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95–692 PDF 2017

S. HRG. 114–665 

RESTRICTING ADVICE AND EDUCATION: DOL’S 

UNWORKABLE INVESTMENT PROPOSAL FOR 

AMERICAN FAMILIES AND RETIREES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON EMPLOYMENT AND WORKPLACE 

SAFETY 

OF THE

COMMITTEE ON HEALTH, EDUCATION, 

LABOR, AND PENSIONS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON

EXAMINING THE DEPARTMENT OF LABOR’S INVESTMENT PROPOSAL 

FOR AMERICAN FAMILIES AND RETIREES 

JULY 21, 2015 

Printed for the use of the Committee on Health, Education, Labor, and Pensions 

( 

Available via the World Wide Web: http://www.gpo.gov/fdsys/ 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS 

LAMAR ALEXANDER, Tennessee, Chairman 

MICHAEL B. ENZI, Wyoming 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

RAND PAUL, Kentucky 

SUSAN COLLINS, Maine 

LISA MURKOWSKI, Alaska 

MARK KIRK, Illinois 

TIM SCOTT, South Carolina 

ORRIN G. HATCH, Utah 

PAT ROBERTS, Kansas 

BILL CASSIDY, M.D., Louisiana 

PATTY MURRAY, Washington 

BARBARA A. MIKULSKI, Maryland 

BERNARD SANDERS (I), Vermont 

ROBERT P. CASEY, JR., Pennsylvania 

AL FRANKEN, Minnesota 

MICHAEL F. BENNET, Colorado 

SHELDON WHITEHOUSE, Rhode Island 

TAMMY BALDWIN, Wisconsin 

CHRISTOPHER S. MURPHY, Connecticut 

ELIZABETH WARREN, Massachusetts 

DAVID P. CLEARY, Republican Staff Director 

LINDSEY WARD SEIDMAN, Republican Deputy Staff Director 

EVAN SCHATZ, Minority Staff Director 

JOHN RIGHTER, Minority Deputy Staff Director 

SUBCOMMITTEE ON EMPLOYMENT AND WORKPLACE SAFETY

JOHNNY ISAKSON, Georgia, Chairman 

RAND PAUL, Kentucky 

TIM SCOTT, South Carolina 

MARK KIRK, Illinois 

PAT ROBERTS, Kansas 

BILL CASSIDY, M.D., Louisiana 

LAMAR ALEXANDER, Tennessee (ex officio) 

AL FRANKEN, Minnesota 

ROBERT P. CASEY, JR. Pennsylvania 

SHELDON WHITEHOUSE, Rhode Island 

TAMMY BALDWIN ,Wisconsin 

PATTY MURRAY, Washngton (ex officio) 

TOMMY NGUYEN, Republican Staff Director 

AMANDA PEREZ, Minority Staff Director 

(II) 

C O N T E N T S 

STATEMENTS 

TUESDAY, JULY 21, 2015 

Page 

COMMITTEE MEMBERS

Isakson, Hon. Johnny, Chairman, Subcommittee on Employment and Workplace Safety, opening statement ......................................................................... 1 

Franken, Hon. Al, a U.S. Senator from the State of Minnesota, opening 

statement .............................................................................................................. 3 

Scott, Hon. Tim, a U.S. Senator from the State of South Carolina ..................... 14 

Murray, Hon. Patty, a U.S. Senator from the State of Washington ................... 16 

Baldwin, Hon. Tammy, a U.S. Senator from the State of Wisconsin .................. 18 

Warren, Hon. Elizabeth, a U.S. Senator from the State of Massachusetts ........ 19 

Cassidy, Hon. Bill, a U.S. Senator from the State of Louisiana .......................... 21 

Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode Island ...... 23 

Roberts, Hon. Pat, a U.S. Senator from the State of Kansas .............................. 24 

WITNESS—PANEL I 

Perez, Hon. Thomas, Secretary of Labor, Washington, DC ................................. 4 

Prepared statement .......................................................................................... 7 

WITNESSES—PANEL II 

Litan, Robert, Economist and Attorney, Wichita, KS ........................................... 25 

Prepared statement .......................................................................................... 27 

Schneider, Peter, President, Primerica Inc., Duluth, GA ..................................... 29 

Prepared statement .......................................................................................... 30 

Miller, Darlene, President and CEO, PERMAC Industries, Burnsville, MN ..... 35 

Prepared statement .......................................................................................... 37 

Puritz, Scott, Managing Director, Rebalance IRA, Bethesda, MD ...................... 39 

Prepared statement .......................................................................................... 41 

ADDITIONAL MATERIAL 

Statements, articles, publications, letters, etc.: 

DOL Fact Sheet—Employee Benefits Security Administration, U.S. Department of Labor ......................................................................................... 49 

Financial Engines ............................................................................................. 53 

Huffington Post article—Senate Republicanns Think Herbalife is a Good 

Model for Your Retirement Savings ............................................................ 55 

Wall Street Journal article—Creative Destruction at a Broker Near You .. 56 

Save Our Retirement, letter ............................................................................ 58 

Response by Scott Puritz to questions of: 

Senator Isakson ......................................................................................... 59 

Senator Franken ........................................................................................ 59 

(III) 

(1) 

RESTRICTING ADVICE AND EDUCATION: 

DOL’S UNWORKABLE INVESTMENT PROPOSAL FOR AMERICAN FAMILIES AND RETIREES 

TUESDAY, JULY 21, 2015 

U.S. SENATE, SUBCOMMITTEE ON EMPLOYMENT AND WORKPLACE SAFETY, COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS, Washington, DC. 

The subcommittee met, pursuant to notice, at 2:35 p.m., in room 

SD–430, Dirksen Senate Office Building, Hon. Johnny Isakson, 

chairman of the subcommittee, presiding. 

Present: Senators Isakson, Scott, Cassidy, Roberts, Murray, 

Casey, Franken, Baldwin, Murphy, Warren, and Whitehouse. 

OPENING STATEMENT OF SENATOR ISAKSON

Senator ISAKSON. We welcome all our visitors. We welcome our 

Secretary of Labor—Secretary Perez, thank you—our other panelists who will testify in a little bit and, certainly, I’m always glad 

to have Ranking Member Franken here. He keeps me straight all 

the time. If not straight, at least he keeps me laughing. 

Senator FRANKEN. You keep me laughing, too. Is that the proper 

thing to say? 

Senator ISAKSON. That sounds good. 

Senator FRANKEN. We’re good friends. We are. And you’re the cosponsor of my very first bill. 

Senator ISAKSON. That’s right, which you mentioned on television, which I really appreciate. 

Senator FRANKEN. You’re very welcome. 

Senator ISAKSON. It was the second comment I didn’t like very 

much, but we’ll talk about that later. 

[Laughter.] 

Senator FRANKEN. We’re going to not rehash our personal history 

here. 

[Laughter.] 

We’re going to go right to the hearing, right? 

Senator ISAKSON. Only good friends talk like this to each other. 

Senator FRANKEN. Yes. 

Senator ISAKSON. Let me welcome all of you, and I’ll start with 

an opening statement and then turn it over to Senator Franken for 

his statement. 

A comfortable retirement is part of the American Dream. Unfortunately, the fine print included in hundreds of pages of DepartVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\DOCS\95692.TXT CAROL
2 

ment of Labor regulation that seeks to redefine a single word, fiduciary, would deny millions of Americans the chance to plan for one. 

The new rule would limit access to investment advice for the families who need it most and, in my opinion, is a solution in search 

of a problem. 

By way of example, in terms of that one word being defined by 

pages of regulation, that’s the regulation and the comments by the 

Department of Labor on the fiduciary rule change, just to give you 

some idea of how much paperwork it took to explain it. 

Senator FRANKEN. Is that like a gift for me? 

Senator ISAKSON. I’m going to let you take that home and read 

it tonight or do whatever else you’d like to do with it. 

[Laughter.] 

The regulation intentions are commendable to ensure that lowand middle-income families receive the same quality of advice 

about their investments as wealthy people do. Under the proposal, 

people who provide investment advice on retirement savings must 

act in the best interest of the investors or forfeit their fees. 

Under the new rule, providers of retirement savings vehicles 

such as IRAs and 401(k)s must either enter into a contract that 

says it will act as a fiduciary and benefit only the investor. The 

problem is that the regulations that govern fiduciary advisors 

would severely limit products available for retirement accounts and 

increase fees so much so that low- and moderate-income people 

would be more low-income, more moderate-income, and less informed. 

The rule also requires disclosure of more information than is reasonable or often even at times impossible to provide. Advisors must 

estimate the cost, level of fees the investor is to pay over multiple 

years. Because fees often fluctuate, as do rates and return, such estimates are inevitably wrong. For that reason, they are considered 

misleading and actually banned by the Securities and Exchange 

Commission. 

I might insert here that in my private life, for 33 years, I dealt 

with Regulation Z in terms of disclosure of real estate and mortgage information. Expressing annual percentage rates and other 

rates of return at any one point in time can by its very nature be 

wrong the next day because of changes in markets, and you can penalize people for something that was no fault of their own. 

The regulation would also restrict IRA investors to a list of products that the Department of Labor deems appropriate. Why the 

Labor Department should meddle in investment decisions defies all 

logic. Yet there is a one-size-fits-all open approach that would prevent investors from diversifying in ways to protect from the downside risk. 

The hundreds of investment options that retirement savers now 

have would be reduced to a mere handful for most Americans. This 

seems entirely counterintuitive to our public policy goals of increasing retirement plan participation for all citizens of our country. 

Worst, because investors must have a contract with their advisors to receive recommendations about what to put in their investment accounts, the millions of existing IRAs and 401(k)s would, in 

effect, be blocked from getting ongoing advice because those contracts weren’t in place when the accounts were created. Millions of 

3 

people will receive letters from the brokerage firm telling them 

they will no longer be able to get personalized assistance. 

By one estimate, a third of the financial representatives would 

be forced to leave the business because they couldn’t be properly 

licensed. Having a personal representative matters. According to a 

2012 study, three-quarters of non-retired consumers who work with 

an advisor contribute to a retirement plan or an IRA, while fewer 

than half of the consumers that don’t have advisors save for retirement. 

In other words, many working families will not be able to get the 

advice they need to feel comfortable about the decisions that are 

made. Studies have shown that losing personal assistance for retirement savings could reduce by as much as 40 percent the 

amount of savings saved by low- and moderate-income people. 

As I told Secretary Perez yesterday on the phone, I am interested 

in seeing to it that people get quality advice, that those that advise 

them are responsible and accountable for that advice, and that we 

do everything we can to improve the access and the amount of savings America’s low- and moderate-income families have. 

The matter is not the goal. The matter is how you get to the goal 

and how you define it. In my judgment, that many pages of regulation and that much explanation of a single goal is entirely too 

much and too restrictive on the access to free advice that these people need to get. 

