Exclusive Interview: Phyllis Borzi on the SECURE Act, Target Date Funds, and “Discredited Disclosure”

Exclusive Interview: Phyllis Borzi on the SECURE Act, Target Date Funds, and “Discredited Disclosure”
June 16
00:03 2020

Returning for a record-breaking fourth time, Phyllis Borzi is well known as a leading proponent for the fiduciary imperative. The former Assistant Secretary at the Department of Labor, she helped shepherd the drive to establish the DOL’s Fiduciary Rule. She tells the story of that journey below, as well as offering comments on more than a few other current topics.

Prior to serving as Assistant Secretary, Borzi was a research professor in the Department of Health Policy at George Washington University’s Medical Center’s School of Public Health and Health Services where she was involved in research and policy analysis. She was also of counsel to the Washington, D.C. law firm of O’Donoghue & O’Donoghue LLP, specializing in ERISA and other legal issues affecting employee benefit plans. She currently serves as a member of the Advisory Board of the Institute of the Fiduciary Standard.

FN: Phyllis it’s always an honor to sit down and chat with you. It’s been almost two years now. What have you been up to?
Borzi: Actually, I have been retired since January 2017 when the new Administration came in, so it has been more than 3 years. Until the pandemic sidelined all of us, I spent a fair amount of time traveling and catching up with my family and friends – relationships that had been sorely neglected by me during my 8 years at DOL!

I am now a self-employed consultant – it gives me the flexibility to work on projects that interest me and where I think I can bring value to the endeavor. Not surprisingly, my focus continues to be primarily improving benefit security for participants, retirees, and their families, although always in a way that recognizes that no one benefits from imposing unnecessary costs or burdens on plan sponsors.

Among the things I have been doing are serving as an expert witness in a couple of cases: one is a pension case in which trustees’ investment decisions were being challenged as imprudent and another challenges drug pricing practices of PBMs with respect to group health plans. In addition, I am working with a number of the states on a handful of issues, including their litigation challenging the various regulatory actions of the Trump Administration in its effort to dismantle and/or undermine the ACA.

FN: The CFP Board recently announced its requirement that all its members to members to embrace their fiduciary role and always act in the best interests of their clients. While the Fiduciary Rule promulgated under your guidance has been vacated, many feel it has inspired a lasting legacy. What do you see that lasting legacy to be?
Borzi: I am so proud of the work that DOL did in addressing in an effective, reasonable, and workable way the systematic institutional problem of conflicts-of-interests in the financial services industry. Our goal was to align the financial interest of advisors with that of their client investors. The current compensation system that is characteristic of the insurance and other financial service business models is rife with conflicts-of-interests that create strong incentives for brokers to recommend products that are in their financial interests rather than in the best interest of their clients. That system must change if we are to move forward to protect investors.

As you noted, although unfortunately the DOL rule itself was vacated, our work significantly contributed to the public debate and moved the marketplace forward in important ways. No doubt certain players in the marketplace had begun to recognize the need to adopt a more fiduciary-like standard of behavior, but I think our efforts helped to accelerate that trend. And in some cases, the planning for and work that certain financial services entities had undertaken to comply with the DOL rule continued even after the rule was vacated.

Our shining the light on conflicted compensation practices accelerated this movement because it began to educate the investing public about the pitfalls, dangers, and harms that can be caused by conflicted advice. It was both exciting and rewarding to read articles in the trade press (some highlighted in your own publication!) that noted that the number of investors that had begun asking whether their advisors were in fact fiduciaries had rapidly increased. That was great news! And my number one bit of advice to investors is to ask if your advisor is a fiduciary and get that representation in writing. Not as good as a regulation, but it does put the advisor on record in writing. And if the advisor won’t commit to a written representation of fiduciary status, find another advisor – there are plenty around who will agree to be fiduciaries.

So we had a lasting impact on investors and the marketplace if for no other reason than individuals are now aware of the need to rely on advice only from those individuals who work under a legal fiduciary standard of care.

