kind of work I've done for other folks . Here's the kind of strategies I've pursued . Here's my references .
Tim HauserYou can go talk to them , and I'd be happy to do this kind of work for you too and tell you what's right for you . But we're going to , but I'm not doing that just yet and you can avoid .
Brian GraffAnd I'm not doing that and , as such , you know , what I'm presenting to you is not .
Tim HauserYou know , I'm not purporting to give you individualized advice and I'm not purporting to give you a recommendation on how to advance your best interest . You know , I'm just I'm letting you know that you should hire me and and I have all of these skills and I've applied these skills to do all these different things . I mean that is one thing we learned from this , that that I learned I probably it was more me than some of the members of the team here but when I think about hiring people , you know I'll look at writing samples and the like , but and I'll check references . But I don't typically like say you know , I've got some briefs on a reg project , do I'd like you to write the briefs and do the reg project for me and then I'll take a look at them and decide whether to hire you for that role . I mean that would just be odd . What you do is I look at their credentials , I interview them about their skills and their experience , I check the references . But we did hear from a lot of commenters who said , yeah , but in the investment management world it often doesn't work that way .
Tim HauserThe way we sell our services in the very first instance as part of the request for proposal , is we literally give the customer very specific advice based on what they told us about their individual circumstances . We were not comfortable saying , well , that's never going to cross the line and be advice . If you're really giving individualized advice , you're telling them this is what's going to advance your best interest and you end up getting compensated for it . That's fiduciary . On the other hand , if the RFP is about you being an investment manager , we gave a special exemption that essentially just says if you're going to be there , if you gave the advice in the context of an RFP and you sign up to be their investment manager , as long as you were prudent , loyal , didn't mislead , didn't overcharge , that's fine . You don't have to adhere , you don't have to do the disclosures , the policies and procedures , the other requirements that are in that exemption . So that was responsive to that .
Tim HauserOne other change to the advice rule that that's worth I mean to the advice definition that's worth highlighting is the definition of retirement investor . That changed too . The concern we were hearing was from there are a number of folks who develop tools , give recommendations , you know , provide guidance to people who don't actually make the investment decisions for the plan , but rather give investment advice themselves to the plans . We ruled that out and said that that doesn't count as fiduciary advice . You know we're excluding from the definition of retirement investor people who are themselves advisors . If you're giving advice to the advisor , that advisor is a fiduciary , but the one level up from that person isn't . The idea was , to us , a retirement investor into this project is somebody who's actually empowered to make investment decisions and to take action based on the advice , rather than the person who's going to in turn make advice . And I think that was responsive to those comments and concerns from people who kind of are wholesalers , right .
Brian GraffAnd also sub-advisory work . That was also very a lot of comments that the rule as proposed could have swept in that sort of that B2B type of advice relationship where the principal plan advisor is relying on other folks to provide some advisory work and what you're saying is the plan advisor , advice to the plan advisor isn't . The plan advisor isn't a retirement investor if they're not empowered to make actual decisions on behalf of the plan .
Tim HauserYeah , so just going on with some changes , because there are some important ones in the exemption that I think are very Before we do that , let me follow up with a few more questions on the rule .
Brian GraffSo you mentioned one of the key changes was adding the word professional to the investment you know in advance of or in connection to an investment recommendation , and that was in response to concerns that we , on behalf of PSCA , some others have made regarding the rule potentially sweeping in HR . Folks who are often talking to participants about their distribution options Actuaries , who are always worried about things are often asked to provide advice with respect to the timing of a lump sum distribution . To the timing of a lump sum distribution . It's not really the cornerstone of what their job is in terms of evaluating the funding rules and the funding requirements of a defined benefit plan . But , as you point out , in the rule the advice respecting distributions is covered , including distributions with respect to defined benefit plans , and so you know , actuaries certainly are professionals , and the concern is , if they're doing this sort of incidental to you know their primary role as an actuary , are they potentially covered by the rule ?
Tim HauserSo that's an interesting question . That's an interesting question , I mean here's
Actuary Fiduciary Obligations and Recommendations
Tim Hauser. What I would say is that let's go through all the things that have to happen for an actuary to be a fiduciary in that context , I think and also let's just say a word about what the implications are , because you're hypothetical . I'm not hearing any prohibited transaction there .
Brian GraffWell , let's assume the plan assets are paying for the actuary's fees .
Tim HauserYeah , but I'm also assuming the actuary doesn't get more or less based on the answer to his question . That's correct , right ? He's just getting whatever the fee is for the actuarial services . So there's not really a prohibited transaction there . The question is just but are you it's Title I , it's advice to a Title I plan and you're subject to Section 404 of the statute , which includes prudence and loyalty , and you know all of the ERISA obligations and maybe they're concerned about that . So they don't have the privative transaction provisions , they don't have to worry about complying with 2020-02 or 84-24 .