With that said, I’ll turn it over to our Ranking Member, Senator 

Franken from Minnesota. 

OPENING STATEMENT 0F SENATOR FRANKEN

Senator FRANKEN. Thank you, Senator Isakson. This is my first 

hearing as Ranking Member of the Employment and Workplace 

Safety Subcommittee, and I look forward to working with my 

friend, Chairman Isakson, and members of the committee on the 

important role the subcommittee plays with jurisdiction over a variety of employment issues, including workforce education and 

training, the health and safety of America’s workforce, wage and 

hour laws, and workplace flexibility. 

In today’s hearing, we are discussing another very important 

issue, protecting America’s workers’ retirement savings, and, in 

particular, a review of the Department of Labor’s proposed rule to 

address conflicts of interest in the retirement advice that Americans receive when managing their retirement nest eggs. 

We have read the headlines time and time again that Americans 

are not saving enough for retirement. I have heard it many times 

from hardworking Minnesotans about how hard they’re working 

just to keep up and provide for their families, let alone save for retirement. 

Saving for retirement is hard, and investing can be intimidating 

for those without any experience, leaving many to rely on advisors 

to help guide them through their retirement planning. Most advisors and brokers put the interest of their clients first, and I have 

heard from a number of them who have sent me letters recently 

in support of the Department of Labor’s proposed rule, including 

Charlie—I’m going to mispronounce Charlie’s name, but it’s someVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\DOCS\95692.TXT CAROL
4 

thing like Bolognino. I think it means meat sauce in some language. 

[Laughter.] 

He is of Side-by-Side Financial Planning in Plymouth, MN. The 

best meat sauce comes from the western suburbs of Minneapolis. 

[Laughter.] 

Charles Buck of Buck Financial Advisors in Woodbury, MN, and 

other Minnesota financial advisors have gotten hold of me in support of this rule. We will also hear from Scott Puritz later today. 

He is the managing director of Rebalance IRA, and he will be testifying. Mr. Puritz offers his clients asset management and custom 

investment portfolios for IRAs and offers one-on-one consultation, 

all while embracing the fiduciary standard, and he charges some 

of the lowest fees in the industry. 

There are also those who charge much higher fees and sometimes even lower returns for retirees. When that happens, it’s hard 

for working Americans who are planning for retirement and they 

pay the price. These hardworking people shouldn’t have to worry 

about the fact that some advisors don’t have their best interest in 

mind. I think we can all agree to that. 

The Department of Labor’s proposed Conflict of Interest rule 

seeks to address this issue. Many groups are supportive of DOL’s 

role, but there are also those that believe the rule will result in unintended consequences. That’s what this hearing is about, and 

that’s why it’s so important. 

This is a process. We will hear from a range of perspectives today 

to help us understand the benefits and shortcomings of the proposed rule. That’s why I was a little taken aback by the title of today’s hearing, which is Restricting Advice and Education: DOL’s 

Unworkable Investment Proposal for American Families and Retirees. 

If I had been naming it, I could have named it DOL’s Fiduciary 

Proposal: What a Great Rule. I don’t think that would have helped 

much, right? No, of course not. 

[Laughter.] 

I think the department’s intent with the proposed rule is very 

clear: to help American investors keep more of their hard-earned 

money for retirement. As the saying goes, ‘‘the devil is in the details’’, and at 400-plus pages, gift wrapped beautifully, there are 

many details in this rule. I look forward to hearing from Secretary 

Perez to better understand how this proposed rule will work and 

from other witnesses on how we can make this rule even better. 

Thank you, Mr. Chairman. 

Senator ISAKSON. Thank you, Senator Franken. 

We’ll now turn to Secretary Perez of the Department of Labor. 

Secretary Perez. 

STATEMENT OF HON. THOMAS PEREZ, SECRETARY OF LABOR, 

WASHINGTON, DC 

Secretary PEREZ. Thank you, Mr. Chairman. 

Senator ISAKSON. If you could hold your remarks to about 5 minutes, we’d appreciate it. 

Secretary PEREZ. I’ll do my best. 

Senator ISAKSON. Thank you. 

5 

Secretary PEREZ. Thank you, Mr. Chairman, Ranking Member 

Franken, and members of the committee. It’s an honor to be here 

with you. 

I want to start by talking about a real person, because behind 

every regulation or proposed regulation is a real person. Merlin 

Toffel was a Navy veteran and an electrician. He did everything 

right. He and his wife, Elaine, raised four kids in suburban Chicago. They built a solid middle class life. They saved their money. 

They built up an impressive portfolio with Vanguard. 

When Merlin was stricken with Alzheimer’s and could no longer 

manage their finances, Elaine made an appointment at the local retail bank. They had used this bank for years. They trusted them. 

The bank’s investment broker told her to liquidate the Vanguard 

portfolio and sold them a very complex variable annuity to the tune 

of $650,000. Merlin was something like 75 or 78 years old at the 

time of the sale of this variable annuity. 

Elaine trusted this advice. She thought it was in their best interest. The annual fee on that variable annuity—the annual fee was 

$26,000, and if the Toffels needed to access the money right away, 

a 7 percent surrender charge would cost them more than $45,000. 

In the end, the broker’s conflicted advice cost a hardworking family 

more than $50,000. 

This story is tragic but not unique. It’s also not illegal, because 

someone concluded that the advice was suitable. Conservative estimates by the Council of Economic Advisors place the cost of conflicted advice at more than $17 billion annually. 

ERISA is over four decades old. In my parents’ generation, when 

you retired, you got a pension, a pin, a party, and that pension was 

a defined benefit pension. Today, we have an $11 trillion market 

of defined contributions of 401(k)s and IRAs, $11 trillion. 

Times have changed. Consumers now have to make critical decisions about how to invest these funds that they have so hard 

earned. Three of the most important decisions that people now 

make are medical, legal, and financial. When you go to a doctor or 

a lawyer, they have a medical and legal obligation to put your best 

interest first. 

The Labor Department’s Conflict of Interest rulemaking is about 

making sure that the same set of rules—best interest of the consumer—apply to when you are getting help in retirement. Most 

people assume, actually, that the standard already exists, and that 

is, indeed, the case for many advisors, like the one my wife and I 

use, who is a fiduciary, and he does so, and he puts our best interest first. The majority who operate in this space are under no such 

commitment, although in many cases their marketing actually suggests that they are. 

It’s important to make one thing clear, and Senator Franken alluded to this. While there are undeniably some bad apples, this is 

not a case about bad people doing bad things. The majority of folks 

in this space are trying to do the right thing every day. The nub 

of the problem is good people who are operating within a structurally flawed system, a market that sees personal financial interests of the advisor and the firm all too frequently misaligned from 

the best interest of the customer. The result is what we saw happen to the Toffels. 

6 

Our goal in this proposed rulemaking is straightforward, to align 

the best interest of the customer with those of the advisor and the 

firm. This proposed rule has been the product of a significant 

amount of outreach to a wide array of stakeholders. 

I appreciate the support we’ve gotten from so many in the industry, people like Brian Moynihan, the CEO of Bank of America, who 

said, ‘‘We believe that doing what is in the best interest for our 

customers is absolutely the right thing to do.’’ Jack Bogle, the 

founder of Vanguard, is a very strong supporter of this rule. We’ll 

hear from a witness shortly who plays in this space every day as 

a fiduciary working with small investors who tells you when you 

put your customers’ interests first, it’s great for your customers, 

and it’s great for business, addition. 

I also invite you to look at the transcript of a recent hearing we 

had in the House, because there is a really interesting thing happening right now. The conversation is shifting from whether to 

have a best interest standard to ensuring that a best interest 

standard can be effectively implemented. I’m heartened by that 

shift. We welcome any and all suggestions on how to improve the 

proposed rule to ensure that it can be effectively implemented. 

We’ve heard and understand concerns that have been raised 

about issues, such as point of sale disclosure, data retention, and 

the mechanics of implementing the best interest standard. As long 

as we don’t lose sight of our north star in enforceable, best interest 

commitment, we are very flexible on the question of how to get this 

work done. This is about providing guard rails, not straight jackets. 

It’s important to remember as we go through this rulemaking 

that a substantial subset of the advisors already operate under a 

fiduciary model. They serve a wide array of customers, including 

small businesses, small investors, and they do it well. We know 

that it can be done, because it is already being done by so many 

businesses. 

A number of folks have raised concerns that the proposed rule 

will shut out the small saver from investment advice. Entities such 

as the Consumer Federation of America, entities such as AARP— 

they take a back seat to no one, and they’re concerned about small 

investors, and they strongly support this rule. 

We’ve consulted with several profitable firms whose business 

model is all about working with the little guy. There was an investment firm out in Palo Alto called Wealthfront. They cite their success as, 

‘‘living proof that not only is it possible to provide fiduciary 

service at low cost to small investors nationwide, but the market greatly rewards this effort.’’ 

When I talk to firms like this and tell them about the argument 

on the other side, that our rulemaking will make it impossible to 

serve the small saver, the most frequent advice I get is ‘‘Give them 

my phone number, give them my email, because you know what, 

I’ll take their business any day of the week.’’ I know that the industry can adapt to serve this $11 trillion market, and I’m confident that we can work with them. 

We’ve reached out, in addition, to small savers, to small businesses who want to ensure that their employees have access to retirement plans so that they can recruit the best and the brightest. 

7 

Our proposed rule has a number of safeguards and safety valves 

so that they can access retirement plan options for their employees. 

As Kelly Conklin, a small business owner from New Jersey, told 

us, 

‘‘I am all for this proposal. I don’t have a big firm with our 

own in-house financial management team that can advise me. 

I want the financial advisors I work with to be required to represent my interests.’’ 

That’s precisely what we’re trying to do, build a big table, invite 

everyone up. I believe one of the most important things you can do 

when you’re doing rulemaking is build a big table, listen, and have 

a healthy dose of humility. That has been our approach: humility, 

good faith, an open mind, and a keen ear. 

We know our destination and enforceable best interest standard. 

It’s in the line of Ronald Reagan—trust but verify. Your marketing 

material says that you look out for your customers’ best interests. 

This standard is memorializing what is in the marketing materials. 

We’re open to different routes to getting to that enforceable best 

interest standard, and we look forward to continuing to hear from 

as many voices as possible. We’ve extended the comment period. 

We’re convening 3 days of public hearings next month, and then 

we’ll reopen comment after we publish the transcript of those hearings. We look forward to the engagement. 

We have gotten so much good feedback from so many businesses 

who have come in with a get-to-yes attitude. They have challenges, 

they have questions, they have concerns, but they have a get-to-yes 

attitude, because they recognize, like Jack Bogle said, that when 

you put your customers first, it’s great for your customer, and it is, 

indeed, great for business. 

