3 Big Gaps in the DOL's Case for Its New Fiduciary Regs

What You Need to Know

ERISA requires the people serving retirement savers to be fiduciaries.
One problem: Giving everyone the best advice creates groupthink risk.
Another: Performance analyses fail to consider the advisor that is not there.

Officials at the U.S. Labor Department don’t seem to want to use their new retirement investment advice fiduciary definition to destroy the lives of commissioned agents who sell annuities and life insurance.

They say, over and over again, in the introduction to the Retirement Security Rule and in a separate, related set of guidelines for insurance agents, that insurance agents perform useful work, that commission-based compensation is fine, and that carefully structured training trips could be fine.

They emphasize that they simply want to respect the Employee Retirement Income Security Act requirement that retirement savers get investment advice that puts their interests first.

But, whatever one thinks about the value and workability of the new requirements, it looks as if the Labor Department had a hard time getting hard data to support its analysis.

One weird gap: The department had no firm asset figures for the variable annuities and fixed annuities held inside individual retirement accounts.

The Asset Number That Isn’t There

The department relied partly on a Morningstar forecast that reducing conflicts of interest could help retirement savers avoid about $32.5 billion in non-variable indexed annuity costs over 10 years, by narrowing the portion of the “spread,” or difference between the issuers’ assets and the assets in the savers’ own accounts, going to pay for administration, taxes, compliance, and sales, distribution and marketing.

Morningstar assumed in its calculations that the new regulations could cut the cost spread to 1.25%, from 2%.

The Morningstar forecast is based on such an indirect analytical approach that Morningstar declines even to give an estimate for total current U.S. fixed indexed annuity assets or any kind of equivalent figure.

In other words: The Morningstar analysts say, after performing calculations based on non-variable indexed annuity sales and applying the spread changes, that the new Labor Department approach could squeeze $3.25 billion in costs out of the non-variable indexed annuity market every year.

But Morningstar has no way to gauge whether that predicted impact is big or small relative to the size of the non-variable indexed annuity market.

Morningstar, in effect, provided a numerator for a fraction without being able to provide even a ballpark estimate for what the denominator might look like.

ThinkAdvisor algebra suggests that, based on Morningstar’s figures, Americans might have $433 billion in non-variable indexed annuity assets, and that administrative costs, marketing costs and other costs eat up about $8.7 billion per year. But Morningstar declined to do its own math or check ThinkAdvisor’s math.

The Labor Department did not respond to a request for comment.

Of course, the department’s use of a numerator without a denominator is due at least partly to factors beyond its control. It relies on entities such as insurance, regulators, the Federal Reserve Board insurers, insurance groups and financial services data vendors for annuity market data. It doesn’t have magical abilities to conjure all of the data it or an observer might want out of thin air.

But, no matter why the gap exists, it is a symptom of the fact that it’s often hard for regulators to get basic information about what’s happening in financial services markets today. Predicting how new laws or regulations will affect the markets is, clearly, much more difficult.

The Diversification That’s Not There

Another gap in the Labor Department’s analysis is a failure to figure out what requiring all retirement savers to get “the best” recommendations about rollovers might do to U.S. investment market stability.

Economists believe that one force that might help the stability of the financial system is investor diversity.

Most investors follow the crowd, but some do their own thing.

The eccentrics may make a fortune in strange times. They can then bail their friends out and provide the seed capital for the new companies that rise from the ruins of the old order.

But the current focus on encouraging retirement savers to use the lowest cost, highest-performing arrangements is already herding typical retirement savers into giant target-date funds run by a few giant asset managers, and, as Marc Rowan, the CEO of Apollo Global Management, noted in November 2023, about 28% of the S&P 500 index stocks’ market value comes from the stocks of 10 companies.

Vanguard, which now manages such a high percentage of retirement savers’ 401(k) plan account assets that it has become many publicly traded companies’ top shareholder, warned the Financial Stability Oversight Council, an agency that’s supposed to watch for risks that could crash the financial system, that regulatory requirements that promote “groupthink” could be an important source of systemic risk.