FN: When we first met, you surprised me by saying you were a regular reader of Can you tell everyone how you discovered Also, can you now reveal what role played in the writing of the DOL’s Fiduciary Rule?
Borzi: I don’t really remember when I first became aware of but it probably was through the clipping service at DOL that was operated by our press office. From time to time, I’d see interesting articles and when I clicked through to them, I’d scan the rest of the publication and when I saw something that might be useful to the staff, I’d pass it on.

In creating the comprehensive economic analysis that was required by the Administrative Procedures Act and the Office of Management and Budget (OMB) to support any proposed or final regulation, our economists, legal and policy analysts were always looking for additional data and research. Many of the articles and posts that you pick up and highlight might not have been picked up by a typical clipping service. So fills an important gap. Now that I’m retired, checking out your publication is even more helpful to me to keep abreast of what is going on.

FN: Section 203 of the SECURE Act refers to disclosure regarding lifetime income. It mandates plan sponsors provide a disclosure converting the existing account balance into both a single life annuity and, assuming a spouse of the same age, a 50% CA. What do you think of Section 203? Would you have encouraged Congress to permit alternatives so that those plan sponsors who already provide lifetime income estimates need not adjust their voluntary projections? Would you have encouraged Congress to apply the same rule not only to tax-qualified individual account retirement savings plans, but also pensions and IRAs?
Borzi: One of my biggest regrets in leaving my post at DOL was our inability to finalize a lifetime income disclosure regulation. But not only did we just run out of time, we ran into a problem in finding reliable independent data and research that would have been able to help us to make the case that such a disclosure would make a difference in encouraging the offering and selection of a lifetime income distribution option. As I noted in the answer to my earlier question, a prerequisite to approval of a final rule is comprehensive economic analysis and data that supports the need for the rule. There was some industry data, but very little independent data.

Nevertheless, we did spend nearly three years working to develop a lifetime income disclosure rule that would give participants a better sense of what their account balance might produce in terms of monthly income, while recognizing limited flexibility for plans that had voluntarily provided these disclosures in the past.

At the time, there was a legislative proposal, similar to what was adopted in Section 203, which we thought was a good start but was too insurance product focused and did not seem to recognize that there were other ways to assure lifetime income without actually purchasing a commercial annuity. This was important because, at DOL, we tried to avoid putting our fingers on the scale between competing industry actors and favoring one financial sector over another. In addition, we were particularly sensitive to avoiding proposals or terminology that equated lifetime income with only insurance products, in part because we knew from other work we were doing at DOL that many of the current insurance products heavily promoted to plans and participants were really investment products and only incidentally provided some form of lifetime income.

In addition to consultation with Hill staff on both sides of the aisle, we worked extensively with industry representatives who provided various types of lifetime income products and approaches – both through plans and outside of plans – and we took extensive public comments on the topic. We also worked closely with our colleagues at Treasury and the Service. The proposed final rule we eventually sent to OMB for clearance and approval was the product of intensive and extensive public industry and consumer input. However, as previously explained, OMB felt we needed greater independent economic research to support the rule before a final rule could be issued.

So, I look at the enactment of Section 203 as a missed opportunity. It reverts back to the Hill’s initial approach from many years ago, which in my estimation is not an even-handed approach to encourage various lifetime income alternatives, but rather clearly favors insurance products. It sadly disregards all the positive work that was done at DOL in coordination with all the stakeholders. I suppose something is better than nothing in terms of lifetime income disclosure, but if plans are going to be required to provide the disclosure, it would have been better if the requirement would have been drafted in such a way to treat all lifetime income products in an evenhanded fashion and not made it more complicated or expensive to comply if a plan fiduciary chooses not to use an external insurance product.

Another important improvement would have been if the disclosure requirement applied to all qualified plans and IRAs.

FN: Is there a place for non-fiduciary financial relationships (traditional brokers, insurance agents, etc.)?
Borzi: Today it is impossible for consumers to differentiate between investment advisers subject to a legal fiduciary duty of care from others (brokers, insurance agents) who hold themselves out as providing investment and financial advice using the same marketing terms but who claim non-fiduciary legal status.