This is about middle class security, and one of the pillars of middle class security is retirement security. I look forward to working 

with this committee and with all the stakeholders to continue the 

process of producing a rule that will work for American savers and 

will work for American business and will work for all stakeholders. 

Mr. Chairman, thank you for your time. 

[The prepared statement of Secretary Perez follows:] 

PREPARED STATEMENT OF THOMAS PEREZ

Thank you for the invitation to appear before the subcommittee to speak about 

the Department’s proposal to protect workers from conflicts of interest in retirement 

investment advice. As this subcommittee explores the issues facing America’s workers, I’m pleased to have the chance to discuss this rulemaking, and hope that we 

can continue to engage in a productive dialog. We believe that we have proposed 

a reasonable, middle-ground approach that is responsive to our extensive outreach 

and feedback. It is grounded in a basic principle—that investment advisers should 

act in their clients’ best interest not their own. The proposal’s 90-day comment period closes at the end of today, and will be followed by public hearings that begin 

August 10th. The comment period will reopen on the day of the hearing and remain 

open until 14 days after the hearing transcript is published—a process that we anticipate will provide an additional 30 to 45 days of public comment. I want to assure 

all stakeholders, including Congress, that the Department is appreciative of the 

comments received to date, which have already begun to sharpen our thinking about 

potential changes so that the proposal accomplishes its goals in the simplest, most 

practical way for all concerned. 

Retirement security is a fundamental pillar of the middle class. We must ensure 

that Americans who work hard and save responsibly for retirement are getting a 

fair share of the returns on those savings. This subcommittee knows too well that 

there is a retirement crisis in America and that not enough Americans are saving 

8 

for retirement. I’m deeply concerned that even if you’ve done the right thing, worked 

hard, and saved what you could, you could end up in a situation where you do not 

have what you need for retirement simply because your adviser isn’t required to put 

your interests first. The majority of advisers already does the right thing and serves 

the interests of clients first, but most Americans do not have room for error and 

cannot afford to invest in products with unnecessarily high fees or low returns that 

benefit their advisers but do not meet their own needs. 

Throughout my career, I’ve seen over and over again that making the right financial decisions is critical to a person’s life and future, but that far too often, people 

don’t have the information and tools they need to make the best decisions. When 

I was in State government and at the Justice Department, I saw firsthand how the 

foreclosure crisis turned the American Dream into a nightmare for millions of families; I saw how it turned thriving communities into decaying neighborhoods. 

The crisis was a function of inadequate regulation and irresponsible, sometimes 

predatory, lending practices. But it was also a stark reminder of how little so many 

of us understand the biggest financial decisions we make, and how we so often have 

to rely on what we are told by professionals, and to trust that they’re giving us the 

best information. 

The biggest decisions we’re faced with fall into one of three categories: medical, 

legal or financial. Most people know that lawyers and doctors have an obligation to 

look out for what’s best for you. When you go to a doctor, you expect to get advice 

that’s in your best interest. If you have cancer, you don’t want your doctor telling 

you just what’s ‘‘suitable’’ for you. You need your doctor to tell you what’s best for 

you. When you hire an attorney, that attorney is legally bound to work in your best 

interest. 

And most people assume the same is true for professionals who provide financial 

advice. You should expect that when you are relying on someone to provide retirement investment advice, they are going to tell you what is best for you, not what 

earns the most money for them. But in reality, conflicts of interest and hidden fees 

too often result in bad advice that is not in our best interests. 

There are many advisers who work every day to do right by their clients. Some 

financial advisers commit to serve your best interests. But others operate under no 

such commitment, and there’s nothing stopping them from getting backdoor payments at their client’s expense. The corrosive power of fine print and buried fees 

can eat away like a chronic illness at a person’s savings. 

An analysis by the Council of Economic Advisers concluded that this kind of conflicted advice leads to losses totaling about $17 billion every year for IRA investors. 

Losses due to conflicts of interest, on average, reduce returns for affected savers by 

about 1 percentage point per year. Over 35 years of saving, this could reduce savings by more than a quarter. And in many cases, the affected consumers don’t even 

know it is happening. The lack of rules of the road is confusing, it creates an unlevel playing field, and it hurts working people who just want to be able to save 

enough to retire comfortably. 

When I became Labor Secretary 2 years ago I committed to slowing this rulemaking in order to ensure that we got it right. During that time, my review of the 

evidence has demonstrated that there is in fact a large problem that needs to be 

solved. I heard from too many hard working Americans whose golden years became 

tarnished when the savings they thought would carry them through retirement disappeared into high fees and poor performance. One of the people whose story I 

learned is named Phil, a retiree from California. In 2002, Phil was offered a buyout 

from the company where he had worked for 30 years, and he was presented with 

three choices: he could ignore the offer and keep working; he could take the company’s pension and receive a monthly check of $1,500 for life; or he could take a 

lump sum of $355,000—money he had earned. After talking it over with his wife, 

he decided to call a financial adviser whom the company had brought in a few years 

prior to provide some retirement advice to employees. 

That adviser came to Phil’s house, and sat with them at their kitchen table. She 

encouraged Phil and his wife to take the lump sum and let her invest it for them. 

When Phil came to Washington recently to tell lawmakers his story, he said 

‘‘I will admit, being a blue-collar union employee and being watched over, 

cared for and protected by the company and the union my entire career, I was 

ignorant when it came to these financial matters I had to deal with, and I needed professional help.’’ 

As so many of us do every day, Phil and his wife trusted the adviser to guide 

them in the right direction. 

But she didn’t do what was in their best interest. Instead, she put Phil’s money 

in investments that weren’t appropriate for him, and she misled him about how 

9 

much monthly income he could safely withdraw. Today, Phil and his wife have lost 

nearly all of their savings. They live on a strict budget and shop at thrift stores. 

They’re at risk of losing the home they’ve lived in for more than 40 years. They 

won’t have anything to leave for their kids or grandkids. 

In addition to stories like this, the Department’s own economic analysis conservatively estimates that the proposed regulatory package would save investors more 

than $40 billion over 10 years, even if one focuses on just the one subset of transactions that have been the most studied. The real savings are likely much larger 

as conflicts and their effects are both pervasive and well-hidden. 

Even as I became more convinced of the problem, I knew that we had to act carefully to solve it in a way that protected people like Phil, but that avoided unwarranted disruption to the industry. As I assured this committee when I appeared before you just a couple of months ago, our proposal serves three main principles: (1) 

it updates our regulation to protect retirement savings in the much-changed retirement landscape; (2) it allows flexibility so the industry can use its knowledge and 

expertise to find the best way to serve its clients and continue to innovate; and (3) 

it meaningfully responds to the input we received in the extensive outreach that we 

have conducted. I would like now to show how I believe our proposed rule honors 

those three principles. 

The existing DOL rule was put in place a generation ago, in 1975, when most of 

America’s workers did not have to worry about making decisions regarding how to 

invest their retirement savings. But now that the retirement landscape has 

changed, our rules have to change as well. When the rules were last overhauled almost 40 years ago, Individual Retirement Accounts had just been created and employer-based 401(k)s did not even exist. Today, America’s workers have more than 

$7 trillion invested in IRAs and more than $5 trillion in 401(k)-type plans, which, 

combined, exceed the value of traditional pension benefits. As more baby boomers 

retire, more and more of them are moving their retirement savings from employersponsored plans into IRAs, making the protection of rollovers and IRAs increasingly 

important. Congress created and encouraged the growth of this 401(k) and IRA marketplace by giving those savings tax preference—as a result, under ERISA and the 

tax code, we have an obligation to ensure that those savings are protected. 

The proposal will close the loopholes in the 1975 DOL rule that today make it 

possible for advisers to exclude from protection the kind of advice relationships that 

are common now for 401(k) and IRA holders. Under the proposal’s new definition, 

a fiduciary is a person providing investment advice for a fee or other compensation 

with respect to a plan or IRA if either the person doing so acknowledges he or she 

is acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code 

OR the advice is provided pursuant to an agreement or understanding, written or 

verbal, that the advice is individualized to, or specifically directed to, the advice recipient for consideration in making investment or management decisions with respect to investments of plans or IRAs. 

To serve our second principle to allow maximum flexibility, the proposal that we 

published in April does not include detailed rules as to what advisers can and cannot do to serve their clients. Instead, the proposal has one fundamental tenet that 

should be unassailable—retirement advisers should put the best interests of their 

clients above their own financial interests. This proposal is intended to provide 

guard rails, but not to be a straightjacket, because we know there is not a one-sizefits-all solution to putting clients’ interests first. 

Our proposal’s second principle is best illustrated by the proposal’s carve outs and 

exemptions, which allow for flexibility and workability. The proposed exemptions 

from ERISA’s prohibited transaction rules would broadly permit firms to continue 

common fee and compensation practices, as long as they are willing to adhere to 

basic standards aimed at ensuring that their advice is in the best interest of their 

customers. Rather than create a highly prescriptive set of transaction-specific exemptions, the Department instead is proposing a set of exemptions that accommodate a wide range of current business practices, while minimizing the harmful impact of conflicts of interest on the quality of advice. 

At the heart of the proposal is the best interest contract that would govern the 

advisory relationship if the adviser is receiving conflict of interest fees or other payments. It is an innovative approach designed to respect existing business models 

while protecting consumers and leveling the playing field for impartial advisers. 

This principles-based approach obligates the adviser to honor the interests of the 

plan participant or IRA owner, while leaving the adviser and employing firm with 

the flexibility and discretion necessary to determine how best to satisfy these basic 

standards in light of the unique attributes of their business. 

The proposal clearly reflects our third principle—a commitment to being responsive to the substantial input we received from a wide range of stakeholders. My staff 

10 

and I have met with representatives of all of the major financial industry groups, 

CEOs of big and small firms in the financial services industry, and representatives 

of employers who offer retirement plans to their workers. I have also met with consumer groups and civil rights groups who are concerned that their members are the 

ones who can least afford to see their retirement savings dissipated by conflicts of 

interest among financial advisers they rely on for investment advice. We have also 

worked extensively with colleagues throughout the government, including and especially the Securities and Exchange Commission. 

I am encouraged by the substantial and growing areas of agreement between the 

Department and the financial services industry. For example, there is an acknowledgment and acceptance among our stakeholders in the financial services sector 

that there are significant conflict of interest problems in the marketplace serving 

retirement investors. There is also a broadening consensus around the core elements 

of a solution, including: (1) an enforceable best interest standard, (2) a requirement 

that firms carefully design structures and procedures to mitigate conflicts, (3) adherence to the existing securities laws, (4) more effective disclosures to investors, and 

(5) the need for concrete steps to address fees and other revenue incentives that 

may improperly influence investment recommendations. 