Tim HauserBut could they trip the wire ? Well , if they regularly are making recommendations about here's when you should make a distribution . So that's the the first question . Are they actually making a recommendation as opposed to just saying look , you want me to do some modeling for you run some . Give you some some calculations of what you know the implications are likely to be in light of current interest rates and it falls short of a recommendation as to timing , then it's not going to be fiduciary . But if they actually make a recommendation , then potentially they're a fiduciary , but they're going to have to give .
Tim HauserI'm going to assume , for sake case for under your hypothetical , that they did not say I'm a Title I or Title II fiduciary . If they did , they're faked up . But assuming they didn't , you know they'd have to be giving a recommendation based on the individual circumstances of the plan , based on their professional judgment . They probably are right . I mean they're looking at the specifics of the plan , they're making the individual recommendation , but they also have to be holding themselves out as acting in the best interest of the plan effectively . I mean they're giving this advice to advance the best interest of a retirement investor . So a participant or the plan or a fiduciary hypothetically they could do that . They might not do that If they're paying , if it's a plan fiduciary looking for the guidance as opposed to the sponsor , and the plan fiduciary is , as I guess would be the case , if the plan assets are paying for it .
Tim HauserIf plan assets aren't , you know , if assets are paying for it and the question is really what's in the employer's best interest ? Then I have a whole set of other issues for the employer . But you know , if they're holding themselves out that way , they could potentially be a fiduciary if they're compensated for the recommendation . And there I think it's a question of like what is this arrangement with the plan ? Is this part of the services that are being provided to the plan and compensated ? Do they include ? You know that one of the yeah , one of the services I'm paying for here is I want you to give me recommendations on the best approach for the plan with respect to timing of distributions . If it is , they could get picked up , but they have to trigger . The actuary is gonna have to kind of trigger those things to be a fiduciary .
Brian GraffAnd you're getting to the but for question too , which it does come up quite a bit if , in that instance you know , in many cases the actuary really isn't getting incidental compensation for doing this , it may not even be part of the arrangement . They're just , you know , trying to be helpful .
Tim HauserYeah , but if there's an understanding that part of the arrangement they're just , you know , trying to be helpful , yeah , but if there's an understanding that part of the services that they're getting paid for is to answer this kind of question , I don't know how sanguine I'd be about .
Brian GraffUnderstood , and that's why we're asking the question .
Tim HauserSo I think it's something that actuaries need to be paying attention to . There's another series of questions to . There's another series of questions , I do think , in a lot of these transactions that involve professionals talking to plan fiduciaries you have a lot of . To some extent , the keys are the parties can structure this arrangement to avoid fiduciary status . It's very easy for them to avoid holding themselves out as kind of best interest advisors if that's what they want to do .
Brian GraffBut also Tim . It's very common for them to be talking to participants about this . Participants may ask that , and so that's different right .
Tim HauserRight , and you do kind of the same analysis , exactly , I think .
Brian GraffSo a whole series of questions around the platform provider discussion . In the final rule Again , a lot of it having to do with hinging on this recommendations based on the review of retirement investors' particular needs and individual circumstances . So let me give you an example which is very common . A platform provider offers the marketplace , either through advisors or direct-to-plan sponsors , a list of , let's say there's , 10 major investment categories large cap , small cap and in those 10 major categories they offer six or eight different investment options and it's the plan sponsor's job to select one from each category and that becomes the constructed plan menu . And the question is repeatedly asked is that , you know , because it's you know , it's not the full universe of Q-SIPs , it's a you know more , let's say , 60 options for the participant to choose sorry , for the plan sponsor to choose from . Does that ? Where is that in terms of the line between individualized and a product offering ?
Tim HauserSo I mean so , just so I understand the hypothetical here . So you have a platform provider and essentially they're saying to the plan you can choose between any of the following lineups , is that ?
Brian GraffNo , no , they actually . That actually does exist . So let's say there's three different lineups , or they offer , you know , the major asset , the major investment categories , and you choose one from each category and they'll give you like six options for each to choose from . Does that make sense ?
Tim HauserYeah , I mean I think everything is going to hinge on what the nature of the communication is .
Tim HauserI mean , certainly , if what they're saying is , look , I've looked at your plan , circumstances , the investments I'm putting forward as in your interest , based on your circumstances , they could cross the line . If , on the other hand , the nature of what they're doing is just saying , I mean there are a variety of ways a factual scenario could play out . The employer could say , look , I'd like to know a bunch of funds that meet the following attributes . And they say here's what we've got that meets those attributes , not fiduciary . They could say you know , I've gone through the universe of investments and the following , as far as I'm concerned , you know , after looking at your circumstances here , these would all be great for you , they all are in your best interest , or kind of an equipoise . I mean you know that would probably be fiduciary . It's very . The more options that are being offered up and the less individualized the advice is , the less likely you have a recommendation or you've been picked up by the rule . You know .