Although investor confusion is a significant problem, it is not the root cause of the harm to investors, but rather simply an obvious symptom. The source of the harm is the existence and proliferation of institutional business models in the financial services industry that utilize compensation systems that encourage and reward conflicted investment advice rather than recommendations to investors that meet the traditional duty of loyalty required of individuals who occupy positions of trust with respect to the affairs of others.

In other words, the problem is not that brokers or insurance agents are bad people, but rather it is that these people are enmeshed in a compensation system for product distribution in which their success is dependent on selling certain investment strategies and products identified by third parties that are designed to generate the greatest revenue for them, not necessarily to be the best fit for particular investors based on their financial situation and investment goals (i.e., investments that are in the customer’s best interest). In making a recommendation to an investor, what would be most beneficial to the investor should be the driver, not how much the broker/insurance agent/third party will benefit in compensation or other types of rewards from steering the investor’s decision in a particular direction.

From a policy and regulatory point of view, there are only two ways to approach this problem: (1) create very clear lines differentiating between the two categories of advisors so that the consumer can easily tell the difference and make a choice between the two, or (2) recognize that this is not possible and subject all that hold themselves out as experts and provide recommendations to a single fiduciary legal standard.

When DOL proposed its first rule in 2010, we took approach #1. We tried to accommodate the desire of the industry to retain a role for brokers and insurance agents who wanted to continue to provide non-fiduciary financial services. Among other things, we required individuals who wanted to remain non-fiduciaries to clearly acknowledge that they were merely salespeople, not providing objective independent investment advice to clients, and that their financial incentives were not necessarily aligned with that of their customers.

You will recall that all hell broke out as a result – the financial industry made it quite explicit that most certainly they did not want to make any of those things clear to investors, although they insisted that they should retain the ability to provide non-fiduciary advice. Their representatives kept talking about the need to preserve “consumer choice” although it is hard to imagine a consumer who deliberately would choose to continue to receive advice on such a critical life decision as to how to invest their savings from someone who refused to acknowledge that they owed a basic duty of loyalty to the client and were legally accountable to put the client’s interest first. Rather the “choice” that the industry so clearly touted was not consumer choice at all, but the choice of the broker or insurance agent to continue to avoid fiduciary responsibility for his/her recommendations by giving advice on a non-fiduciary basis.

We spent many hours holding public notice and comment events and meeting with hundreds of individual financial services companies and their representatives struggling with this issue. We conducted extensive outreach to Members of Congress and their staff, our fellow federal agency representatives and staff, including the SEC, the Treasury, the Consumer Financial Protection Bureau, state and federal banking, securities and insurance regulators, and consumer advocates, including representatives of organized labor. All of these activities were enormously helpful to us as we moved forward.

We gathered as much data as we could trying to determine whether there was a way to accommodate both fiduciary and non-fiduciary advice, but were never able to get to point where we could propose a new regulatory structure under which we were comfortable that consumers could tell the difference between fiduciary and non-fiduciary advisors without the type of clear and understandable disclosures that the industry had thoroughly rejected.

Accordingly, the second proposal and ultimately the conflict of interest rule that DOL finalized in 2015 generally took the second approach: it treated everyone who held themselves out as experts and made “recommendations” (we used the SEC definition to avoid confusion about a new standard) to investors to a fiduciary standard. In other words, the only people who could be characterized as giving investment “advice” had to operate and be accountable as fiduciaries. Non-fiduciary services could still be provided to investors, but not non-fiduciary “advice.”

Once again, the industry fought back against this approach. But having spent the better part of seven years doing a deep dive into these issues, I have concluded that it is impossible to construct a definition that is understandable to most consumers so that they will be able to distinguish between fiduciary and non-fiduciary advice givers. And if we could, if past is prologue, even if we could, most in the industry would never agree to such clarity.

So, I believe the only reasonable course is approach #2 – subject all those who provide “recommendations” to investors to a legal duty of loyalty to their clients through a fiduciary standard. By the way, nothing in the recent work of the SEC in its Reg BI guidance package which purports to focus on approach #1 changes my view. If you want to give investment advice, you must operate and be legally accountable for your recommendation as a fiduciary.