We heard from numerous stakeholders, in both the industry and advocacy communities, that a principles-based rule would work best in this rapidly evolving marketplace. We responded with the best interest contract exemption—a completely new 

approach that directly addresses these suggestions. 

You can also see our responsiveness not just in what the rule will do, but also 

in what the proposal won’t do: 

• We heard that banning commissions would cause excessive disruption in the industry—therefore, like the prior proposal, the new proposal does not ban commissions or many other common payments for advisers. 

• We heard that including appraisals or valuations of stock held by employee 

stock ownership plans in this rule was too complicated and not a good fit—so the 

rule does not apply there. 

• We heard that large plans with sophisticated fiduciaries making investment decisions need greater flexibility in dealing with advisers so we included a carve-out 

for them, commonly referred to as the seller’s exception. 

• We heard that it was important to provide retail customers who want to direct 

their own transactions with the ability to place orders without unnecessary process, 

so the rule will not apply to brokers who just take direct orders from customers and 

do not provide advice. 

• Finally, we heard about the important role that the financial services industry 

plays in providing much-needed financial education. Because we value that role, the 

proposed rule does not limit access to financial education. In fact, it would expressly 

allow employers, call center employees, and other financial professionals to continue 

to provide general investment education without becoming fiduciaries, and extends 

this express allowance, historically applicable only in the 401(k) market, to distributions, rollovers and IRAs as well. 

The proposed rule and its accompanying Regulatory Impact Analysis includes numerous requests for comments on particular issues—more than any other rule that 

we have published while I have been Secretary. I think of these specific requests 

as an invitation to a very real conversation that I hope will prove to be a productive 

one. Our track record gives us credibility when I say that we are open to making 

real changes in the rule to improve it, and that’s why we urge our partners in the 

industry and advocacy community to engage in a good faith dialog during the comment process. For example, we included in the rule some illustrative examples of 

the kinds of practices and procedures that firms could adopt to meet the requirements of the best interest contract exemption. We hope that comments from stakeholders will address whether these are the right examples or whether there are better ones. 

Many of you have raised important questions about how this may affect retirement savers with small balances, something we carefully considered while drafting. 

I simply don’t believe the argument that small savers cannot be served by advice 

that is in their best interest, especially with the advent of new, technology-based 

and technology-assisted models. We know that advisers can live up to a best interest 

standard and still make a living because so much of the industry already does just 

that. Every day, Americans are served by advisers like the certified financial planner with whom my wife and I work, who has embraced the best interest standard. 

In fact, the rule will help the best advice win out, because those already selling good 

products or giving good advice stand to benefit in a world where a client’s best interest has to be put first. What I’ve learned through a robust and exhaustive outreach 

11 

process is that when you put the interests of your customers first, it’s good for your 

customers and it’s good for business. Jack Bogle, the founder of Vanguard, made 

this concept a cornerstone of his business model, and he and other firms large and 

small have proven that it can be done to great success. 

We have put forth a simple proposition—the client’s best interest should come 

first. So far, we have heard from some who want us to go further and ban all conflicts of interest and end commissions, while others have said that we don’t need 

to act at all. Those comments tell me that we have probably found the right middle 

ground in providing greater consumer protection in a way that respects the important role played by investment advisers in helping the middle class achieve the 

American dream of a secure retirement. I am most heartened by the comments that 

offer suggestions on even better ways to achieve that objective. I hope to continue 

that conversation here with you. 

Thank you again for the invitation to testify. 

Senator ISAKSON. Thank you, Secretary Perez. We appreciate 

your attendance and your service to the country. 

If your rule was implemented as it’s currently contained in this 

stack of papers here, what would have happened differently to Merlin Toffel and his wife with the $650,000 they cashed in at Vanguard and bought a variable annuity? What would your rule specifically have done with the $26,000 fee, which was the maintenance fee annually, or the 7 percent early withdrawal fee, or any 

other thing you might determine was wrong? 

Secretary PEREZ. Sure. What would have happened differently is 

that that person advising them would have had an obligation to 

look out for their best interest. What happens in a suitability 

standard—— 

Senator ISAKSON. Excuse me for interrupting. That’s a point I 

want to get to. I understand who they went to was a bank. Is that 

correct? 

Secretary PEREZ. Yes. 

Senator ISAKSON. Would that bank be considered—would a bank 

be considered to meet the fiduciary standard you require? 

Secretary PEREZ. They went to a broker dealer at a bank. A 

broker dealer has an obligation—had a suitability obligation, which 

is less—which creates part of the challenges that we have in this 

situation. 

Senator ISAKSON. Continue. 

Secretary PEREZ. The broker dealer under the proposed rule 

would have an obligation to look out for the best interest of the 

consumer. The challenge that we see and the $17 billion annual 

cost of conflicted advice is born out of the fact that there are multiple products that can be suitable, and that broker dealer is totally 

within his or her bounds to then take four or five suitable products 

and steer the customer to the product that generates more fees for 

him or her at the expense of the customer. We think that isn’t 

right, and we think it should be changed. 

Senator ISAKSON. In your vision, how would they be able to remedy the situation with this broker dealer? What would have been 

the broker dealer’s obligation under the fiduciary rule to the lady 

and gentleman who bought the variable annuity? 

Secretary PEREZ. To put the customer’s best interest first. 

Senator ISAKSON. How do you do that? I mean, what if he said 

that was in the best interest of the customer? What penalty is 

there—what do you do to the broker dealer or the person offering 

the advice to penalize them for what you consider was bad advice? 

12 

Secretary PEREZ. You would file a claim for excessive fees to recover the losses that were incurred as a result of the conflicted advice. 

Senator ISAKSON. It basically creates a cause of action for an individual who feels like they’ve been aggrieved to be remedied. Is 

that correct? 

Secretary PEREZ. Right. The proposed rule has a provision in an 

individual claim like this that the particular bank could have an 

arbitration clause so that they could require that if there’s any 

claim that arises out of the service they provide, it would be resolved through arbitration. That’s one of the proposals in the rule 

that’s in the—— 

Senator ISAKSON. The advisor would do that or the individual 

would call for it? 

Secretary PEREZ. No. The institution that is working with this 

individual could, as part of the agreement working with that individual, be able to include an arbitration clause. In other words, it 

says that if we have a problem, you can’t go and file a claim in 

State court or Federal court. You have to go through arbitration. 

Senator ISAKSON. I understand. 

Secretary PEREZ. That’s a proposal that is taken from—we spoke 

to a lot of other agencies that are involved in this issue—SEC and 

other regulators—and that is basically parallel to the procedures 

that are used in another sister agency. 

Senator ISAKSON. It’s a meritorious move. You made the statement—you said the nub of the problem—and I wrote fast, so if I 

missed it, tell me. You said the nub of the problem is, ‘‘good people 

operating in a flawed system.’’ Would you explain that? 

Secretary PEREZ. Sure. There is a misalignment between the incentives that a person giving advice has and the best interest of 

the consumer. For instance, again, getting back to the Toffels, if 

you have four or five different products under the current suitability rule that are suitable, and the first product, the variable annuity, generates $26,000 a year in fees, and another product which 

would have a comparable return has a fraction of those fees, you 

have a perverse incentive to steer them to the product that generates the most fees. 

Again, that’s totally permissible, so I’m not casting aspersions on 

the person that does it. I’m saying that that’s not right. We can devise a system—and I underscore what I said in my testimony. 

There’s a substantial number of people, including one of the witnesses who will come up on the next panel, who operate under a 

fiduciary model already. They’ve demonstrated that this can be 

done. This is being done. 

Senator ISAKSON. Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

Secretary Perez, I know today is the last day of the official comment period, and next month a public hearing is scheduled followed 

by a second comment period. I’ve heard from stakeholders who said 

they are participating in this process and are thankful that the department has provided opportunities for feedback. 

Can you share with us how the department has incorporated this 

feedback in the rule that we have before us today? 

13 

Secretary PEREZ. I can talk about the feedback that we have gotten. We haven’t made any decisions yet, Senator, on what to do because the comment period is still open, and so we want to take in 

all the comments that we get during that comment period. 

What I can say to you with confidence is that we’ve gotten some 

great advice. Again, there have been a number of people who have 

come in from industry who have talked about how we agree that 

there should be a best interest standard. We want a level playing 

field, as you said from your testimony. We have concerns about 

things like—there are some data retention obligations, and we 

think you could do it differently. 

There’s a best interest contract framework, and we have heard 

feedback from folks saying that it’s clunky, and there’s a more 

streamlined way to do it. We have a point of sale disclosure requirement, and people have said that that is not necessary. 

What we’ve done in every circumstance—when someone says 

that the best interest contract is clunky, our response is, ‘‘Tell us 

how to do it better. How do we retain that north star of an enforceable best interest contract and do it better?’’ That’s the feedback 

we’re getting and it’s been really, really helpful. 

Senator FRANKEN. And you’ve incorporated it? 

Secretary PEREZ. We haven’t made final decisions yet because we 

won’t put out a final rule until after we’ve gotten all of the comments. I’m quite confident that if history is a guide, the final rule 

will be materially different than and better than the proposal, because you’ve got to be a good listener in this business. We haven’t 

made any decisions, and we continue to keep that open mind. 

Senator FRANKEN. And you’re open to continued suggested fixes 

from industry and—— 

Secretary PEREZ. Absolutely. We’re not only open. We have affirmatively reached out for it, because there’s a lot of folks who 

know a lot about this, and we want to get their insights. 

Senator FRANKEN. Darlene Miller, who is from Minnesota and is 

going to be testifying in the next panel, is president of PERMAC 

Industries in Burnsville, MN, and she’ll be talking about being a 

small business owner. She offers a 401(k) plan on roughly 30 employees. 

Darlene is helping her employees prepare for retirement and setting the right example for many other businesses. She has some 

concerns that the proposed rule will jeopardize her ability to provide this important benefit to her employees going forward. 

Can you assure us that you will continue to work with business 

owners like Darlene to make sure that these rules don’t have unintended consequences? 

Secretary PEREZ. I welcome the opportunity. I read Ms. Miller’s 

testimony, and she’s a very successful business owner, not to mention a Minnesotan. We’ve spent time with small business owners. 

Small business owners—what they tell me most frequently is, 

‘‘I’m an expert at making my product, my widget. I have 10 

or 15 people. I don’t have expertise in 401(k)s. I know I want 

to offer it, because I want to attract the best and the brightest.’’ 

What we have done in this proposal is include a number of carveouts for small businesses so that they can continue to do that. AcVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 S:\DOCS\95692.TXT CAROL
14 

tually, what we do to help protect people like Ms. Miller is we’re 

changing the status quo, because the status quo right now—and 

she’s had a very good experience with her advisor. Other’s haven’t. 