Brian GraffSo let's carry this a little further . Chris , in the preamble you talked about PEPs and typically PEPs small market product . There is a one lineup . There is a lineup and you know someone could be an advisor saying , hey , here's a low cost option for you to consider , and you know there's , there's and here's a low cost option for you to consider and it has a specific list of you know one lineup to choose from . But it's not like the advisor saying I've evaluated each of those options and I believe these investment options are in your best interest . It's merely I'm suggesting this as a product for you to offer as a 401k
Expanded Scope of Exemptions in Finance
Brian Graffplan . You seem to be suggesting in the preamble that that would not be considered an individualized recommendation . Is that correct ?
Tim HauserYeah , I mean I may be just having a hard time following all the hypotheticals or I may be reading more into them than what you're offering , but I mean so just the way I'm thinking about it and then tell me if I'm answering . I mean one . You can offer a platform platform and you can do that without making a recommendation . This is just . Look , I have a platform here . I have the investments available that I do . I think they're good , but if you want advice on whether this is right for you or which ones you should pick from what's available on my platform . That's not what I do . You should really , if that's your scenario . That's not fiduciary advice .
Brian GraffSo you can be like with a PEP . You can be . This is the product . This is a good , low cost way to offer 401k plan . I'm not giving you advice with respect to the investments per se . That's obviously . What you're telling us is that that's obviously not an individualized recommendation that is subject to the rule .
Tim HauserRight . And then , on the flip side , you , you , you can go the other direction . You can tell somebody I have this , this product , I have this platform and this is exactly what's right for you . Let me tell you why you should invest in this . Then you get compensated . On that basis . You're likely tripping the wire . It's very context dependent and the parties have some ability to define what that relationship is going to be .
Brian GraffI think in that context , let's switch gears and move to the PTE 2020-02 .
Tim HauserYep . So there are significant changes in the exemptions and I just want to make sure we don't lose them , but that , to my mind , probably the most important are ways in which we've expanded the scope of relief under these exemptions . There are just two exemptions now . Again , our goal was to get as much uniformity as possible in this marketplace , so everyone's competing on a level playing field centered around best interest to the extent they have conflicts or they're giving advice to a Title I plan , and so there are two exemptions . One is broadly available for everything , essentially . The other exemption is really tailored to independent insurance agents and is meant to deal with the special issues for people who are independent agents and aren't , you know , direct employees of the insurance company whose product they recommend . They recommend multiple insurance companies' products and don't really have that employment relationship with any of them . That we thought there were some tweaks we had to make to make an exemption there . But , broadly speaking , now 2020-02 is the big broadly available exemption . You can recommend anything under that exemption . As a practical matter , you can also recommend insurance products . You don't have to use 8424 at all the independent agent exemption if you don't want . But probably the most important thing about 2020-02 . Now and this is a change is we've expanded its scope . It used to be limited in the range of products you could recommend . We decided that , in light of the exemptions impartial conduct standards , these duties of prudence and loyalty and not overcharging and not misleading your customers and the acknowledgement by the firm that it's acting in a fiduciary capacity and its oversight responsibilities , that we weren't going to put any kind of thumb on the scale with respect to particular investment products . Those duties of loyalty and prudence and the like , coupled with the acknowledgement , coupled with the other protections in the exemption , that ought to be enough to let people essentially recommend anything that's out there in the market , just understanding that you better make sure you know that some of these products are especially , have special risks and special complexity and you want to be careful about recommending them . But you may . So we expanded it to include all principal transactions . It includes robo-advice . It's a very , very broad exemption that's widely available now . That , I think , is very significant and it really is contingent . We decided we were able to find that the exemption was sufficiently participant , protective and that we could move forward with it , precisely because it had these impartial conduct standards , because it has a fiduciary acknowledgement because it has a policies and procedures , requirements and the like , and so that's what we've done . That , I think , is a really big deal .
Tim HauserIn 8424 , the exemption , as it was originally written , only covered commissions to the insurance agents narrowly defined kind of similar to what happened in 2020-02 , which is broadly available for all types of compensation , as long as you comply with the exemption conditions . 8424 , we no longer restrict it to commissions . It covers any compensation the independent agent receives . As long as they comply with the exemption's terms , they can get it . We also expanded the scope of what kind of agents can rely on the exemption a little bit , so people who are captive employees of a company when they're selling away from that company , they can rely on the exemption if , assuming their insurance employer statutory employer doesn't have a financial interest in the transaction . The key difference between the two exemptions apart from some unique tailoring of what kind of disclosure has to happen based on the difference in the marketplace is just that under 8424 , we don't require the supervising insurance company to acknowledge fiduciary status because of concerns expressed by the insurance industry about being held liable or accountable as fiduciaries for people they don't control the way they control their own employees . Otherwise , I mean those are the biggest , most important changes .
Tim HauserThe other changes we had you can be disqualified under these exemptions for committing you know . You can be disqualified under these exemptions for committing various specified felonies , both foreign and domestic . We also have provisions in there for egregious misconduct that could result in your loss of the exemption , lying to federal regulators systematically failing to pay excise taxes when you're supposed to systematic violations of the exemptions . But in the proposal we had given ourselves authority to make those determinations and to disqualify people subject to a process where they could come in and talk to us on so many days notice and we would make a final decision .
