The Government Accountability Office (GAO) is urging the Internal Revenue Service (IRS) to play a more proactive role in addressing conflicts of interest within firms providing retirement advice.
The GAO has released a comprehensive report based on its investigation into the retirement advice sector, which involved analyzing over 2,000 conflicts disclosed by firms and conducting undercover calls to 75 financial professionals.
The investigation revealed a marketplace fraught with conflicts of interest, particularly in cases where one product is recommended over another. It also found that many firms were not fully transparent when questioned about their incentive structures.
“While firms’ conflict disclosures are available to investors, these documents are often not reviewed or fully understood by investors,” the GAO states. “Federal agencies encourage investors to inquire about conflicts of interest, but our undercover calls indicate that such inquiries may not always yield useful information.”
This report arrives as the Department of Labor (DOL) is working to extend its regulatory framework, established under the Employee Retirement Income Security Act (ERISA), to include a broader range of retirement advisors. This extension aims to impose fiduciary responsibilities on professionals such as insurance agents who recommend annuities to retirement savers.
The DOL’s latest efforts in this area are currently on hold due to a federal court stay delaying the regulation’s implementation. However, even without a stricter fiduciary standard, the ERISA framework continues to impose fiduciary duties on many advisors assisting clients with retirement planning.
The GAO highlights that the IRS holds exclusive enforcement authority over firms advising individual retirement accounts (IRAs) that are classified as fiduciaries under the tax code. However, IRS officials informed the GAO that they usually depend on the DOL to refer prohibited transactions for investigation and enforcement. Such enforcement can include imposing an excise tax on the firm, a measure designed to protect retirement income by penalizing transactions deemed especially problematic.
“Nonetheless, the DOL lacks the authority to audit IRAs for prohibited transactions and, as a result, cannot typically refer IRA fiduciaries to the IRS for excise tax enforcement,” the GAO reports. “Without an IRS audit process for IRA fiduciaries, investors may remain vulnerable to the negative impacts of prohibited transactions that could jeopardize their financial security in retirement.”
The GAO's report includes two key recommendations for the IRS, both of which the tax agency has agreed to pursue.
First, the GAO urges the IRS to establish a program to detect conflicted retirement advice without relying on referrals from the DOL. This program might involve a more thorough examination of a firm's advisory practices during tax audits.
Second, the GAO recommends that the IRS and DOL enhance their collaboration through a formal agreement, such as a memorandum of understanding, to identify conflicts of interest and prohibited transactions that could warrant excise tax enforcement.
