Borzi says she is pushing through Bush administration initiatives; her expansion of the fiduciary standard is drawing ire

March 8, 2011 — 3:24 PM UTC by Elizabeth MacBride

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If you had to choose one word to describe Phyllis Borzi, it would probably be Formidable. The Assistant Secretary of Labor has been a force in Washington, D.C. since the early 1990s, when she served on Hillary Rodham Clinton’s health care reform task force and was serving as a lawyer on a House subcommittee working on health care issues.

Now, she sits in a chair at the Department of Labor – head of the Employee Benefits Security Administration, which oversees 401(k) plans and has sway over the IRA market, too – that gives her the power to reshape investment advice to, she says, help participants and small companies. During her tenure, the Department of Labor has been pushing through a host of regulations that would force service providers to disclose fees and limit conflicts of interest.

The regulation under current debate, which would broaden the definition of fiduciary so that it applied to many more service providers, was the subject of a hearing last week. See: DOL’s proposal puts the screws to legacy 401(k) providers. The regulation is due to be finalized by the end of the year.

Borzi smiled often at that hearing, but not in sympathy to the industry’s loud wailings. When witnesses – there were many, from some of the biggest retirement companies in the country – challenged her, she listened, allowed her staff to drill down on specifics, and mostly batted away their objections.

“First and foremost is that she knows what she’s talking about,” says Ed Ferrigno, vice president Washington affairs for the Profit Sharing/401(k) Council of America. “If you’re going to debate her, you’d better be prepared with some facts.”

A witness himself, Ferrigno came away unscathed – probably helped by the fact that the Council supports the regulation with some relatively minor changes.

Under regulations issued 35 years ago, a service provider is a fiduciary only if they pass a five-part test. The new regulations would extend the definition of fiduciary to include advisors who are giving advice to a plan on a one-time basis, and advisors whose advice does not necessarily serve as a primary basis for plan investment decisions. The proposed regulation also says that people who call themselves fiduciaries will be held to ERISA’s fiduciary standard, even if they later try to claim a legal exemption.

It’s thought that the regulation may benefit investment advisors because they already operate in a fiduciary model. The CFP Board of Standards supports the regulation with some modifications; the IAA has suggested some revisions but is not opposing the rule.

Too broad, not ready for prime time?

However, others, including Borzi’s predecessor, Bradford Campbell, a Bush administration appointee who is now of counsel at law firm Schiff Hardin, say that the regulation is too broad and would result in service providers abandoning the market, as well as higher costs to small plan participants. He also questions the legal authority for extending the law to the IRA market, and says the DOL has not done an extensive enough analysis on the cost of the regulation.

“How much more is record-keeping going to cost if you can’t have an bundled service provider?” he asked. “This thing (the regulation) is not ready for prime time.”

In the Q&A below, Borzi said that part of what she’s doing is pushing through many regulations that were started under Campbell. He took issue with that, saying by e-mail; “I have great respect for Assistant Secretary Borzi, but she and I disagree on a great many policy issues. While she did complete the final regulations on fee disclosures (the 408(b)(2) service provider fee disclosure and the 404(a) plan disclosure to participants regulations) in a manner largely consistent with the efforts of the Bush Administration, she generally has charted a radically different policy direction on most other initiatives.”

Giving a notch here and there, Borzi is making it clear that she intends to keep driving for reform.

“The types of arrangements that are out there in the marketplace now, don’t provide the kinds of clear unbiased advice … that people need,” Borzi said. “I think it’s really important that participants have access to unbiased, timely, reliable investment advice. The world has gotten way too complicated for people to be able to make all those choices on their own.”


Q: Why did you take this job, and what is your mission here?

I’m absolutly committed to public service. What I saw over the years was that the relative balance that Congress established in ERISA between protecting employees and not overburdening employers had shifted. What I saw was a statute that had gotten out of balance.

I am unabashedly a pro-worker, pro-retiree person, but I don’t see that there’s any mileage in it to overburden employers. I’ve always worked well with all the various interest groups.

I thought it gave me an opportunity with nearly 40 years of experience I had to try to help restore that balance.

In addition, I saw a lot of things on the regulatory agenda that were unfinished business from the Bush administration. They were things like fee disclosure.

It might seem somewhat odd for someone like me to be complimenting the Bush administration. But they were focused on the good things. I saw that it was my job to take (those regulations) across the finish line.

That looks like we’re doing a lot. But nothing that should come as a surprise.

Q: Why wasn’t the Bush administration able to take those regulations across the finish line?

I don’t know the answer to that. The couple of things that they did put out in final form were extremely controversial.

Q:What characterizes “unbiased advice” for people saving for retirement?

It’s a lack of conflicts of interest. It’s making sure that people aren’t being steered to one product or another product because of a financial interest (on the part of the person giving them the advice).