Tim HauserAnd we got a lot of comments from people who said you know that's , you're giving yourself too much authority there for disqualifying people . We're concerned about potentially losing access to this exemption based on the determination made by the department , as opposed to some impartial arbiter or something . We changed that . So now the findings of these kinds of factual , the findings of the sorts of egregious misconduct I mentioned , have to be made by a court in a court proceeding and they have to be in a court proceeding and they have to be or in a court-approved settlement . But we're not going to be the . We don't resolve these facts . A court does .
Brian GraffSo you have an Article III judge resolving these issues . So I think You're imagining this would be that would be happening in the context of some type of enforcement action that you guys would be in .
Tim HauserYeah , well , it's only in actions brought by regulators , and I don't remember . I mean a concern I've heard folks express , which I think this takes care of , is they don't want there's some concern about , like a class action plaintiff's attorney using the potential of finding in a case they've brought as disqualifying them as leverage , and we said yeah , and so this avoids that altogether . These are going to be actions brought by federal or state regulators , based on their determination , so I think that was very thoughtful . We also reduced the disclosures to bring them in line in the case of 2020-02 , with the SEC disclosures to a much greater degree . We reduced the disclosures a bit under 84-24 , bringing them closer to Reg BI and to the NAIC's model rule , and I feel like there are a couple other important changes in the exemptions , but Timing of the disclosure .
Tim HauserTiming of the disclosure . So one this might have . Actually you might have made this comment I'm trying to remember who made the comment but a number of folks objected that our exemptions could be read . The proposal could have been read as requiring that disclosures be made at or before the time of the recommendation , but that's a time before the person is entitled to get compensated . They may turn out not to be a fiduciary at all . The transaction hasn't yet occurred . Can't you give us authority to make the disclosures prior to the actual transaction , prior to the time that compensation is earned , or before ? But you don't have to give it immediately when you're making the recommendation . If it's not , you know if the coin hasn't yet dropped on your fiduciary status , for example . That seemed reasonable and we made that change , which I hope makes exemptions much more practical . For people .
Brian GraffWe certainly were very grateful and definitely welcome that change . A couple things going back to . I do want to remind people because this remarkably still comes up there's nothing in the proposed or final rule , for that matter , that creates a private right of action and prohibits arbitration agreements , correct , that's absolutely correct .
Tim HauserI mean there's a requirement that you acknowledge your fiduciary status if you want to take advantage of the exemption . But you have no need of the exemption if you're not a fiduciary . And there's an obligation that you disclose what your obligations are under ERISA , under the exemption just your obligations of prudence and loyalty . There's no obligation to enter into a contract with the customer and in fact we go out of our way in the preamble to say and you're welcome to specifically disclaim any remedies outside of whatever ERISA provides . You can say listen , we are not committing to give you any contractual enforcement right of any sort . You just get what you get under ERISA and that's it .
Brian GraffAnd that's all we intend Very important distinction between this final rule and what you know , what you all did in 2016 . So so back to the disclosure , because again this comes up . There is you mentioned this earlier this , this , this conflict or disagreement in terms of who's a fiduciary under what set of regulation . Sec has its own rules around who can and cannot call themselves a fiduciary . Generally , commission-based brokers can't call themselves a fiduciary under SEC rules if they're commission-based . But for this rule , a commission-based broker in fact has to say they are fiduciary , but only for purposes of Title I in the code .
Tim HauserRight , that goes back to what we discussed earlier .
Regulatory Compliance and Compensation Structures
Tim HauserIf you want to use Different regulatory regimes , use the word fiduciary in different contexts . Here , the only acknowledgment that would be required to use the exemption is that you're a fiduciary under Title I or II of ERISA . You're not required to acknowledge fiduciary status under any other regulatory regime . You're not required to say you're a fiduciary under any other regulatory regime . You just have to acknowledge your fiduciary status under Title I or Title II of ERISA . You do If you're , especially if you're , in the retail market , you I mean , I just would caution you want , you want to be careful about the titles you kind of throw around .
Brian GraffIf you're , if you're looking to avoid fiduciary status , you want to be kind of careful about you know I've gotten some feedback from some in the insurance world that there's some value to them being elite , Some of them by no means a majority . This is probably that they embrace .
Tim HauserCan I ? Yes , can I say something about that ? I just want to . So a lot of our conversation today , brian which is completely understandable has been focused on different ways . People can not be fiduciaries under this rulemaking and I understand completely where that's coming from and really I enormously appreciate the questions because it kind of tells me that a whole lot of the people you're talking to are looking at , they're trying to figure out how this works and when they're in and when they're out , and they're trying to figure out , I think , compliance issues . But questions like when is an actuary a fiduciary and the like . They're important obviously to those folks , but it's not at the core of this rulemaking . I mean , what this rulemaking is chiefly going to affect are broker-dealers , insurance agents , financial planners , people who really are kind of unquestionably making investment recommendations , and the question is when are they being fiduciaries , and what I'd like to say is I mean , I do understand everybody's desire to avoid fiduciary status , because people would prefer not to be regulated , no doubt .
