The Department of Labor has sent its proposed fiduciary rule to the Office of Management and Budget for review. Here's where we're going and where we've been with the proposed rule.

Amendments to the proposal published last year have likely been made, based on the thousands of comments from stakeholders generated from two comment periods and four days of open public hearings last August.

OMB must review rule - 60 to 90 days

But those amendments won’t be made public until the OMB finishes its review of the rule.

Typically, that process takes 60 and 90 days, depending on the magnitude of the proposed regulation.

Review period by lawmakers - 60 days

Upon completion of the review, the Congressional Review Act requires a 60-day review period by lawmakers before a regulation can be officially finalized.

Any legislative effort to derail the rule’s finalization will have to survive a veto from the White House.

Next Tuesday, the U.S. House of Representatives Education and Workforce Committee will hold a mark-up of two companion, bipartisan pieces of legislation crafted as alternatives to the DOL’s rule.

Culmination of a more-than 5-year effort

The DOL’s proposal is the culmination of a more than five-year effort by the Obama Labor Department to address what it says are inherent conflicts of interest in the distribution of retirement products and advice to the IRA and defined contribution markets.

Read: The DOL Fiduciary Rule page

Shortly before the DOL’s proposal was first made public last year, the White House released a report from the President’s Council of Economic Advisors defending the necessity of addressing conflicts of interest in the financial services industry.

The report estimated that $1.7 trillion of IRA assets are invested in commission-sold products that generate conflicts of interest.

That results in losses of $17 billion a year to investors, the report claimed.

The DOL’s first attempt to propose a fiduciary rule in 2010 was criticized for not providing a robust enough cost-benefit analysis. That proposal was ultimately withdrawn.

The second DOL attempt at a fiduciary rule

When it released its second proposal last year, the DOL included a detailed cost-benefit analysis of the regulation, estimating that complying with the new standard would cost industry between $2.4 billion and $5.7 billion over 10 years.

For however expensive that may be, the DOL said its proposal, which would hold most advisors to sponsors of 401(k) plans and all advisors of IRAs to a fiduciary standard of care, would result in $44 billion in investor gains over 10 years.

“These gains alone would far exceed the proposal’s compliance costs,” said the DOL in the proposal’s cost-benefit analysis.

Industry groups and sector analysts have called into question the accuracy of those estimates.

In a letter it sent during last year’s open comment period, the U.S. Chamber of Commerce called the DOL’s cost-benefit analysis “arbitrary” and “capricious.”

The cost of disclosure requirements under the proposal’s Best Interest Contract Exemption provision will cost industry 10 times the DOL’s estimates, said the Chamber’s comment letter.

New letter from the U.S. Chamber of Commerce

Today, the Chamber sent a new letter to Shaun Donovan, the director of the OMB, raising concerns for what it says is “DOL’s failure to properly assess the economic impact” of the proposal on small businesses.

Specifically, the DOL failed to allow the Small Business Administration’s Office of Advocacy to provide a panel review of changes the DOL made to the rule before it was sent to OMB.

The Chamber is calling on DOL to share its final proposal with the SBA advocates. In lieu of that, the Chamber is calling on OMB to conduct its own new independent economic analysis of the proposed rule’s impact on small businesses.

The DOL’s proposal includes a “seller’s carve out” that would exempt advisors to 401(k) plans with more than 100 participants from complying with the rule’s disclosure requirements.

Assuming that provision has not been amended or withdrawn, advisors to plans with fewer than 100 participants would have to comply with the proposals Best Interest Contract Exemption.

That will create increased costs and liabilities for small plan advisors that will be “grossly disproportionate to the benefits of servicing small plans and low-balance accounts,” says the Chamber.

Advisors will pass those costs onto small-business plan sponsors, or simply stop servicing them altogether, the letter added.

In passing increased costs on to employers, some small business sponsors may be forced to reduce or eliminate matching contributions to savings accounts, putting them at a competitive disadvantage with sponsors of large plans that will be better able to attract talent with richer retirement benefits.

Some businesses can be expected to stop offering retirement plans as a consequence of the DOL’s rule, claims the Chamber.

The Chamber’s latest allegation that the DOL’s cost-benefit analysis failed to consider the proposal’s financial impact on small businesses comes as The White House and Congress are working to advance legislation that would increase small business employees’ access to workplace retirement savings plans.

More than 5.5 million businesses in the country employ less than 100 workers, and half of those businesses don’t offer retirement plans.

Lowballing costs

The Financial Services Institute, a trade organization representing the interests of independent broker dealers, also claims the DOL lowballs the rule’s impact on industry in its cost-benefit analysis.

FSI says the rule will cost more than $3.9 billion in start up costs, or more than 20 times the DOL estimate.

Analysts at Morningstar have said the DOL vastly underestimates the rule’s impact on industry.

About $3 trillion of client assets and $19 billion of revenue at wealth management firms will be impacted, according to one Morningstar report.

Moreover, up to $600 billion of low-value IRA accounts can be expected to be let go by full-service wealth management firms, as compliance with the rule will make those accounts too costly to maintain, says Morningstar.

Of the 25.8 million IRA counts examined by the Employee Benefits Research Institute, about 45 percent held less than $25,000 in 2013.

In a more recent report, Morningstar analyst Stephen Ellis, director of financial services equity research at Morningstar, wrote that even the highest estimates of the rule’s cost on industry are low, because they only focus on the cost of implementation.

Those high-end estimates put the rule’s cost at $1.1 billion to industry, but Ellis thinks the cost will be closer to $2.4 billion.

The question of DOL’s accuracy in estimating the cost of its rule could lay the groundwork for legal challenges by the rule’s opponents.

In recent years, courts have blocked final implementation of two Securities and Exchange Commission regulations based on a failure to accurately establish the economic impact of rulemaking.

In 2012, new regulation on proxy access was blocked, and in 2010 new regulation on fixed-income annuities was blocked, both by the District of Columbia Circuit Court of Appeals.

Instant Insights /

DOL fiduciary rule sent to OMB: What's next and where it stands

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