“Preserving Retirement Security and Investment Choices for All Americans”

Statement of Paul Schott Stevens
President and CEO
Investment Company Institute

U.S. House of Representatives Committee on Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises and Subcommittee on Oversight and Investigation

September 10, 2015
Washington, DC

As prepared for delivery.

Thank you, Chairmen Garrett and Duffy, and Ranking Members Maloney and Green. I am grateful for this opportunity to discuss the Department of Labor’s proposed new definition of “fiduciary duty” for retirement advice and services.

ICI and its members strongly support the principle that underlies the Department’s proposal: all financial advisers should be held to act in the best interests of their clients. The proposal itself, however, is deeply flawed. Were the rule adopted in anything like its current form, it would harm retirement savers by drastically limiting their ability to obtain the guidance, products, and services they need to meet their retirement goals. It also would increase costs, particularly for those retirement savers who can least afford them.

You have my detailed written testimony. In this statement, I’d like to make four points.

First, supporters of the proposal claim that retirement savers are suffering $17 billion a year in harm due to broker-provided advice. This claim is false—an exercise in storytelling. Why?

  • The claim relies on academic studies using outdated statistics that simply don’t reflect today’s fund marketplace—and the Department then misapplies those studies to overstate their findings.
  • The Department also assumes that broker-sold funds are “underperforming” and thereby harming investors. In fact, a simple review of publicly available data shows that investors who own front-end load funds have concentrated assets in funds that outperform—not underperform—their Morningstar category by about one-quarter of 1 percent each year.

Second, the Department ignores the significant societal harm that its proposed rule would cause. Its economic analysis takes no account of the costs the rule would impose on investors by forcing them to move from commission-based advice to fee-based accounts. We calculate that the higher costs of fee-based accounts will total $47 billion over the rule’s first 10 years.

The Department also ignores the harm that investors with small accounts will suffer when they lose access to advice. Fee-based advisers typically require minimum balances of $100,000 or more. But three-quarters of individual retirement accounts hold less than $100,000; in fact, half hold less than $25,000—and that’s 20 million savers.

We estimate that bad decisions by investors who cannot obtain the advice they need will reduce their returns by $62 billion over the rule’s first 10 years.

Thus, we submit that far from reducing costs, the rule would increase fees and lower returns, resulting in $109 billion in net increased costs to American workers over 10 years. To make matters worse, rather than “grandfathering” existing relationships, the rule would compel many investors to pay twice for the same advice and services, by incurring fees to manage assets on which they’ve already paid commissions.

Such a massive overhaul of the marketplace for retirement investment advice should be supported by a solid analysis that clearly identifies a substantial problem and convincingly demonstrates that there are no easier or better remedies available. By this standard, the Department’s justification for the proposal fails utterly.

My third point: the Department’s overly expansive and ambiguous fiduciary definition will impede commonplace interactions that retirement savers now take for granted. In my written statement, I describe my adult son’s recent experience consulting with the call center of a major mutual fund company about rolling over his 401(k) balance to an IRA. Following the adoption of the rule as proposed, I believe it highly unlikely that fund providers will be able or willing to provide the kind of help and information that he received and that is most needed by young people starting into the work force, people of limited financial expertise, and those with modest retirement savings balances.

Fourth, the Department’s “Best Interest Contract” exemption will not mitigate the harm caused by this expansive and ambiguous fiduciary definition. As drafted, that exemption is laden with burdensome contract requirements and an array of compliance and liability traps. It is, in fact, quite useless. Perhaps the Department never intended that it be used. What is certain is that financial firms are unlikely to subject themselves to the BIC Exemption’s strictures—and our members have told us that they will not.

As a result, savers who rely today on brokers and other commission-based advisers will no longer be able to do so. They will be forced to pay more for fee-based advice, or go without advice altogether—the most costly course of all.

As you will see in my written statement, ICI and its members have offered the Department detailed suggestions to repair the proposed rule’s many fundamental flaws. We share with this Committee and the authors of H.R. 1090 the goal of getting this rule right. If the Department continues on its current course, it will get this rule disastrously wrong—and America’s retirement savers, and our nation’s retirement preparedness, will suffer.

Thank you for your attention. I look forward to your questions.