Tim HauserBut I think that I just want to again stress that this rule is , at its core , pretty straightforward . What it asks of you is that your recommendations be prudent , that they be loyal , that you don't overcharge , you don't mislead people and that the firm you're working for has policies and procedures that make that happen . They , annually at least , look back on the year and see whether or not their controls seem to be working . And that , if you're going to use the exemption , you acknowledge your fiduciary status and there's some disqualification provisions if you do fairly egregious things , including committing felonies . But a court's going to have to decide that and that is .
Tim HauserThose are the obligations , and I don't believe there's , when we're talking about the kind of investment recommendations that are mostly what this rule is going to cover recommend , you know , recommendations of securities , commodities , real estate , investment strategies and those sort of things . I don't think there is a single market where somehow people cannot effectively compete and serve their customers under standards that require they be prudent , loyal , don't mislead the customers and don't overcharge them , and so some of these arguments I've heard from folks who are actually in those industries recently and are saying this is , you know , just expressing enormous apprehension or suggesting that maybe something really bad might happen by virtue of being out to these obligations I well , let me , let me . Let me , let me try . I have more confidence in these industries ability to give prudent , loyal advice that doesn't involve misleading or or or overcharging people than than sometimes I think that the industry does Well , I think .
Brian GraffI think maybe you know part of it is you know the fact that they're having to change the way they feel like they have to the changes , the way they feel like they have to change the way they have to do business .
Brian GraffAnd , yes , a big part of that is compliance , which is what's driving a lot of the questions for me that I've gotten that we're discussing today .
Brian GraffBut related to your point in terms of business models , the final rule in its policy procedures kept a statement that financial institutions may not use quotas , appraisals , performance or personal actions , bonuses , contests , special awards , differential compensation or other similar actions or incentives in a manner that is intended or that a reasonable person would conclude are likely to result in obligations that do not meet the care or loyalty obligations .
Brian GraffYou know we've discussed this sentence before , in particular gotten lots of questions around differential compensation , because you know you go out of your way in the preamble saying we're not intending to ban differential compensation , ban differential compensation , but then in the exemption you've got this standard that says you can't do differential compensation in a manner that a reasonable person would conclude it doesn't meet the care or loyalty obligations and people are struggling with that and maybe if you could give an example of what , how you would perceive differential compensation operating or working , that would be consistent with that . I think it might help . I'll be perfectly upfront with you the way people are responding to this . They're basically saying that they don't see how you can square differential compensation , in the context of that sentence , with the care and loyalty obligations . They're struggling with this where , unless there are differences , you know meaningfully different products or services .
Tim HauserObviously , and so no , but right , I mean that's one obvious point . I mean to the . I mean one way to comply is you make sure that you haven't created any particular financial incentives as between products all of which kind of require the same level of effort and the like . But you can draw distinctions where different products require different levels of effort or different , and then you can monitor especially closely maybe the you know on the border between you know when people are choosing between those categories and the like .
Brian GraffRight . So , for example , I can make , I can make a very , actually I can make a very strong argument that if I , you know , am recommending an annuity , which is , you know , very complicated transaction , that there is a , you know , particularly depending on the product , where you know a commission based fee is going to be more sensible than a buy and hold strategy for the type of income that this is producing . That you know that the commission based annuity product versus a , you know , target date fund , the differences are , you know there's a reasonable basis for those differences is the argument I'm saying . But is it fair to say , as many people have been looking at this , believe that if you're really choosing from among the same set of the same type , let's say same category of investments , let's say it's the same set of fixed index annuities , three different options but all fixed index , no distinguishable difference in service levels involved in terms of those three products , hard to imagine how differential compensation would be okay in that scenario .
Tim HauserYeah , I mean if I were building a compliance structure myself in those circumstances . But you know I'm not in this business . But I would really want to hear a justification . If I'm giving you know more for one product rather than another , that kind of is aligned with the customer's interests . You know , before I signed off on that , if I didn't have something like different levels of effort , different you know kinds of products and the like . But that said , I think in a way that is a very efficient , practical way to manage and mitigate conflicts is where you have ready opportunities just to make sure that you're not creating financial incentives between products to avoid them . And to levelize said we don't mandate that .
