Sleeping With the Enemy: DOL’s Betrayal of Plan Participants and Retirees

Despite promises made during election campaign, the Trump administration has predictably chosen to side with big business over the interests of consumers. The regulators responsible for protecting the public against the abusive practices of the investment industry have increasingly become little more than shills for the very industries they are supposed to be regulating, eagerly adopting and promoting every disingenuous argument put forth by the industry to deny investors much needed protections.

The securities industry has requested that complete implementation of the Department of Labor’s (DOL) fiduciary rule be delayed for an additional eighteen months based on claims that they are not ready for the new rules.  I previously addressed the lack of merit in such claims in a previous post. As expected, the DOL formally submitted a request to the Office of Management and Budget for such extension and the OMB has just approved the request.

While the investment industry publicly claims lack of readiness to incorporate the DOL’s new fiduciary rule into their business, insiders claim that the industry’s real motivation is :to delay or totally eliminate the class action provisions of the DOL’s rule, to deny plan participants access to the court system and full discovery rights. The fact that the DOL has suggested to a court that it will most likely consent to the investment industry’s objection on this matter is very interesting given the express language in ERISA regarding its purpose

It is hereby declared to be the policy of this chapter to protect…the interests of participants in employee benefit plans and their beneficiaries…by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.(emphasis added) 29 U.S.C. § 1001(b)

So the DOL has consciously chosen to ignore the clear mandate of ERISA, choosing instead to promote and protect the interests of the industry it is supposed to regulate instead of honoring the Department’s expressed mission statement or promoting and protecting the best interests of American workers and pension plan participants, including the express right to access to the courts.

As an attorney, I cannot help but remember the wise words of the court in Norris & Hirshberg v. SEC (177 F.2d 228, 233). Facing a similar situation, the court rejected the dingenuous arguments of a broker-dealer seeking protection from the court, the court stating that

To accept it would be to adopt the fallacious theory that Congress enacted existing securities legislation for the protection of the broker-dealer rather than for the protection of the public….On the contrary, it has long been recognized by the federal courts that the investing and usually naive public need special protection in this specialized field.

The same position can, and should, be adopted by the DOL, especially in light of the documented evidence of the abusive practices that the investment industry has engaged in in connection with the pension and retirement industries. ERISA was, and still is, intended to provide for the protection of American workers, not the investment industry.

Congress is also actively engaged in efforts to deny American workers and pension plan participants the much needed protections provided to them under the DOL’s new fiduciary rule, despite the fact that the investment industry has failed to produce any legally admissible evidence to support its ‘doom and gloom” claims against the DOL’s fiduciary rule.

With both the executive and legislative branches deserting them, the public can only look to the judicial branch to uphold the law and protect them against the investment industry’s abusive practices. Most courts have recognized the problem and become the sentinels for enforcing the law.

Sadly, some recent court decisions are troubling, as they reflect either a lack of a basic understanding of ERISA’s goals and purposes, as well as investment industry practices that brought about the DOL’s new fiduciary rule. In recent decisions, the courts have seemingly ignored or overlooked one of the primary goals and purposes of ERISA, to help workers work toward accumulating sufficient assets for retirement, by ignoring the financial impact of overpriced and underperforming mutual fund options within pension plans.

In some recent decisions, the courts have focused entirely on the absolute level of fees of actively managed mutual fund options within a plan, an approach the investment industry has constantly opposed. As the investment has pointed out, the focus should be on a fund’s fees relative to the benefit provided by the fund.

Unfortunately for the investment industry, the history of actively managed mutual funds has consistently shown a pattern of overpricing and underperformance relative to comparable passively managed/index mutual funds. This irrefutable evidence makes the recent court decisions supporting actively managed funds even more troubling.

Section 90, comments h(2) and m, of the Restatement (Third) Trusts states that a choice to due to the added costs and risks generally associated with actively managed mutual funds, such funds should only be chosen when it can reasonably be assumed that actively managed fund will produce sufficient benefits to offset such added costs. As mentioned earlier, the majority of actively managed funds cannot meet this requirement. The courts’ decisions seemingly either ignored or overlooked this crucial fact, a fact that indicates that most actively managed mutual funds do not help to promote a plan participant’s ‘best interests” or retirement readiness.

As the investment industry, the DOL and Congress all work to deny plan participants much needed protections against the proven abusive marketing strategies of the investment industries, one can hope that litigation will eventually result, with an informed court stepping forth to protect pension plan participants, including preserving the right of plan participants to access to the court through class-action suits where appropriate, as set out in ERISA. In stepping forth to protect plan participants, such court need only look to the analogous recognition and admonition of the problem by the court in Archer v. S.E.C (133 F.2d 795, 803), where the court stated that

The business of trading in securities is one in which the opportunities for dishonesty are of constant recurrence and ever present. It engages acute, active minds trained to quick apprehension, decision and action. The Congress has seen fit to regulate this business.

The same conditions that necessitated the enactment of ERISA are still present today and even more insidious as plan participants and retirees are fleeced of their life savings. Based on current indications, an enlightened judiciary may be the last hope for American plan participants and retirees.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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