CT Blue

The New York Times reports that the financial industry is upset that the Labor Department is considering making it illegal for them to cheat people out of their retirement savings.

Amid fierce pushback from the financial services industry, the Labor Department, which oversees retirement plans, recently delayed releasing a revised proposal that would require a broader group of professionals to put their clients’ interest ahead of their own when dealing with their retirement accounts. The department said it would release the proposed rule in January, according to its regulatory agenda, instead of this August. (Phyllis C. Borzi of the Labor Department, had signaled that it could miss the deadline.)

“They have really been stymied by the financial industry, which is spending millions of dollars to fight this rule,” said Karen Friedman, executive vice president and policy director at the Pension Rights Center, a nonprofit consumer group. “All the Labor Department is trying to do is modernize a rule that is out of date.”

The agency is trying to amend a 1975 rule, part of the Employee Retirement Income Security Act, known as Erisa, which outlines when investment advisers become fiduciaries — the eye-glazing legal term describing brokers who must put their customers’ interests first. The rules are stricter for fiduciaries who handle consumers’ tax-advantaged retirement money compared to fiduciaries under federal securities law.

But it is easy to avoid becoming a fiduciary under Erisa, consumer advocates say, because brokers must first meet a five-part test before they are required to follow the higher standard: If the advice is provided on a one-time basis, for instance, the rule does not apply. On top of that, the consumer and the broker must also “mutually agree” that the advice was the main reason for the investment decision.

They'll probably win this round; they always do. This brought to mind some cases I've had involving ERISA where this same industry adamantly maintains that it is a fiduciary.

For reasons I won't go into, employee's medical and disability benefits are subject to ERISA. The perverse, and I think unintended, consequence of this is that the administrators of the retirement plans-and this responsibility is often offloaded onto insurance companies- are considered “fiduciaries” when they decide whether an employee is or is not disabled.

Now, in the ordinary case of a privately purchased disability policy, the insured has certain advantages. If he or she is denied coverage, he or she can sue. The judge or jury will then decide the issue, and any ambiguity in the policy is construed in favor of the insured.

Enter ERISA. Because the insurance companies are considered “fiduciaries” of the employees retirement plan, their decisions prevail unless they have “abused their discretion”. In other words, instead of a tie going to the insured, as in the regular case, the umpire has to call the insured out in an ERISA case as long as the insurance company doesn't throw the ball out of the park.

Now, a few judges took the position that this couldn't possibly be the rule where the insurance companies had a built in conflict because their own money was on the line. So they ruled that the “abuse of discretion” rule applied only when the company was administering a plan funded by the employer, rather than a policy in which the employer merely paid premiums, and the company paid the benefits.

But the Supreme Court would have none of that. We must, it ruled, leave no employee un-screwed. The insurance companies maintained their fiduciary status, despite the obvious conflict, though the conflict could be considered as a factor in deciding whether the company had abused its discretion. But that requires proof that the conflict was a factor in the decision, something it is almost impossible to prove in any given case.

So now we have the same type of scum running from fiduciary status when it suits their needs. No doubt our Supreme Court will oblige them if the Labor Department won't.