Tim HauserI mean and I think my view would be one can imagine a variety of scenarios in which it's kind of unavoidable or where the thing that seems facially kind of levelized actually creates a weird incentive . Some things are just easier to recommend , even though levelized , than others may be . You know what I mean , and I don't know that we're in a position right now to tell people structure your compensation this way or that . The key thing from our perspective is if you do have something that raises concerns about whether you're incentivizing people to make a recommendation , not because it's in the customer's best interest , but because the advisor sees a personal advantage in making that recommendation . You want to have an answer to why that incentive is there or what you're doing to manage it . And it could be part of what you're doing is I'm going to have heightened supervision at that point . I know that this product creates some temptations , maybe that aren't there for others , or this compensation does , and for that reason I'm going to have red flags , or I'm hoping that folks take the retrospective review requirements seriously . I mean , part of the idea is you create a good faith compliance structure that aims at making sure that your folks are not , you know , incentivized to make recommendations that run counter to the customer's interest and then when you're looking back you see , did that work ? Are people actually complying with this obligation ? Are they making recommendations that are prudent and loyal and don't overcharge ? And if they aren't , then you tweak it and you make adjustments . If they are great , but we're a little bit right now . I certainly would . I mean , I can honestly say , in many circumstances I think levelizing is your absolute best thing , but it's not always and it too can involve perverse incentives and we can't get rid of conflicts in this space . I mean , you have , in a sense , you have differential compensation every time . Your compensation is transaction-based in a sense . Right , I mean , if they engage in the transaction you're compensated , if they don't , you get zero . Still , we're not saying , oh , it's impossible to do that . No , we're saying you're going to have to supervise .
Tim HauserAnd the other thing on that score and I'm glad you brought this up , because I almost forgot we had said something in the preamble to forgot we had said something in the preamble to the proposal we suggested that we have special concern about , like trips and training events and stuff that are used as incentives for people , which we do . I mean you have to be careful about making sure that , like the one thing that stand , the only thing standing between your advisor and you know , an all expenses paid luxury trip should not be an imprudent recommendation . You know you want to make sure that . What's driving that ? But we said in the proposal , we suggested , that we don't see how you could do that if you're making the trip or the training contingent on the volume of sales . And boy did we hear from people on that .
Tim HauserYou know people said what are you ? Come on , I'm relying on independent agents and they're not selling my stuff and I should be sending them to a training event . I mean there has to be some recognition that you know , volume can matter for these purposes . And I would have to say I mean that's one example where I think commenters correctly pointed out that we got that wrong . Not by the same token , watch those trips , watch that training . Don't create , you know , do not , you know , create perverse incentives that make that . Let me , let me , let me try , but but you know it's , none of these rules are . This is a rule of reason . It's about managing the conflicts .
Brian GraffSo let me let me try to clarify the point about education that you just made . Is it correct to say , under the final rule , that attendance at a conference or educational event due to an ongoing business relationship is permissible , but that attendance that is premised on the sale of certain products may raise concerns ?
Tim HauserWell , I mean any of it could raise concerns If it's a legitimate training event and it's Sure , let's assume it's a legitimate training .
Brian Graffyou know , there's plenty of education , all that stuff .
Tim HauserYeah , I mean you just want to be careful about again is the training event . Are you creating an incentive for somebody to , you know , make a recommendation that violates the standards ?
Brian GraffIn other words , if you want to be carrying this product versus that product , kind of thing where there's differential compensation .
Tim HauserRight , that could be an example . It could be just . You know , it's nominally a training event , but it's pointedly noted that the training goes on from nine to 10 and T times a 10 .
Brian GraffI think that's a general concern for FinBud Right .
Tim HauserI mean we're no different than others on that score , but , on the other hand , you absolutely can take into account . It can make a difference on whether you're going to subsidize a trip , whether they're actually making the investment recommendations for your firm in the first place , and and and and there's nothing that should deter people from offering legitimate training and education if , if they're carefully managing any any you know potential adverse .
Brian Graffyou know conflicts , so you know .
Rollover Disclosure Rule Clarifications
Brian GraffGoing back to the , you know we're talking a little bit about rollover context here and so you know , to some degree , for the folks in the insurance world , I actually think the final rule favors insurance relatively speaking . Let me explain why insurance relatively speaking . Let me explain why Because I believe , based on everything you're saying , that it is much easier to justify and validate why rolling money out of a plan into an IRA for a lifetime income product as opposed to rolling money from an IRA into a set of , you know , investment options that are comparable to the ones that are already in the plan , because plans very rarely today offer lifetime income solutions in a defined contribution environment . Is that a fair statement ?
Tim HauserTo me , everything is dependent on the particular product . But yes , I think I mean it is that people don't always think about their retirement in terms of lifetime income and you know , how is this income ? How am I going to not outlive my money ? That is an important problem for people and annuities can be a great solution for that . And they can be unique and sometimes your plan doesn't often , plans don't often offer that , and that can justify a recommendation like that . You know , assuming it's a good product , I mean .
Tim HauserBut again , to me , I mean I do think we get more opposition to this rule from the insurance industry than from any other segment . Far be it for me to tell them what's in their long run financial interest , what's in their long run financial interest . But to me , part of the reason there is a natural reluctance . People have to turn over a lifetime of savings to an insurance company maybe to any firm , but especially to an insurance company that's based on a promise of a future income stream . That's just like psychologically hard for people , I think , but I do think it's and the more you can build up trust and confidence in this marketplace and the more people feel like , hey , when these people make a recommendation to me . They're willing to stand behind it and it's going to be prudent , loyal and not overcharges or misleading me . I feel like that's going to redound to the benefit of the industry in the long run and it may help , you know , it may help encourage and promote annuity sales , it seems to me .
