The DOL Retirement Security Rule Promotes a Narrow Worldview

When the Labor Department wrote the document it used to describe its new Retirement Security Rule, department officials embraced the worldview of registered securities sales representatives and other investment advisors.

Not the worldview of insurance agents, and certainly not the worldview of retirement income distribution planners.

Investment advisors, insurance agents and income planners differ markedly in terms of perspectives, philosophies, product preferences, licensure, methodologies and priorities. In many ways, their worldviews are as incompatible as freshwater fish and saltwater fish.

Nothing in the new DOL rule will support financial professional diversity in any meaningful sense.

What’s Missing

The DOL analysis of the new rule is 153,943 words long. That’s equal to the total word count of two average novels.

But something important is missing: Not once in this mighty text do DOL officials use the two-word term “retirement income,” outside of references to the Employee Retirement Income Security Act, one direct quote from a Labor Department advisory opinion, and references to the names of a few sources of annuity market data.

This omission is revealing: The authors of the fiduciary rule either do not understand, or choose to ignore the fact, that an individual’s retirement security is a function of income, not savings.

The source of that insight about the primacy of income is Robert Merton, a winner of the Nobel Prize in economics. (Larry Kotlikoff told me about Merton during my appearance on his Economics Matters podcast.)

No one in the world is a greater expert on this subject than Merton, who has been described by another Nobel laureate, Paul Samuelson, as the “Isaac Newton of personal finance.”

Registered investment advisory firms have been slow to take Merton’s insight to heart.

While preparing for a conference presentation a couple of years back, I searched for the term “retirement income” on the websites of 50 small, medium and large RIA firms.

Not one of the firm’s websites mentioned retirement income.

The Labor Department analysis reflects that limited worldview.

The Fiduciary Rule Lacks Balance

Most retirees need a thoughtful mixture of assets, like stocks and mutual funds, which expose portfolios to market risk, and safe-money vehicles like annuities, which provide stability and lifelong income.

In the same way that we cannot build a house without a solid foundation, we cannot build an effective income plan without a strong foundation of lifetime income.

This is the most important concern for retirees, yet it seems to have been completely ignored in the new Retirement Security Rule.

By focusing on rigid disclosure and supervision requirements, and by not addressing the centrality of lifetime income and annuities in a way that encourages wider use of annuities, the Labor Department missed an opportunity to strengthen Americans’ retirement security.

The Right Doctor

Veteran life insurance agents know that many in the investment advisor community tend to look down on them and the commissions they earn.

I see this reflected in intense debates on LinkedIn, where some members of the investment advisor community deride agents for accepting commissions.