When you have a bad experience with your advisor, under the 

status quo, if litigation ensues, the defendant is the business. It’s 

not the advisor, because under the current status quo, the person 

providing the advice is actually off the hook. I actually think that’s 

kind of perverse, and I think it doesn’t help people like Ms. Miller. 

I’d love to sit down and explain to her the carve-outs that help 

her and other small business owners, as well as why the status quo 

actually presents challenges for small business owners. We look 

forward to doing that with her and other small business owners. 

Senator FRANKEN. I’m running out of time, but let me just end 

with this. Some have said this proposed rule may limit their ability 

to market their services and products to their clients or even limit 

small business employers and employees from access to education 

and financial advice. How would you briefly respond to that? 

Secretary PEREZ. Sure. We’ve sought to clarify the line between 

education and advice. Education is critical. The educated consumer 

is the best customer. What we’ve done here is clarify that, for instance, if you want advice on how to apportion your portfolio, how 

much is going to be in index funds, how much is going to be international, et cetera, that’s—— 

Senator FRANKEN. Asset allocation. 

Secretary PEREZ [continuing]. Asset allocation. It’s totally education. You can run simulations about different asset allocation 

models, and that is education. Those are the critical nuts and bolts 

of advice. 

What we’ve told people who have said to us, ‘‘We feel the line between education and advice is either blurred or should be drawn 

differently’’—again, our response is, ‘‘How would you do it better, 

and what ideas do you have? ’’ We’ve heard feedback to that effect. 

We attempted to be responsive the first time around, and our 

proposed rule is quite different from the 2010 rule in the educationadvice context. We continue to look forward to hearing more advice. 

Senator FRANKEN. Thank you. 

Senator ISAKSON. For the benefit of the panelists who are going 

to testify in the second panel, I’m going to be very strict on the 5- 

minute rule, and I’d appreciate you holding your answers to a concise answer so we can get everybody’s questions in, because we’re 

on a definite hard stop at 4 o’clock, and I don’t want to cut our 

other testimonies short by running out of time. 

Secretary PEREZ. OK, Mr. Chairman. 

Senator ISAKSON. Senator Scott. 

Secretary PEREZ. Good afternoon, sir. 

STATEMENT OF SENATOR SCOTT

Senator SCOTT. Thank you, Mr. Chairman. 

Good afternoon, Secretary Perez. How are you doing? 

Secretary PEREZ. I’m doing well. Good to see you again. 

Senator SCOTT. Thank you. You, too. Over the last 80 years or 

so, the SEC has been the primary regulator of broker dealers and 

investment advisors. That is why Dodd-Frank charged the SEC 

15 

with having significant involvement in any effort to revisit the 

standards of care that apply in retail security transactions. 

Nevertheless, your department has now stepped—and I would 

suggest overstepped—into this area of regulation. Last month at a 

House hearing, you used the phrase, dramatic and extensive coordination, to describe the relationship between DOL and Chair 

White on this rulemaking. You referred to pages and pages of documentation about meetings and calls between DOL staff and Chair 

White’s staff. 

It’s one thing to coordinate, but that verb doesn’t tell us the 

whole story. I realize that you cannot speak for Chair White. She 

can speak for herself. Based on your private coordination meetings 

with Chair White and the SEC, is it your impression that there is 

no daylight between your thinking and their thinking on this 

issue? 

Secretary PEREZ. I can’t speak for Chair White on this. What I 

can certainly say is that the feedback we got not only from Chair 

White but from the career staff there has been extensive. We’ve 

been talking to the House Workforce Committee. We’ve given them, 

I think, 800 pages of documents showing the extent of the coordination. 

In short, I think the proposed rule is a better proposal as a result 

of our coordination. I would note that we have some overlap, but 

we are the agency that Congress has charged with enforcing 

ERISA for over 40 years. 

While we have some overlap, we have distinct jurisdictional responsibilities, and that’s why ERISA is in our lane. We’ve gotten 

some good feedback from them and have incorporated it, but we 

continue to have that responsibility. 

Senator SCOTT. You’re suggesting that because of the amount of 

coordination that you guys are on the same page, or you can’t suggest that you’re on the same page at this point? 

Secretary PEREZ. Again, what I’ve heard from Chair White—and 

she has stated this, I think, a couple of times—is that she thinks 

that the best interest standard is, in fact, the right standard for 

the SEC purposes. The definition of best interest that we used in 

the proposed rule is actually taken from the 2011 SEC report that 

was prepared in the followup to the Dodd-Frank law, and it was 

done so because, again, we heard a lot of feedback that we should 

try to harmonize to the best extent possible the work we’re doing 

between the DOL and the SEC. In fact, the key definition is taken 

in large measure from that 2011 report. 

Senator SCOTT. On the fee structure that you mentioned in the 

example that you gave on the person who had $600,000 or 

$700,000 and had an annual—what would be an appropriate fee 

structure for an investment with a proper risk allocation and asset 

allocation? 

Secretary PEREZ. I wouldn’t be able to answer that question because I don’t know all the facts about their risk tolerance threshold 

and what they had told their client. What—pardon me? 

Senator SCOTT. Do you have—I’m sorry. Do you have—you said 

you can’t really answer that question. Do you have any idea that 

what went into the actual fee structure in the product that was 

sold was just basically a mutual fund, or was it—— 

16 

Secretary PEREZ. No, it was a variable annuity, a very complex 

instrument. 

Senator SCOTT. Did it have a lifetime income that was factored 

into the fee structure? 

Secretary PEREZ. It did, and it was given to a person who was 

in his mid- to late-70s and who kept very copious records. 

Senator SCOTT. Did it have a life insurance component? 

Secretary PEREZ. I don’t know whether it had a life insurance. 

What variable annuities try to do is help guard against the risks 

and help give you more reward. What I’ve seen in the outreach we 

have done is that we’ve had a number of significant challenges in 

the variable annuity context, and this family—$50,000 is what they 

lost. 

I believe the son-in-law came and testified because Mr. Toffel 

passed away a few months ago. There was a hearing in one of the 

committees here, and it was a sad story, and it was preventable, 

in my judgment. 

Senator SCOTT. Part of the challenge that I have with the fiduciary rule as we know it today is that I do believe that while we 

have an opportunity today to discuss the success or the failures of 

a representative, that, in most part, so many Americans will be 

more dependent on social security and less dependent on their own 

funds because they’ll have fewer advisors in the market for them. 

My thought is that as we find this fiduciary rule going into force 

that you’ll actually have fewer folks playing at the most important 

level of access, which is the minimum level of access, somewhere 

around the $100,000 to $200,000 accounts. 

I think you’ll have more folks making their own investment decisions, hopefully on the internet, where they can have an advisor 

there. The fact of the matter is that too often, too many people will 

be making their own decisions, not based on expertise, not based 

on background, but based on what they hope is a good decision. 

Secretary PEREZ. I would respectfully disagree, sir, and there’s a 

witness on the next panel who is doing a lot of work with small 

investors. 

Senator SCOTT. I’ll be happy to continue the discussion. 

Senator ISAKSON. Senator Murray. 

STATEMENT OF SENATOR MURRAY

Senator MURRAY. Thank you very much, Chairman Isakson and 

Senator Franken, for holding this really important hearing. 

Thank you to the Secretary for coming to testify today, as well 

as our second panel. 

It seems to me that families have a lot to worry about today, and 

questioning the advice that they get for their retirement account 

shouldn’t have to be one of those things. We should all be concerned that workers are losing money out of their pensions that 

they were counting on for a secure retirement, and making sure retirement advisors are working in the best interest of their customers is essential for retirees as well as for advisors and brokers. 

This best interest standard is what is best for our economy to 

help ensure more seniors have access to a secure retirement. It is 

important that we get this rule right, and I hope that all sides are 

going to participate in this process, submit their comments, and we 

17 

make sure that the final rule reflects the important feedback that 

you have heard. I hope that our debate can really center on how 

to get the final language of this rule right. 

I know there’s been an enormous amount of work put into this 

since the original version of 2010, and I’ve heard some critics say 

that this new rule is either worse than that or we didn’t learn from 

the 2010 version. I wanted to ask you while you are here if you can 

walk us through some of the changes you’ve made since the 2010 

proposal to make this one better. 

Secretary PEREZ. Sure. One of the critiques we heard was that 

there wasn’t a sufficiently robust economic analysis. There is a 

much more robust economic analysis. One of the concerns that was 

echoed was about a provision we had to regulate ESOPs and appraisals, and we heard from a number of people that that should 

be removed. That has been removed from the proposed rule. 

We heard that we need to establish a vehicle to enforce the best 

interest requirement, and so the best interest contract vehicle is 

that vehicle. It was not there in the 2010 rule. We made a number 

of changes in response to feedback that we got from people about 

where the line between education and advice should be, so that’s 

another example, Senator. There are others, but in the interest of 

time, I’ll cite those four. 

Again, what we’ve said is give us feedback on how this works for 

you and how we can effectively implement it, and if there are 

changes that can be made, we’re all ears. 

Senator MURRAY. Senator Franken asked you about what you 

were hearing. You cited a number of things, key data enrollment, 

point of sale discussion, a lot of things. I assume that you are remaining open to making appropriate and necessary adjustments to 

the rule to ensure that it both works and is workable as you get 

these comments back. 

Secretary PEREZ. Absolutely. Again, we’ve gotten great feedback 

from all stakeholders. We’ve had probably 50 meetings since the 

proposed rule came out with different industry stakeholders. I’ve 

been impressed by the get-to-yes attitude. They understand, as 

Brian Moynihan and others have said from the industry, that this 

is the right thing to do. They have questions and concerns about 

how we do it, and they’ve given us some great feedback. 

Senator MURRAY. I wanted to also just ask—the current rule was 

established about 40 years ago. How has the retirement market 

changed, if you could just define that for us, since then, that we 

should be conscious of? 

Secretary PEREZ. Right. In the Ozzie and Harriet world of yesteryear, again, people worked 30 years, usually at the same job, and 

at the end of it, they had their pin, their pension, their party. It 

was a defined benefit plan. 

Today, you have—the defined benefit world is shrinking. It’s 20 

percent of the market. You have between defined contributions, between IRAs and 401(k)’s—that’s an $11 trillion market, and you 

have roughly $2.8 trillion in the DB market. In a year from now, 

that disparity will continue to widen. 

People have to own—in the modern family universe, they have 

to own these decisions, and that’s why a rule that was established 

40 years ago when 401(k) was a rural highway in the Midwest and 

18 

IRA was your elderly uncle—today, those are part of our lexicon. 

That’s why today’s rule—today’s consumer protection framework 

needs to reflect today’s realities. 

Senator MURRAY. Thank you, and thank you for all of your hard 

work on this and for your continuing work to make the rule work 

at the end of the day. I really do appreciate it. 

Mr. Chairman, I will yield back my time. I know you’ve got a second panel. 

Senator ISAKSON. Thank you, Senator Murray. 