Brian GraffNo , I think that's an interesting take and so you know . Another change with respect to the rollover disclosure is well . Yeah , this had to do with fees and costs . Previously , under the proposal , you had to disclose that upon request , disclose that it was available . Upon request , you change that so that you have to disclose fees and costs upfront . Can you discuss what was driving that change ?
Tim HauserHonestly on that issue . I'm not sure there was a huge change on that score . I'd have to go back to look at the proposal to remind myself . I hate to say it , that's okay .
Brian GraffI mean just . You know . As we understand it , the PT now requires financial institutions to provide upfront disclosure of fees and costs , but previously there was a disclosure that those fees and costs were going to be made available upon request , and so that yeah , I think there may have been a little talking past each other on what the initial disclosure was supposed to include .
Tim HauserThat may be , to my mind at least , we were as much clarifying what was intended in the first place as anything . We did intend a two-step kind of thing where there'd be some basic disclosure up front about the basic fees , conflicts and the like , and then you could ask for more detail in the second .
Brian GraffYes , yes .
Tim HauserAnd we dropped the upon request piece . We no longer mandate that at all .
Brian GraffSo you're saying , basically , the point being that you want those fees disclosed up front . So also there's this requirement with rollovers from plans that they have to show , you know , some type of comparative analysis between the fees in the plan and the fees in the potential IRA .
Tim HauserOn the rollover .
Brian GraffOn the rollover yeah , but there is discussion in the preamble about the use of reasonable estimates . Can you kind of walk people through that ? You know what you're envisioning that process to be . What do they have to do first in order to be able to rely on an estimate ?
Tim HauserYeah , there were some Qs and , as we put out in connection with 2020-02 , as before it was amended , that discussed a little bit what our expectations were in that regard . I don't think that's changed . I mean , first and foremost , you want to actually get a handle on what the fees and expenses are for the participants , so you want to try and get the actual information on their particular plan . If you can't , there will be circumstances where , for whatever reason , you can't get that , or you know , if you can't , then you can use kind of , but you need to make some good faith effort to get them .
Tim HauserMake a good faith effort to get it and you can use proxies if need be . And , you know , be clear with your customer on the . You know I'd be better off if I could get this information . I can give you more precise advice , but you know you do your best and you work within the limits of the information you have . I think is the answer , and sometimes that means using a variety of benchmarks and services to get there .
Tim HauserWe require that documentation . This is another change from proposal to final . But we require that documentation for plan to IRA rollovers . But we don't require it anymore under the exemption for IRA to IRA rollovers . But we don't require it anymore under the exemption for IRA to IRA rollovers , which was responsive to a number of comments . I mean , there's still the issue for , from a compliance standpoint and if I were running somebody's supervision structure , I would still want the documentation , I'd want to make that record . I you know , and there's no such you it's hard to see how you make a prudent recommendation without taking into account , well , what are you invested in now and what are you giving up and what are you gaining by moving from it ? But we don't require the documentation except for the plan to the IRA context , which was just fairly core to what we were trying to achieve here , which was just fairly core to what we were trying to achieve here .
Brian GraffSo another factor that you know should be considered by the fiduciary advisor with respect to rollovers is the degree to which employer or another party pays administrative fees , and that's created some confusion because you know obviously there's an audit fee that the plan sponsor pays . I can't imagine that's relevant to the rollover transaction .
Tim HauserI don't think that's the point at all , yeah .
Brian GraffSo what are you getting at here ?
Tim HauserWe're just getting at that . I mean , what matters obviously for this comparison is what you , brian Graff . You're a participant in the plan . What do you have under the plan that you're giving up ? What are you gaining or losing ? Right , but that can be a function and part of the fact that the employer's picking up expenses that you may now have to incur outside the plan .
Tim HauserThat would be reflecting right , that would you know in your particular experience it's it's , it's right , I mean it's , I mean I right now , if I , if I pulled my money out of the thrift plan , one of the disadvantages um a competing investment . You know , I'm in the federal thrift plan as a federal employee . Right , we have very , very low , very low expenses in that plan . I mean it's fairly low , partly because they're subsidized by the employer , also because it's just a huge , very efficient plan .
Brian GraffIt's the largest plan in the world .
Tim HauserThat's right , but I would want to take that into account .
Brian GraffBut that would still be looking at . You know , what am I paying out of my account ? Versus now , versus what I would be paying ?
Tim HauserI mean , I love the Department of Labor . I you know I love working for the government , but my focus in terms of what I'm invested in pre and post retirement will be on what's what I'm paying .
Brian GraffAnd that's what makes sense to us too , so I appreciate the clarification . Finally , on rollovers , there was a change in terms of when the rollover disclosure is required . It's no longer required from rollovers from IRAs to another IRA . Can you talk a little bit about what the thinking was there ?
