Executive Summary
Since the Department of Labor (DOL) originally proposed its fiduciary rule in 2010, one of the focal points in the debate over retirement accounts has been the relationship between financial advisers and their clients, especially in relation to IRAs. Many individuals turn to professional advisers due to the difficulty of handling complicated financial decisions or just to save time. However, certain commission compensation structures, are seen as a conflict of interest by some policymakers and are often blamed for poor investment returns. These worries are the main reason for the Department of Labor’s proposed “fiduciary” rule definition, which aims to modify the rules financial advisers must follow when working with tax-qualified retirement savings plans, including IRA accounts. However, the release of the proposed rule has raised many questions about the far-reaching consequences and potential negative impacts on the one thing that the rule hopes to accomplish: increasing savings and providing a secure retirement for individuals.
Current U.S. retirement markets are characterized by an aging population with longer life expectancy, a Social Security system under financial stress, the shift of employer-sponsored plans from Defined Benefit to Defined Contribution plans, and shorter job tenures. All these trends point to the importance of saving for retirement and keeping these funds intact during working years. Whether it is due to behavioral reasons (i.e. lack of self-control or discipline, the culture of instant gratification that fuels over-consumption, and overconfidence about one’s own judgment and abilities) or lack of financial knowledge, U.S. retirement savings is less than optimal. However, research shows that people who work with financial advisers do better than their counterparts who do not have access to financial advice.
Earlier this year, the White House Council of Economic Advisers (CEA) lent its support to the DOL fiduciary rule by summarizing some academic literature on the cost of conflicted advice on retirement savings, especially for IRA account holders. CEA claimed that investment underperformance amounts to a cost of $17 billion per year. DOL’s Regulatory Impact Analysis followed a similar approach and assumes that the rule will eliminate the underperformance difference resulting in a benefit to investors of $4 billion per year. Both reports have been criticized by economists based on their use of simplified assumptions, stale data, and generalizations to reach their conclusions. The most significant critique of both reports is that the analysis ignores the benefits associated with financial advice. These benefits include increased savings rates, less risky and speculative trading, age and goal appropriate portfolio balancing. According to research, including prior analysis issued by the DOL, the value of financial advisers could be more than the cost of conflicted advice envisioned by both the CEA and DOL.
Other widely cited potential consequences of the re-proposed rule include:
- Cost increases and decreased access to financial advice especially for low and moderate income individuals
- Increased leakage of assets during job changes
- Decreased access to workplace retirement for small businesses
- Limits to investment education
When these potential consequences are quantified, one analysis shows that the re-proposed rule could decrease retirement savings between $68 and $80 billion each year.
A comprehensive retirement policy designed to maintain growth in savings, expand coverage, and prevent leakage during job changes is imperative for retirement security. The recently re-proposed DOL fiduciary rule, meant to protect the retirement savings of individuals, may well have the opposite effect. The DOL rule should be more fully analyzed and adjustments made to ensure the rule does not have an adverse impact on retirement plan access and investment education.
Full Report: DOL’s Retirement Advice Rule: Helping or Harming Sound Retirement Planning?