Senator Baldwin. 

Senator BALDWIN. Thank you, Mr. Chairman. 

Senator ISAKSON. Senator Cassidy, I was told you weren’t ready. 

Are you ready now? 

Senator CASSIDY. No. Go ahead with Senator Baldwin. 

Senator ISAKSON. Senator Baldwin. 

STATEMENT OF SENATOR BALDWIN

Senator BALDWIN. Thank you, Senator, for yielding. I want to 

thank the Chairman and Ranking Member both for convening today’s discussion. 

Secretary, you just outlined some of the significant changes in 

the retirement marketplace. If you think about the ways in which 

it’s changed since ERISA was passed in 1975, it’s quite significant. 

I worry about what the future looks like for those trying to achieve 

the American Dream, living in the middle class, worked hard their 

entire life, but perhaps in the recession lost work, needed to dip 

into savings, needed to do so for sending their kids to college—all 

that would have otherwise gone toward retirement, in addition to 

any pension plan they had, but isn’t available anymore. 

We know that workers are not saving enough for their retirement. We know, as you’ve outlined, that there has been a real shift 

from defined benefit to defined contribution plans. That shift puts 

more responsibilities on workers’ shoulders to manage risks and to 

manage the decisions, oftentimes without having investment expertise. 

You’ve actually covered a lot of territory that I hope to cover in 

my questions with you, in particular, about how workers with 

smaller accounts, those who arguably need the retirement protection the most, will have access to high-quality and affordable advice. 

I’m going to move to something a little bit more specific, given 

some of the proud traditions in my home State of Wisconsin. We 

actually have a real history of cooperatives and mutual ownership 

companies, so companies that are owned by—— 

Secretary PEREZ. Northwest Mutual, for instance. 

Senator BALDWIN. For instance. 

Secretary PEREZ. I got married 2 miles north of their headquarters. 

Senator BALDWIN. I had a very good visit not too long ago. I 

would say, and I would just—while tooting the horn of my State— 

say that a lot of those traditions root back to Wisconsin’s progressive era, when people like Senator Robert M. La Follette, Sr.— 

Fighting Bob as he’s known in the State—really laid the groundwork for the formation of a number of these companies. 

19 

A lot of them have gained incredibly valuable experience that’s 

sort of embedded into the products that they sell. I’d like you to 

talk about what assurances you can give to these sorts of companies that they will continue to be able to sell their own retirement 

products as we move forward. 

Secretary PEREZ. Sure. Those are sometimes referred to as proprietary products, and the rule is the same. Whether you’re Northwest Mutual, which has a long and distinguished history—and, 

again, I got married like a mile and a half north of their world 

headquarters in Milwaukee. The rule is, again, putting your customer’s best interest first. 

Part of that is making sure you have policies and procedures in 

place to oversee your sales force. That’s true whether it’s Northwest Mutual. That’s true whether it’s the ABC Bank. A big part 

of what the best interest standard means is that you have those 

internal policies. 

For instance, you’re insuring—in the case of like a Northwest 

Mutual that might want to sell a proprietary product, one thing I 

would suggest that might be a good idea to ask is that it ought to 

be a product that a reasonable independent person would recommend to the customer. One thing we’ve seen—and I’m not saying we’ve seen it at Northwest Mutual—but one thing we’ve seen 

in the course of our outreach is that sometimes sale incentives become perverse. If you sell X number of one product, you get a trip 

to Hawaii. Or I’ve even heard about the trip to the Masters. 

When that person walks in to give me advice, I don’t want them 

looking at me, thinking, ‘‘You’re the only thing between me and 

Hawaii with my family.’’ That is when you have a misalignment of 

incentives, and that’s what we’re trying to address by making sure 

that we have the best interest standard in place. 

What the best interest standard does not mean is that you have 

to sell someone the lowest fee product, because I don’t buy a Ugo 

because it’s a crappy car, even though it’s the lowest cost. That’s 

why it’s no longer on the market, I believe. 

The point is it’s not about the lowest cost. It’s all about—the 

north star is the best interest of the customer. I think places like 

Northwest Mutual or the ABC Bank or the broker dealer or the 

person who’s working with the small business owner, like Ms. Miller—the north star is the same for all of them. 

Senator ISAKSON. Senator Warren. 

STATEMENT OF SENATOR WARREN

Senator WARREN. Thank you, Mr. Chairman. It is hard, really 

hard, to save for retirement, and the stats bear this out. Almost 

one-third of Americans on the edge of retirement have zero savings, 

and another third have less than a year’s worth of income put 

away. That’s why it is doubly important that every dollar that 

someone puts away for retirement is protected. 

Many Americans rely on investment advisors for guidance on 

how to save for retirement. Most of those advisors have their savers’ best interest at heart. Not all advisors put their customers’ interest first, and that’s created a hole that’s draining $17 billion a 

year in retirement savings, money that’s going into some investVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6601 S:\DOCS\95692.TXT CAROL
20 

ment advisor’s pocket instead of into the pockets of the people who 

are trying to save for retirement. 

Thankfully, that hole may soon be plugged with the new rules 

that would require brokers and advisors to put their customers’ interests first. I have just two quick questions about this, Secretary 

Perez. 

As I understand it, several studies, in many of them, most Americans don’t even realize that their investment advisors, their retirement advisors, aren’t actually required to put the clients’ interests 

first. They think that if they go to someone who advises them that 

their interests will be first. 

Can you explain just very briefly why it is legal today for advisors to steer clients into products that line the advisors’ pockets 

while draining away the clients’ savings? 

Secretary PEREZ. We have folks who are operating under the fiduciary model, like my—we go to a certified financial planner. That 

person is required to put our interests first. 

A very quick example: the first thing he said to me was, ‘‘Keep 

your thrift savings plan, your Federal stuff from your Federal employment—keep it in the thrift savings plan. I can’t do any better.’’ 

That’s an example of putting our interests first. 

Senator WARREN. Even if he won’t make any money from that 

advice. 

Secretary PEREZ. He didn’t make a dime off of that. I’ve referred 

a number of clients to him because he looks out for me. 

Senator WARREN. There you go. 

Secretary PEREZ. That’s why it’s good for business. The person 

who is under a suitability standard—again, there are a number of 

products—— 

Senator WARREN. Let me stop you right there. I get the suitability standard. What I don’t get is why—how did it turn out to 

be legal? What went wrong? Why is that legal, Mr. Secretary? 

Secretary PEREZ. It shouldn’t be, and that’s why we’re trying to 

change it, because I think the suitability standard is facilitating 

this misalignment—— 

Senator WARREN. When was the last time we updated these 

laws? 

Secretary PEREZ. We haven’t updated our laws in earnest in 40 

years. 

Senator WARREN. We’ve got a problem with outdated laws, loopholes in the laws, and that’s how we end up with these two different standards. 

Secretary PEREZ. Right. Again, we didn’t think about IRAs and 

401(k)s back in 1975. We were in the defined benefit world. This 

stuff just didn’t matter because people had a guaranteed pension. 

Senator WARREN. All right. You’ve proposed some commonsense 

rules to try to close these loopholes, to try to update the laws, just 

to make sure that all advisors are putting the customers’ interests 

first. Lobbyists for some of the biggest financial companies and 

some investment advisors are fighting this proposal tooth and nail. 

Help me out here, Mr. Secretary. What is it they’re so worried 

about? 

Secretary PEREZ. I’ll let them speak for themselves. I can tell 

you—I guess I’ll say two points. No. 1, I have been heartened by 

21 

the remarkably constructive conversations I’ve had with so many 

industry stakeholders. As I said in my testimony, there has been 

an undeniable shift toward a recognition of the need for the best 

interest standard. 

Then there have been folks who have been out there since the 

outset—Merrill Lynch and B of A—and then there are others who 

are coming to us absolutely wanting to get to yes. Those who are 

perhaps in a different place—they tell me that they would like to 

think that they put their clients’ best interests first now. My response to that is, ‘‘There’s good news, then, for you. This will be 

easy to comply with if you are, in fact, putting your customers’ best 

interests first.’’ 

I think it is something that can be done. I hear from so many 

folks who are playing in this space day in and day out. We need 

a level playing field, because people go to their advisor—and, actually, there are some advisors that are dual hatted, depending on 

what part of the transaction it is. Sometimes they’re a fiduciary, 

sometimes they’re not. It’s already confusing to begin with. That’s 

stunningly confusing, and we need one standard, and it ought to 

be the best interest standard. 

Senator WARREN. I love the one standard. I love the best interest 

test. I assume there are a lot of people, though, who are making 

a lot of money. That $17 billion is going somewhere. It’s not staying 

with the retirees. 

I’ve got to say this one seems like a no-brainer to me. Hardworking Americans who manage to pull together some money for 

their retirement should be able to trust that their retirement advisors are looking out for them. Besides that, the thousands of honest, hardworking advisors and brokers around this country who already put their clients first every day shouldn’t have to compete 

against those unethical advisors who don’t. 

I understand why we’re in this fight. I understand there are people who are making money from keeping the game rigged. We don’t 

work for them. It’s time to level the playing field. 

Thank you, Mr. Secretary. 

Thank you, Mr. Chairman. 

Senator ISAKSON. In the interest of the four panelists who will 

testify afterwards, I want to introduce Senator Casey, who will be 

brief within his 5 minutes, and we’ll go straight to the second 

panel, and I think we’ll have enough time to hear from everybody. 

Senator Cassidy. 

Secretary PEREZ. Good afternoon, sir. 

Senator CASSIDY. Hey, Secretary Perez. 

Secretary PEREZ. It’s good to see you again. 

STATEMENT OF SENATOR CASSIDY

Senator CASSIDY. Good to see you. I don’t pretend to understand 

this as you do. Let me just kind of channel that which people have 

asked of me and then ask you to comment upon it. 

A fellow came and said, 

‘‘Listen. I have a client. He’s pretty well off. I go into his office, help him with his financial planning, and he says, ‘Do you 

22 

mind just speaking to my employees and give them general advice about how to handle their money?’ ’’ 

And he goes, 

‘‘I do it as a favor to my client, but I think under this rule 

I’d have to have each of those employees sign a contract before 

I’d be able to give them the advice I’m giving them.’’ 

Is that true or not? I don’t know. I’m asking. 

Secretary PEREZ. I don’t think that’s true for the following reason. If you’re sitting there telling workers, 

‘‘Here’s what you need to think about, workers, to have a 

healthy retirement. What’s your risk-tolerance threshold? If 

you’re married, what’s your wife’s or husband’s risk tolerance’’—— 

Senator CASSIDY. I think you may have gotten to the nubbin of 

where I was. You don’t think so, or you know not? 

