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DOL Retirement Rule: Could The Way You Invest Be Changing?

September 8, 2015
DOL Retirement Rule: Could The Way You Invest Be Changing?

How well do you know your investments? That's a question the Department of Labor (DOL) is seeking to answer—and address—with a sweeping proposal that stands to change the way Americans invest in their retirement.

The DOL’s mission is a noble one: protecting investors from being inappropriately influenced to purchase investments in their retirement accounts by financial advisers not acting in the investor’s best interest.

But even the most well-intended actions can lead to unintended consequences. The DOL-proposed legislation has left many financial services providers and investors worried about how the proposed changes could alter choice and flexibility in tax-deferred IRAs, including the increasingly popular use of options strategies. Limited, too, could be many of the tools, research, and education currently offered within IRAs to self-directed investors—if the proposed rule goes into effect.

Outdated Regulation?

From the government’s perspective, the rule change would update and close loopholes in an investment landscape that is dramatically different from the four-decade-old investing climate during which the Employee Retirement Income Security Act (ERISA) was created. At that time, most retirement income was tied to traditional pension plans that guaranteed income streams.

Today, most Americans rely on defined contribution plans, including workplace 401(k)s, or corporate profit-sharing plans, as well as IRAs. The varied menu means that savers and investors are increasingly doing their own research—looking to online and in-person sources for financial information and education.

Conflict of Interest?

The DOL views the way in which some financial advisers are compensated as creating a conflict of interest with the investors receiving advice on products and services for their retirement plans and IRAs. They believe it is important that those advising retirement plans and IRAs be obligated to put the client's best interests ahead of their own. In fact, a White House Council of Economic Adviser’s study claims that the annual cost of this potential conflict of interest is one percentage point for retirement savers, equivalent to some $17 billion annually; however, others have found significant flaws with this study.

Today, registered investment advisors, known as RIAs, are fiduciaries who are required to deliver advice in the best interests of their clients, and if conflicts arise that can't be avoided most are permitted to be disclosed. As outlined in a recent White Paper by Morgan Lewis, broker-dealers are required to offer suitable products based on individual client profiles, and while operating under a different standard of care, operate within a comprehensive regulatory framework that includes anti-fraud provisions and the obligation to deal fairly with their clients and, according to FINRA Rule 2010, observe "high standards of commercial honor and just and equitable principles of trade."

The DOL's proposed rule will broaden the definition of fiduciary that will apply to both RIAs and brokers and require the same high standard of care when advising on IRAs and retirement plans and generally prohibit all conflicts of interest unless a specific exemption applies. The implications of this rule will result, in part, in the restriction of certain broker communications to clients, including education, call center support, and even being informed about the services that a broker has available to offer.

“Investment professionals operating in the securities industry in general, and TD Ameritrade in particular, have long supported a best interest standard when providing personalized investment advice about securities to retail investors,” says Ellen Koplow, Executive Vice President and General Counsel for TD Ameritrade Holding Corp. “But the broad-brush nature of this proposed rule fails to provide realistic accommodations for current business models or recognition of an investor's right to choose from a broad variety of products or services for their retirement accounts.”

The Big Challenge? Implementation

While the DOL proposal contains exemptions, the brokerage community widely sees them as onerous and unclear. Also, the assets brokers are permitted to offer to clients in an IRA pursuant to the key exemption are limited, which the DOL has not previously restricted. The DOL is concerned that certain assets are inappropriate for retirement accounts.

Take, for instance, the subject of certain derivatives, such as options, in broker-advised IRAs. Today, many investors use options in their IRAs to mitigate risk and generate income, supported by their broker through education, support, and tools. Protective puts and covered calls are commonly used strategies in IRAs. The DOL's proposed list of permitted assets in the exemption does not include any options, so even these most basic strategies would not be allowed. Steve Sears of Barron's opined that this ban would deprive investors of an important tool for protecting their portfolio.

“The DOL's efforts are laudable, and financial advisers are in general agreement as to the way in which investor's interests should be taken into account when advice is given," says Steven Quirk, Senior Vice President, Trader Group at TD Ameritrade. "But passage of this proposed rule without modification to address its serious flaws will likely lead to reduced access to retirement accounts, products, and services to many."

Time for a Rewrite?

Concerning for many are the unnecessary limitations imposed on selecting financial providers and investments in retirement accounts. At a time when the markets are in flux and interest rates are at historic lows, investors are looking for more solutions, not less.

There are solutions to help investors obtain the financial advice they deserve and reduce opportunities for advisers to act in their own self-interest, but the current DOL proposal as written doesn't work. You can find more information, ask questions, or voice concerns to the Department of Labor by visiting its website, or via

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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