Jeremiah Ntepp: Department of Labor Fiduciary Rule Rewrite Poses Severe Repercussions on Middle-Class Americans

Jeremiah Ntepp

Inaccessibility, raised costs, fewer choices and a policy that would exacerbate the racial wealth gap. That would be the reality if the Department of Labor’s previously flawed fiduciary rule resurfaces.

The rule seeks to increase consumer protections. That doesn’t sound bad. But investment professionals - including those offering retirement advice for 401k rollover benefits - are already required to put their clients’ interests before their own. This new rule wouldn’t change that. It would, however, change how savers can access retirement products, what products they could use and what savers pay for that help.

Today, someone looking to open an Individual Retirement Account (IRA) can work with a professional of their choice. That professional might be a broker-dealer, or that person might be a registered investment advisor. Both professionals are required to make recommendations in their client’s best interest, but there are differences in how each professional is paid and who they work with.

The fiduciary rule under consideration by the Department of Labor would make it very difficult for broker-dealers (who are more affordable and accessible to smaller savers and communities of color) to offer the same services to retirement savers that they offer today. The rule specifically targets commissions and other practices that allow broker-dealers to keep their costs down.  Under the new rule, most retirement savers would be left with registered investment advisors to turn to for help. That’s where the problems come in.

Registered investment advisors typically charge on-going fees and will only work with savers who have $100,000 or more in the bank. They also provide services that many “buy and hold” savers do not want or need. 

Under the proposed DOL rule, many savers with small retirement savings would be left on their own. These savers do not meet the account minimums set by registered investment advisors, nor can they afford to pay new annual fees. 

Suggesting small savers and BIPOC will be disproportionately hurt under a new DOL rule is not an exaggeration. Recent history gives us proof.

According to a Deloitte study - conducted after DOL attempted to implement this rule in 2015 - nearly 53% of financial advising firms limited or eliminated access to brokerage advice for small retirement accounts, due to increased costs of compliance and oversight. This change impacted an estimated 10.2 million accounts; or over $900 billion dollars in retirement investment savings. And, 95% of firms reduced the choices of retirement products (mutual funds, annuities, etc.) that savers could access because of the rule.

Similarly, a recent study released by the Hispanic Leadership Fund (HLF), found that the proposed fiduciary rule would raise costs for everyday investors, because fees-based advisors are often more expensive than those who operate on a commissions basis; meaning that people who opened Individual Retirement Accounts (IRAs) with a commissions-based advisor will pay 75 to 195 percent more for retirement guidance.

For communities of color, working with a financial professional can mean the difference between being comfortable in retirement or not. We know that financial literacy and access to savings vehicles in our communities are key to closing the racial wealth gap. And while in a well-meaning way, the new rule seeks to address perceived conflicts of interest, the way it does so would further disadvantage consumers who already have to jump over institutional hurdles.

There is a better way forward. A few years ago, the Securities and Exchange Commission (SEC) took a different course. The SEC determined that consumers benefit from being able to seek advice through different channels.  Rather than eliminate some sources of help, they published their Regulation Best Interest that says whether a professional earns a commission or gets paid by a fee, they must put their client’s best interest first.

The SEC got it right. The DOL should work to further harmonize its rules with the SEC, rather than striking out on its own.  Now is not the time to introduce another “solution” that would cause a loss of access and choice and affordability to financial products that could help BIPOC communities save.

Jeremiah Ntepp Bio: Miah Ntepp serves as Policy advisor and civil rights leader for the Denver Chapter NAACP as well as a local political staffer who researches and tracks legislation in Colorado; he is also a deep-rooted Black rights activist. A strong believer in the power of progress, Miah regularly campaigns on platforms to implement equity and support for all regardless of zip code, ethnicity, or socio-economic status. Miah continues to advocate for his local neighborhood Montbello, as well as for progressive policies that implement health and equity for all.