Secretary PEREZ. You need to give me more facts, Senator, and 

then—— 

Senator CASSIDY. I’m saying this not to be pedantic, but just because if he—unless he has clarity from DOL, he won’t have clarity 

in terms of how he conducts himself. Would he say, 

‘‘OK. I want you to sit here, and I’m going to say this is what 

you should do with your money. If you’re younger, put it in 

this. If you’re older, put it in that. First you’ve got to figure out 

your risk tolerance, et cetera. Thank you. Good to see you. I 

hope you’re all well.’’ 

That’s sort of general advice. Would that be something that they 

would need to sign a contract for? 

Secretary PEREZ. General advice that is not ‘‘Go pick this product 

or that product,’’ but ‘‘Go into mutual funds, go into index funds, 

go into something like that’’—that is advice in the area of education or asset allocation. That wouldn’t cross the line of education. 

Senator CASSIDY. Sounds great. I am told that the United Kingdom put in laws similar to this in 2013 and that banks stopped offering investment advice to customers with less than $80,000 in assets. It may be that the answer to Senator Warren’s question is 

that this model works for those lower and moderate-income people, 

or at least those with moderate assets. 

Just comment on that again. I don’t know whether it’s true or 

not. Just your thoughts on that. 

Secretary PEREZ. It’s not true, and let me give you the facts. 

After the United Kingdom put in place their regulation—and, by 

the way, their regulation bans commissions. We don’t ban commissions. Their advisors dropped 310,000 clients, and 820,000 new clients came into the market. There was a net delta increase after the 

regulation of over half a million. Investors with low balance accounts continued to be served, because you were concerned about 

that. 

Here’s the most interesting data point about the United Kingdom—I traveled there personally to meet with them, because I 

heard that feedback a lot. The most interesting point about what 

happened in the United Kingdom, Senator, is that more and more 

people are now getting in lower cost funds, because the problem 

with our system in the United States is it incentivizes complexity 

23 

when simplicity is all too frequently what is called for. It 

incentivizes complexity because complexity generates more fees, 

just like the variable annuity I described. 

The U.K. experience—I welcome further inquiry into it, because 

there’s been a fair amount of incorrect information surrounding it. 

Senator CASSIDY. OK. The last thing, just to say, the DOL is estimating that the cost of the rule be between $2.4 billion and $5.7 

billion over the next 10 years, and yet I’m given a study by Deloitte 

which suggests that over 10 years, it could exceed $15 billion. Any 

thoughts on that discrepancy? 

Secretary PEREZ. I think our cost-benefit analysis is quite strong. 

We estimate the benefit over the next 10 years to be $40 billion. 

In an $11 trillion market, the cost of conflicted advice—when you 

have a $50,000 loss for the Toffels, in an $11 trillion market, it 

adds up fast. These are folks who can ill-afford to lose this. 

The benefit I’m hearing from employers, like one of our next panelists, has been that market forces are working to the advantage 

of small investors. I hope you’ll talk to some of these folks who are 

already fiduciary, Senator, and doing great work. 

Senator CASSIDY. I yield back. Thank you. 

Senator ISAKSON. One of our members is grossly late, but he’s my 

dear friend. His staff has been doing a good job of convincing me 

he only has 2 minutes worth of questions. Is that true? 

Senator WHITEHOUSE. I am fully convinced, Chairman. 

Senator ISAKSON. We have four other people to testify before the 

4 o’clock vote, so I’m going to recognize Sheldon Whitehouse, who 

will be brief. 

STATEMENT OF SENATOR WHITEHOUSE

Senator WHITEHOUSE. Very well. 

Mr. Secretary, you can answer briefly, too. I have heard from 

companies who are major providers of services to investors who are 

totally on board with the notion that they should have the responsibility of meeting the fiduciary standard but are concerned that 

around the edges, things like the way in which they communicate 

with vast numbers of customers might be affected by this probably 

in ways that none of us would intend. 

I just want to make sure that you will be attentive to trying to 

make sure that there’s not too much regulatory sprawl into areas 

outside of what we all expect, which is to keep them putting the 

interest of the client first. 

Secretary PEREZ. Absolutely. We had that conversation earlier, 

and we certainly had a number of very constructive meetings with 

firms who have addressed concerns, I think, similar to that, and it 

certainly wasn’t our intent. Again, our question that we always ask 

is, 

‘‘Show us in the proposal where you think that concern 

arises, and then give us some potential solutions for that so 

that we can contemplate how to make sure that we’re getting 

to the right place.’’ 

Senator WHITEHOUSE. Very good. Thank you very much. 

I’m well within my 2 minutes, Mr. Chairman. 

24 

Senator ISAKSON. Let the record reflect that Sheldon Whitehouse 

was brief. 

[Laughter.] 

Senator WHITEHOUSE. You don’t have to make it sound like 

that’s a novelty. 

Senator ISAKSON. It was refreshing. 

Secretary PEREZ. Mr. Chairman, thank you for your courtesy, as 

always. It’s always a pleasure to be with you. 

Senator ISAKSON. Thank you. 

Will our second panel please come forward? 

In the interest of time, I’ll begin the introductions of our panelists so we can get straight to their testimony. First, Peter Schneider, who is the president of Primerica, which I’m proud to say is 

a Georgia-based company that I have visited before. 

Thank you for being here today, Peter. 

They are a leader in financial services, providing services to the 

middle-income marketplace, offering retirement savings options 

and insurance to millions of Americans. Mr. Schneider became 

President and served before that as executive vice president for 

Primerica. 

We welcome you here today. 

We also have Scott Puritz. Is that correct? Scott is the managing 

director of Rebalance IRA in Bethesda, MD. He is a retirement expert, having been referenced previously by the New York Times, Forbes, and CBS. He is a graduate of Tufts Institute with a master’s degree from Harvard University. 

Welcome and thank you for being here. 

At this time, I’d like to turn to Ranking Member Franken to introduce Ms. Miller, followed by Senator Roberts from Kansas to introduce Mr. Litan. 

Senator FRANKEN. Thank you, Mr. Chairman. It’s my pleasure to 

introduce Darlene Miller, who is joining us today from my home 

State. Ms. Miller is the president and CEO of PERMAC Industries 

in Burnsville, MN, a manufacturing company that provides precision small part machines to other industries. 

PERMAC was named the U.S. Chamber’s Small Business of the 

Year in 2008, and in 2010, Ms. Miller herself was named by the 

Burnsville Chamber of Commerce as the Businessperson of the 

Year. I’ve had the good fortune of meeting Ms. Miller in 2012 when 

we toured Burnsville Senior High School together to discuss the 

importance of STEM education. We have also discussed my Community College to Career Fund Act, which would create public-private partnerships to address the skills gap in manufacturing. 

Ms. Miller, thank you for being with us today to discuss how you 

can best meet the needs of your employees. 

Thank you, Mr. Chairman. 

Senator ISAKSON. Thank you. 

Senator Roberts. 

STATEMENT OF SENATOR ROBERTS

Senator ROBERTS. Thank you, Mr. Chairman. It is my privilege 

to introduce Bob Litan, an impressive economist, attorney, and native Kansan. Growing up in Wichita, Bob has become a notable figure in the economics community. He brings a balanced perspective 

25 

on this issue, and he has been an executive in private, public, and 

government sectors. 

His list of accomplishments, employments, and memberships on 

advisory boards reads more like a collection of several highly accomplished people rather than one man. He is a current nonresident senior fellow at the Brookings Institution, of counsel to a 

law firm based in St. Louis and Chicago, and is chief economic advisor at Patent Properties. 

I thank you for taking the time to come before this committee 

today to provide a viewpoint that, unfortunately, seems to be lost, 

if not solely ignored in this conversation. We look forward to hearing your testimony. We hope that you can offer us some solutions 

on how we can maintain access for middle- and lower-income families and businesses in regards to financial guidance and retirement 

planning. 

Thank you, sir. 

Senator ISAKSON. I hope all the panelists will try and limit their 

testimony to 5 minutes, and after that eloquent introduction, Mr. 

Litan, I think you should be first. 

STATEMENT OF ROBERT LITAN, ECONOMIST AND ATTORNEY, 

WICHITA, KS 

Dr. LITAN. Thank you very much, Mr. Chairman. 

Thank you also, Senator Roberts, for that very kind introduction. 

Senator ISAKSON. Turn your mike on, the little switch there. 

Dr. LITAN. I’m thanking everybody again for their kind introductions and so forth, OK? 

Senator Roberts, I don’t want you to choke on these words, but 

I’m a lifelong Democrat and a former Clinton administration official, but very proud to be from Kansas. 

Senator ROBERTS. That doesn’t bother me one damn bit. 

Dr. LITAN. OK. 

[Laughter.] 

I say that because I come from a background where I was in an 

administration where we cared deeply about the kind of goals that 

the department is pursuing in this proposal. I want to respectfully 

disagree with the way the proposal has been outlined, and I’m 

going to make three quick points. 

No. 1, the correctly estimated benefits of Labor’s proposed rule 

do not outweigh the cost. This is because Labor gives absolutely no 

credit or assigns no value to human investment advice, namely, encouraging clients to avoid trying to time the market, one of the 

worst decisions a long-term investor can make, and also helping clients re-balance their portfolios over time. 

When these factors are taken into account, my colleague, Dr. Hal 

Singer of the Progressive Policy Institute, and I come to the conclusion that rather than generating $4 billion in annual benefits for 

investors, it would produce net harm of roughly $1 billion to $3 billion annually, depending on how many brokers are induced by the 

proposal to no longer serve the IRA mutual fund market. 

In fact, during a future market downturn, Dr. Singer and I estimate—and we actually show this in our comments that we submitted to DOL yesterday—that by causing many current accounts 

26 

to be uneconomic to serve, the rule could cost investors as much 

as $80 billion, double the 10-year benefit estimate claimed by DOL. 

I should also mention this connection, that the $17 billion number that’s been thrown about by the CEA estimate, in our opinion, 

is flawed. It’s based on a flawed reading of the academic studies, 

and we show this in our report. In fact, not even Labor counts on 

the $17 billion. They only use a $4 billion figure, and even that figure, we point out, is incorrect. All right. That’s just important to 

keep in mind. 

A word about robo-advice, because I know it’s coming up. With 

all due respect to robo-advice, which I think is an important addition to the market, I think we have to be careful about drawing too 

much of a conclusion from online or text messaging. 

While robo-advisors can certainly help savers identify asset allocations and products to consider, an email or a text message during 

a market rout is not an adequate substitute for a human being on 

the other end of a telephone reminding investors of the clear evidence that it pays to stay put if you’re a long-term investor, which, 

by definition, retirement savers are. 

No. 2, my second point. If you lose your broker, the only other 

source of human advice you’re likely to go to is somebody who is 

providing advice on the basis of a wrap fee, which is a percentage 

of your account. We show in our report that for investors to choose 

that option, they’ll end up paying more than they do under the current regime. This is for small investors. 