We went through this discussion at the hearing: whether a fiduciary has a responsibility or is able to put a finger on the scale to favor participants. We didn’t mean that. We’re talking about straightforward, correct advice that is not tainted.

Q: Is fee-based advice a better model?

I’d have to give that more thought. There are certainly pros and cons of the fee-based model. There are pros and cons of every model. I don’t feel absolutely one way or the other about this.

We already have an exemption for receiving commissions. Certainly if we need to look at that exemption … if we need to revise it, we would.

Q: When it first came out, this regulation was seen by the industry as perhaps less consequential than the fee disclosure rules. Now, it seems that because of drafting issues, the industry is in somewhat of an uproar. Will the DoL consider proposing a new regulation rather than revising the old one?

There are many ways to deal with drafting. One of the ways is to just sit down with people and just fix it.

Q: Should the DoL defer to the SEC, waiting for new rules to be issued on the fiduciary standard, because of the commission’s Congressional mandate? Why or not?

What I really heard people saying at the hearing was that somehow we should grind to a halt until the SEC or the FTC issues rules. What they were saying is that we should wait. If we did, then the pressure will be on us to simply abide by those rules.

But the fiduciary standard under ERISA is much higher than under security laws. Even the SEC folks, with whom we’ve been working closely, they’ve been encouraging us to move forward.

As I said at the hearing, though it didn’t appear that the witnesses heard me, was that we actually sent our proposed regulation to the SEC for their comment and input. ... They would have flagged it at that point if they had seen an issue.

We’ve identified a handful of issues on which we need to coordinate.

One of the witnesses said: Coordination is just talking.

We’re actually trying to harmonize. It’s not likely that we’ll come to the conclusion that we’ll need to defer to the SEC and adopt some lower fiduciary standard.

Q: Is it fair to ask companies to exist in two parallel fiduciary universes?

It’s quite common for an entity to be subject to multiple legal regimes. ... It’s just the way things are.

We take seriously the concern that we need to work closely with the SEC and the other agencies. ... What we need to do is make sure that people that can comply with Dodd-Frank and other rules without violating ERISA.

Q: Part of the fiduciary regulation says that if you call yourself a fiduciary, the Department will hold you to that standard. How impactful will that be? How many companies and what kinds of companies will be affected?

It’s critical. Think about it. You’re an investor. You’ve got this money. You’re not an expert. Somebody comes to you and says they are an expert, and then says: ‘And by the way, I’m to agree to being a fiduciary … I’m even going to put that in writing.’

You, because you trust this person, agree to it.

It turns out this person has caused a loss and so … what is your recourse?

We can’t look to the investment advisors. We wind up in essence going after the people who are the victim: the small and medium-sized companies.

They are the people who will benefit from this. They are the ones left holding the bag.

Right now, when something goes wrong, the participants ask investment advisors and broker-dealers … to be accountable. They don’t stand behind their advice.

They hide behind the five-part regulation.

Q: Some group annuity providers – and other companies — include a fiduciary warranty in their contracts and then right next to it, say, ‘We are not a fiduciary.’

You’re talking about disclaimers. When I as in private practice, I often xx’d those out. I don’t know that we’re targeting that set of providers, but people who hold themselves out to be a fiduciary will be held accountable. They can write all the disclaimers they want in 26-point font.

But if they actually are acting as a fiduciary, under this regulation, they’d be held to it.

Elizabeth’s note: After the Q&A ended, I squeezed in one final question, asking the DoL’s press office for an update on what’s known as the Participant Advice regulation (408(g)), which would make it much harder for brokers working with retirement plans to receive compensation from mutual funds. See: Why the DOL’s proposed 401(k) rules could ding brokers and leave the spoils to RIAs and IRA assets could be ripped from the grasp of brokers if DOL has its way. The DoL press office said, “We are far along in our development of a final rule implementing the statutory exemption for 'eligible investment advice arrangements’ in certain individual account retirement plans. The clearance process for regulations makes it difficult to predict publication dates with certainty, but we are not too far off the May 2011 target date indicated in our last semiannual regulatory agenda.

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Craig Morningstar said:

April 12, 2013 — 11:11 PM UTC

If you are an Advisor who knows exactly what a Named Fiduciary, Limited Scope 3(21), 3(38) is, and can speak to all the various aspect of ERISA and DOL….do us all a favor. Call fund companies and recordkeeper services providers…and ask if they serve in these roles. I had a shock today when I did just that, called service providers and asked what fiduciary service they provide. The questions were direct, simple and ment to test if they actually knew what they were saying. In a few words….they said they do all of the ERISA requirements. The DOL should call the recordkeepers and ask these types of questions….then send letters and let them know the difference. It is about time someone sets the guidelines, to stop the plan industry lies.

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