Tim HauserIt really was . Just we made a deliberate effort in this in going from proposal to final in the exemption to make the exemption as usable as possible , to encourage take-up of the exemption , to get people under the fiduciary umbrella I mean to encourage them to use the exemption , which we think is the core conditions are really good and , as I said , they're really important to us . If we were to lose those through litigation or otherwise , we'd have to rethink . You know all the conditions here . But we really wanted people , we wanted to encourage take-up , we wanted people to use the exemption , we wanted to minimize the cost and the burden associated with it , and so we made some decisions that were really chiefly based on that .
Tim HauserWe just , you know , we were especially concerned about the plant IRA rollovers . That's where we chiefly seen problems and where we had concerns , and we were hearing from a fair quarter of the industry that IRA to IRA rollovers presented unique you know information challenges for them and we're causing them undue concern . So we made that call . I mean it's kind of the same . On the disclosure provisions , if you look at our disclosure provisions in 2020-02 , you'll see we've lined up pretty significantly with Reg BI and it's partly for that same reason . We really wanted to build a structure that , if you're already complying in good faith on a strong regulatory regime , keep doing that . We're not going to make it hard for you to be prudent , loyal , not overcharge people , not mislead them . We want you in and we want you doing that so that I don't . That really , I think , was the chief thinking there .
Brian GraffVery good . Last question Can you generally explain the effective date ? And then I got a follow-up clarification question .
Tim HauserAll right . Well , chances are slim that I'll be able to . The applicability dates are essentially five months . In five months , the impartial conduct standards , the rule itself by the way , that's September 23rd , in case you're counting Thank you .
Tim HauserOn September 23rd five months from publication in the Federal Register , I assume then the fiduciary advice definition goes into effect , but the only part of the exemptions that will be required at that point if you have conflicts that need an exemption are going to be the impartial conduct standards , which are prudence , loyalty , not misleading people , not overcharging them and the fiduciary acknowledgement . The other pieces of the exemption go into effect one year after that five-month date , so September , what is that ? 2025 ?
Brian Graff2025, .
Tim Hauseryes , yeah , and that's the period . So I mean and again , that was also responsive to comments People thought that we were over-optimistic and how soon people could be in compliance with that .
Brian GraffSo just to clarify , the question really is around the retrospective review review . Is it accurate to say that in 2026 , which would be the first retrospective review would only be with respect to that partial period between September ?
Tim Hauser23rd 2025 and the end of the year . Well , I'm going to give an answer because I'm incapable of not giving answers . I'm going to give an answer because I'm incapable of not giving answers , but I'm going to qualify it by saying I may have to look and correct it , but I think the way we structured the rule is that all those other obligations , including the retrospective obligation , kick in after that one year period , after that one year period . So I think the way it would work is you don't have the retrospective obligation until you get to September of 2025 . And at that point you have an obligation to do it at least once a year . So I think you need to do the retrospective review at some point .
Brian GraffEven retroactive , before the September .
Tim HauserI think I again I'm out on a limb here . I'd have to go back and look at this detail , but I'm not so sure . There's not . I think you want your policies and procedures done and standing up as of September 25 . I think you have the retrospective review is going to be a year after that , potentially right , and then you're going to be looking back at how did those policies and procedures work in practice over this proceeding year . But I need to go piece through . I need to parse that language myself .
Brian GraffWell , we got a little bit of time , but note that that question is coming up .
Tim HauserAnd you know once , when we get there , where you were with respect to 2020-02 . We did want to make sure that people who , in good faith , built strong structures to comply with regulation best interest in 2020-02 were rewarded for that , in the sense that those efforts did not go for naught , and I think we succeeded in that . I mean , I think if you took those rules really , really seriously , the exemption seriously , you're in good shape . Your compliance burden should be fairly minimal . But some folks haven't built those structures at all , didn't view themselves as subject to them , haven't done that work .
Tim HauserObviously , we're aware of that and we're aware that different investment products in different categories of firms are going to experience the burden here differently . Our goal in the near term is to get people who are in a position of trust and confidence with their customers to act accordingly and to get into compliance . Our goal is not going to be to , like you know , go after people for foot faults or or , or , um , um , you know , slam folks who are making a good faith effort . But made a different call that I would have made , you know I mean and do you think that that general enforcement theme will last until ?
Tim Hauserit'll last , for I mean for . I mean it'll last . Certainly it's going to last through the entire transition period . I mean I can't really speak for the future administration .
Tim HauserBut I would be shocked if that wasn't the attitude . You know we're much more interested in promoting compliance here than bringing enforcement actions and we do
Seeking Feedback for Improvement
Tim Hauserwanna figure out . Well , where are the issues , where are the questions , where are the ambiguities , what are people struggling with ? And people don't necessarily wanna call me up and tell me , but I wouldn't . If they could get over their suspiciousness , I'd encourage it . I feel like if you tell us where the problems are , where compliance issues are , where you think there's some issue of workability , we can work with you on it . If I don't know about them , I can't help you the same way you know .
Brian GraffOn that positive note , let's close there . Thanks , tim . This is . You know we covered a lot . It's been incredibly helpful . Really appreciate your time , thank you .