Economic Analysis Drives Day 2 of Hearings on DOL’s Fiduciary Rule

By Andrew Remo • August 13, 2015 • 0 Comments
The second day of public hearings on the Department of Labor’s fiduciary rule reproposal was highlighted by a debate over the economic impact that the rule will have on the financial services industry.

When a rule of this significance is issued, it must be accompanied by an analysis from the executive branch agency issuing the rule that tries to predict what the costs would be on the industry affected by the rule as well as the benefits the rule will provide to consumers or the public at large. This type of analysis, called a “regulatory impact analysis” (RIA), is fundamental to the executive branch’s ability to issue new rules for any type of industry. If it is not done correctly by an executive branch agency, that could be used as a basis to nullify the rule in the courts.

A key reason why the DOL’s initial fiduciary rule was scrapped in 2011 was the fact its RIA was widely viewed as flimsy and incomplete. This time, however, DOL issued a 243-page RIA along with seven supporting documents. The DOL estimated in its RIA that the cost of the fiduciary reproposal to the financial services industry would be between $2.4 billion and $5.7 billion over 10 years.

Conversely, the DOL asserted that the reproposal would deliver large gains for retirement investors, although they readily acknowledged that, due to the data limitations of the academic literature and available evidence, only some of those gains could be quantified. However, DOL went on to estimate that the gains the reproposal would deliver to IRA investors alone would be between $40 billion to $44 billion over 10 years, and concluded that these gains would far exceed the compliance costs of the rule.

Industry Groups Dispute Estimate

Industry groups, including the Investment Company Institute (ICI) and the American Council of Life Insurers (ACLI), forcefully disputed the DOL’s figures in the public hearing Aug 11. ICI proffered their own economic analysis quantifying the costs from what they characterized as two major errors of omission in the DOL analysis: the impact on retirement investors who are forced to shift to a fee-based model due to the rule and the cost of retirement investors who become disenfranchised from the advice market. ICI estimates the cost to retirement investors who are forced into the fee-based model at $62 billion over 10 years and the cost to retirement investors who make mistakes due to lack of advice to be $47 billion — a total of $109 billion, or twice the cost in the DOL’s estimate.

Support from Academic Researchers

The public hearing also featured testimony supporting the DOL’s RIA from two academics, Jonathan Reuter from Boston College and Antoinette Schoar from MIT. Reuter’s research and Schoar’s both identified bias based on the compensation structure of brokers that directly resulted in poorer investment outcomes for customers. The academics didn’t delve into DOL’s testimony directly, largely focusing on their own published work. However, their testimony supported the DOL’s assertions in its RIA, and Reuter stated quite plainly at the outset of his remarks that the DOL had accurately interpreted his conclusions in the RIA.

While acknowledging the limitations of their analysis, the academics also complained that the industry refuses to make available retirement investor account level data that would allow for a proper accounting of the adverse impact of “conflicted advice” in the marketplace. Reuter implored the industry panelists to provide him with this data so he could “write a good paper that I can publish somewhere.”

Marcy Supovitz, President-Elect of the American Retirement Association, testified on behalf of the American Retirement Association Aug. 12 at 12:15 p.m. ET. Her testimony highlighted the American Retirement Association’s proposal to create a streamlined “level compensation to level compensation” contract exemption to encourage plan advisers to help plan participants with rollovers. You can watch online here.


Andrew Remo is the American Retirement Association’s Manager of Congressional Affairs.