Hearing on the Department of Labor’s Proposed Fiduciary Rule

Statement of Paul Schott Stevens
President and CEO
Investment Company Institute

U.S. House of Representatives Committee on Ways and Means
Subcommittee on Oversight

September 30, 2015
Washington, DC

As prepared for delivery.

Thank you, Chairman Roskam and Ranking Member Lewis. I am grateful for this opportunity to discuss the Department of Labor’s proposed new definition of “fiduciary duty” for retirement advice and services, and also America’s retirement system more broadly.

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 DOL 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  • The claim relies on academic studies using outdated statistics that simply don’t reflect today’s fund marketplace. The Department then misapplies those studies to overstate their findings.
  • The Department also assumes that broker-sold funds are “underperforming.” 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—similar funds 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.

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 65 percent of households with individual retirement accounts hold less than $100,000 in those accounts—and that’s 22 million households.

Taking these two factors together, we submit that far from helping savers, the rule would increase fees and reduce returns, resulting in $109 billion in net increased costs to American workers over 10 years.

My third point: in proposing such sweeping changes, the Department risks undermining a voluntary, employment-based retirement system that is helping millions of Americans achieve a secure retirement.

ICI and its members support policies that would improve access to retirement saving opportunities and make plans more efficient and effective. But those improvements must build upon the strengths of the current system.

What are those strengths? In today’s system, Social Security provides a sound base for all workers, and a near-complete pension for those with lower lifetime earnings. In addition, four out of five near-retiree households have accrued retirement benefits from employer plans or IRAs. And assets earmarked for retirement today are seven times greater than they were in 1975, even after adjusting for inflation and growth in the number of households.

Finally, my fourth point: recent initiatives to create state-administered retirement plans for private employers raise substantial questions.

  • Would these plans fragment retirement planning, for mobile workers, for employers, and for providers?
  • Would state-run plans erode the current private-sector system—for example, by allowing participating employers to avoid the obligations and worker protections of ERISA?
  • How would state-administered plans be governed, and how would they protect participating investors?
  • And if these plans are developed without a clear understanding of the “coverage gap,” would they impose costs on employers without actually increasing participation by workers?

Mr. Chairman and members of the subcommittee, the questions you are addressing today are vitally important to America’s retirement savers. I appreciate the chance to participate, and I look forward to your questions.