FN: There are over 50 TDF families. In general, what do you think about TDFs, the current litigation involving TDFs, and any future litigation you see as possible? Why might it be important for plan sponsors to have the investment process documented on how the plan’s investment fiduciary picked any particular TDF family?
Borzi: In general, I think TDFs are a positive development for participants. However, there certainly are important considerations for plan fiduciaries in the selection and monitoring of TDFs. Two major considerations are assuring that the underlying composition of the funds within the TDF is prudent and that participant disclosure is sufficient and understandable.

While I was awaiting confirmation at DOL, EBSA had a joint hearing with the SEC on the disclosure issues and the joint work we did with the SEC on this issue was important. Both agencies issued guidance to help plan sponsors properly evaluate and monitor the information provided to participants, particularly on the glidepath around which the TDF was structured.

Among other things I learned from this process, as well as our work on the fee disclosure (408(b)(2) and 404) project, was that some plan sponsors might not have taken sufficient care to understand the underlying investments and glide paths of the TDFs they were considering or offering. In my view, that may open the door for future fiduciary problems.

Given all the pending litigation on this topic, I want to steer clear of taking any definitive positions, but I will say this. It is critical for fiduciaries to document the process they use in selecting and monitoring not just a particular TDF family but also any specific TDF they offer to their plan participants. The same procedurally prudent process should apply to TDFs as to any other type of investment option.

The fiduciary must be sure to request and review important information regarding the investment and its performance (not just at the time of initial selection, but on an ongoing basis), thoroughly document the process used to make any decision to include and retain the TDF in the plan lineup, make sure to carefully review all the materials that are provided to participants as they consider their investment options and regularly and periodically review these investment options (just like they do for other types of investment options) to be sure they continue to be prudent. As I always told my plan clients, my best advice is document, document, and document the process used to select and monitor your TDF offerings.

FN: How will we differentiate between those selling ‘advice’ that IS in the person’s ‘Best Interests’ from those who sell advice that merely LOOKS LIKE it is in the person’s ‘Best Interests’? Who has the authority to oversee and enforce this?
Borzi: That is one of the key weaknesses of the SEC’s Reg BI. It allows brokers to claim they are working in an investor’s best interest without being held to a legal duty of loyalty (i.e., a fiduciary standard that requires accountability for recommendations that actually are in an investor’s best interest). It is based on the thoroughly discredited notion (at least discredited in the objective academic literature and through independent data) that disclosure of material conflicts alone is sufficient protection against harmful financial conflicts of interest, although I understand that disclosure has been a linchpin in securities regulation in the past. And undoubtedly any solution to this problem will involve, among other things, enhanced and clearer investor disclosure.

I was originally encouraged when Chairman Clayton announced that he intended for the SEC to consider a new standard addressing conflicts-of-interest because as I understood Section 913 of the Dodd-Frank Act, the SEC was explicitly given the authority to treat broker dealers like RIAs. However, I was concerned when the SEC defined the problem as investor confusion – undoubtedly an issue but, as discussed above, merely a symptom of the much larger and more serious problem of the tolerance if not encouragement within institutional business models of conflicts of interest.

But then when I saw what the Commission produced, I realized it was simply a way to provide a regulatory cover for brokers to continue to provide non-fiduciary advice under the guise of acting in the investor’s best interest. The fact that an announced goal of the SEC guidance was to generally avoid disruption of current industry practices and business models was a clue to even the most clueless that we needn’t expect much improvement in the legal duty owed to investors.

Sadly this is a missed opportunity – particularly since the rhetoric surrounding the issuance of the rule (e.g., preamble to regulatory package, press releases, sub-regulatory guidance, speeches of SEC Chair Clayton) made it sound like the final rule might have more teeth and be more effective than the text of the actual regulation does. But an October 2019 Trump Executive Order purports to prohibit agencies from imposing legally binding guidance or enforcement activities on the public without going through public notice and comment procedures required for regulations. Although there appears to be an exception for guidance that supposedly clarifies existing obligations, it is doubtful whether the SEC has the authority or inclination to strengthen the pretty general and weak regulatory text it issued last year.

FN: When you’re talking to plan participants, what are some key guidelines plan providers can follow to delineate between when they’re providing investment “education” vs. “advice”?
Borzi: I take a pretty simplistic view of the difference between education and advice but it gives participants (and plan service providers and fiduciaries) a fairly easy way to tell the difference. When the discussion moves from a general discussion of what factors a participant at this stage of his/her life cycle and career should take into consideration, general investment strategies or the general characteristics of certain categories of investments to the much more focused question of “what should I do?” you’ve crossed the line from education to advice.

This is particularly true in the rollover context. In my experience, virtually any rollover conversation with a call center rep or any financial advisor always results in the “what should I do” query whether it involves the decision to take the rollover in the first place, how to invest the rolled over amounts or any of the incidental issues directly or indirectly related to those decisions.

FN: In light of the excitement in the industry surrounding pooled employer plans, was the 2012-04a DOL ruling that restricted Open MEPs something that was – in hindsight – a mistake?
Borzi: Not at all. The recent request to DOL from industry representatives for PTE relief in connection with the new statutory provision reinforces the concerns I had that without sufficient consumer protections incorporated into the authorized legal structure to replace the commonality requirement, the potential for harmful conflicts existed. Notwithstanding the bipartisan support the statutory provision enjoyed, it still falls short of really protecting participants from these potential conflicts. Hopefully, DOL will be able to provide adequate protections for participants by imposing conditions if it does move forward to grant PTEs, but given the current regulatory atmosphere, I am not optimistic. While I was at DOL, we were considering proposing our own approach to so-called “open MEPs” but the press of other regulatory matters overcame those efforts and I regret that.

FN: What did EBSA learn from the few years of use with the 404a-5 disclosures to plan participants? Did the document adequately describe the fiduciary status of the various service providers? Did participants actually read them and do those that do read them understand each service provider’s role?
Borzi: As proud as I am of EBSA’s seminal work which for the first time imposed fee disclosure requirements under ERISA §§408(b)(2) and 404, there were a number of important lessons we learned.

First, the effort we made to work closely with the plan sponsor and service provider community to develop workable standards paid off and I am grateful for the cooperation and support we received in that effort.

Second, there are always going to be people who figure out how to evade the letter and/or spirit of a rule no matter how specific you are and the only way to minimize that is to create an initial safe space for compliance assistance and correction and then begin a vigorous and public enforcement program as a deterrence to lack of compliance. Compliance assistance alone is a weak and ineffective tool to assure compliance.

As you know, the fee disclosure rules were part of a larger transparency effort designed to provide greater information to plan sponsors/fiduciaries and to plan participants so that all could get a greater understanding of the costs associated with their particular investment choices. Soon after the rules were effective, however, we learned that certain service providers were “volunteering” to provide the participant disclosures to make it easier for plan fiduciaries (especially small employers) to comply since the 408(b)(2) disclosures were more detailed and comprehensive than the 404 participant disclosures. The effect of that service provider strategy was that plan fiduciaries didn’t have to bother to understand either the disclosures they received from the service providers or how those costs translated into costs for participants. Obviously, that was not what we intended.  This illustrates how important enforcement and then oversight of prior regulatory actions is and also how critical it is for the agency to commit to continuously issuing additional guidance when issues arise to help the overwhelming number of plan sponsors and fiduciaries who are trying to do the right thing comply with the rules.

FN: Do you have any other thoughts or comments you’d like to share with our audience?
Borzi: Despite the fact that I may appear critical of some of the provisions in the SECURE Act because they may not be structured the way I would have preferred, the new law represents an important step forward in our shared goal of improving retirement security for workers and their families, particularly with respect to the need to create incentives for plans to offer and participants to choose lifetime income alternatives.  Hopefully, its passage will stimulate continued discussion and debate on many of these issues and we can continue to work together to improve and strengthen these rules.

FN: Phyllis, it’s so wonderful to have a chance to sit down and speak with you again. You represent a font of both fiduciary history and philosophy. You have been at the vanguard of pushing the sense of fiduciary into the mass market. This is recognized and will be remembered by all. What’s more, your thoughts keep adding to the canon. We can hardly wait to find out what happens next!

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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