By the way, I want to underscore something about small investors. Secretary Perez started his testimony by talking about a 

$650,000 account. That is not a small saver account. There are millions of people here—and I think Senator Warren pointed this out. 

There are tons of people that have account balances of $10,000 or 

$20,000. That’s all they’ve got. For those people, brokerage is a less 

expensive form of human advice than a wrap fee. That is just a 

fundamental fact. 

Third, my last point. The notion that all retirement investment 

advisors should be held to a best interest of client standard is not 

controversial. Let’s just stipulate that as far as I’m concerned. Let’s 

don’t argue about that. It’s the way we enforce it. Should we enforce it by potential class action litigation or by a body that we already have established to oversee the brokerage industry, which is 

FINRA? 

In fact, my bottom line suggestion, just to cut to the chase for 

DOL, is that what they ought to do is go back to the drawing board 

and go to FINRA—and FINRA, by the way, has offered comments 

just recently, saying the rule is unworkable and that, in fact, a lot 

of brokers are going to leave the market, the same conclusion that 

Hal and I reached. 

What Labor ought to do is go back to FINRA and say, ‘‘Let’s 

work together and figure out a way to actually administer a best 

interest rule that you, FINRA, could enforce.’’ By the way, if the 

problem is insufficient disclosure about whose getting paid and how 

they’re getting paid, there’s a simple solution to that: better disclosure, simple disclosure. Just put a great big bold warning on the 

front of the document that says whose getting paid and how much. 

27 

1This testimony draws on a recent report, supported by the Capital Group, I have co-authored 

with Hal Singer: ‘‘Good Intentions Gone Wrong: The Yet-To-Be Recognized Costs of the Department of Labor’s Fiduciary Rule.’’ The views expressed here are my own and do necessarily represent those of the Brookings Institution or the Capital Group, their officers, directors, trustees, 

or employees. 2The study was supported by the Capital Group, one of the largest mutual fund asset managers in the United States. Dr. Singer and I are solely responsible for the analysis and conclusions in the study. 3 CEA, The Effects of Conflicted Investment Advice on Retirement Savings, (Feb. 2015), available at www.whitehouse.gov/sites/default/files/docs/cealcoilreportlfinal.pdf. 

The only basis—and then I’ll conclude, Mr. Chairman. The only 

basis for rejecting that idea, better disclosure, was one study that 

the Department of Labor cited that’s based on experimental evidence, not real-world market evidence. I’m telling you if I were in 

the government, and I proposed to my superior or secretary or whoever it is that we ought to completely up-end an entire industry on 

the basis of one study on experimental evidence, I probably would 

have been told to go back to my office and find another job. 

There’s absolutely no basis, in my opinion, for at least, at a minimum, not trying better disclosure before we go ahead with this 

massive undertaking. I think that concludes my testimony. 

Thank you very much. 

[The prepared statement of Dr. Litan follows:] 

PREPARED STATEMENT OF ROBERT LITAN1

Mr. Chairman and members of the committee, thank you for inviting me to testify 

today about the Department of Labor’s proposed new rules governing retirement 

savings investment advice. 

My testimony is based on a study of the proposal with Hal Singer, a Principal 

at Economists, Inc, and a Senior Fellow at the Progressive Policy Institute.2

We reach two central conclusions in our report: 

• First, contrary to what the Labor Department claims, the benefits of the rule 

do not outweigh its costs. In fact, during a future market downturn, we estimate 

the rule could cost investors as much as $80 billion. In part, this is because the benefits are overstated, based on a misreading of the academic research the Department cites. Even more important, the Department did not take proper account of 

the benefits to investors of brokers and advisers paid on a commission basis, and 

how investors would either lose those benefits or end up paying more for investment 

advice than they do now. 

• Second, the notion that all retirement investment advisers should be held to a 

best interest of client standard is not controversial. It’s the way the Department 

proposes to implement it, which because of its costs and risks, will lead to many 

clients going without an adviser, or if they are able to retain one, only at substantially higher costs, as I outline below. Meanwhile, the Department failed to adopt 

a simple straightforward fix to the problems of insufficient disclosure on which the 

proposal is based—namely, simpler and better disclosure. The one study it cites for 

not taking this obvious step is theoretical and has no empirical grounding in the 

real world of investing. 

To understand how we come to these conclusions, it is important to understand 

the essence of what the Department is proposing, as well as the February 2015 

study of retirement advice by the Council of Economic Advisors which has been 

widely cited by supporters of DOL’s proposal.3

Both Labor and CEA believe that the way that many individual brokers and advisers serving those with modest retirement portfolios—or small savers—are compensated generates ‘‘conflicted advice,’’ which can only be eliminated if commissions 

were prohibited. DOL’s regulatory analysis claims that a 10-year phaseout of brokerage commissions on mutual funds IRAs would enable investors to earn about $4 

billion more annually from their investments. 

Before I critique these claims, let’s begin with a fundamental fact. It costs money 

to serve any client seeking retirement investment advice, and the mutual fund IRA 

market to which the Department devotes most of its attention has developed two 

basic ways those costs, plus some profit, are recovered: 

28 

4 In our report, we refer to an estimate by Oliver Wyman that an investor’s costs associated 

with a forced transition to the wrap-fee model would increase by approximately 75 to 195 percent, depending on the size of the investor’s assets. 5The Department’s Regulatory Analysis breezily dismisses this estimate by claiming that brokers still can receive commissions under an exemption, presumably the new Best Investment 

Contract Exemption (BICE). But we show in our study, the BICE has numerous restrictions that 

make it unattractive, and thus not likely to be taken up by many, if not most, brokerage and 

advisory firms. 6 Burton G. Malkiel, Janet Yellen Is No Stock Market Sage, WALL STREET JOURNAL, June 2, 

2015, at A13 (emphasis added), available at http://www.wsj.com/articles/janet-yellen-is-nostock-market-sage-1433199503. 

(1) through an up-front sales charge which the Department notes has been falling 

over time, but is now a bit less than 2 percent of the amount invested, coupled with 

a low annual ‘‘12b–1’’ charge, typically 1⁄4 percent of the total invested; or 

(2) a higher annual ‘‘wrap fee’’, which typically is 1 percent or more of the assets 

invested. 

As it is now, many small savers pay brokers and advisers on a commission basis 

(method 1), while those with larger portfolios often pay a wrap fee, assuming they 

want any investment advice at all. 

If the DOL ends up effectively banning method (1), brokers and advisers have two 

choices: they can quit serving small savers or they can tell them: ‘‘we will continue 

to serve you, but only with a wrap fee.’’ Those brokers who choose and small savers 

who accept the second option will end up paying more in the medium to long run 

than they do now for investment advice. This should be obvious since even a 1 percent annual fee on all amounts invested after 3 years (3 percent) will exceed the 

average up-front brokers’ sales charge plus 2 years of the annual 1⁄4 percent 12b– 

1 fee (2.75 percent).4

Small investors who lose their broker because of the rule—perhaps 7 million or 

more—also will lose.5 This is because advisers now provide two very important 

kinds of advice to investors which also are not factored into DOL’s analysis: encouraging clients to avoid trying to ‘‘time the market,’’ one of the worst decisions a longterm investor can make, and also helping clients re-balance their portfolios over 

time. 

There is a belief in some quarters that ‘‘robo-advice’’ delivered online can replace 

human advice from brokers and advisers who find it uneconomic to serve the small 

saver segment of the market if DOL’s rule goes forward. While robo-advisors can 

help savers identify asset allocations and products to consider, it’s a dangerous fallacy to believe that an email or text message during a market rout is an adequate 

substitute for a human being on the other end of a telephone. As famed Princeton 

professor Burton Malkiel has written: ‘‘We know that investors generally move 

money to and out of the stock market at exactly the wrong times.’’ 6

More investors, especially small savers, are likely to make that mistake if they 

no longer have a human broker to serve them when they are most needed, which 

is a likely outcome if the DOL is implemented. In our study, we estimate that the 

cost of depriving clients of human advice during a future market correction—just 

one of the many costs not considered by DOL—could be as much as $80 billion, or 

twice the benefits the administration claims for the rule over the entire next decade. 

Put differently, if investors holding only $1 in $7 invested in mutual fund IRA accounts now are persuaded by their brokers or advisors to hold on through the next 

major stock market correction and rebound, the gains from doing so would totally 

offset the 10-year benefits DOL claims for its rule. 

As if all this weren’t enough, we show in our study that DOL actually overstates 

the benefits of its rule, and CEA likewise overstates the costs of conflicted advice, 

by selectively and inappropriately drawing from the academic literature. In addition, we show the weaknesses in DOL’s studies purporting to rebut our study’s analyses that brokers help clients avoid market timing or help them re-balance their 

portfolios. 

The bottom line from a careful analysis of DOL’s proposal is that rather than generating benefits for investors, it would produce net harm of $1–$3 billion annually, 

depending on how many brokers are induced by the proposed rule to no longer serve 

the IRA mutual fund market. These dollar cost estimates are conservative. 

Fortunately, there is an easy and obvious way to avoid this adverse outcome. If 

the problem is insufficient disclosures of how brokers are paid, then why not require 

better, simpler disclosure? Our report gives a one sentence example, and also points 

to one chart that the Department itself proposes as an Appendix to its proposed BIC 

exemption as a possible solution. 

The Department’s only basis for rejecting this idea is one academic paper reporting results from a lab experiment—not from the real investing world—in which 

29 

more disclosure didn’t work well. But these very same authors elsewhere endorse 

disclosure as an appropriate remedy for information failure under certain conditions, which Hal and I note in our report are present in the investment advice market. 

Even if the study the Department cites were based on real world empirical data— 

which it is not—using a single study is an extremely thin reed on which to adopt 

a rule that would fundamentally change the internal compensation systems of 

many, if not most, brokerage and advisory firms, while imposing massive new paperwork and contracting requirements for millions of clients, all under an impractical 8-month deadline. On top of this, do policymakers in a presidential election 

year want to face potentially millions of small savers when they receive notices they 

are being dropped by their longtime advisors or forced to pay much more via feebased accounts in order to keep them? 

Doesn’t it make far more sense at least to try better disclosure before risking any 

of this? I trust the question answers itself. 

Thank you. 

Senator ISAKSON. Thank you. 

Mr. Schneider. 

STATEMENT OF PETER SCHNEIDER, PRESIDENT, PRIMERICA 

INC., DULUTH, GA 

Mr. SCHNEIDER. Mr. Chairman, Ranking Member Franken, and 

members of the subcommittee, I appreciate being here today. The 

Department of Labor’s proposed rule is of enormous consequence to 

the middle-income families we serve every day and in each of your 

States. Please allow me to tell you a little bit about Primerica, and 

I like talking about it. 

We were founded almost 40 years ago on a central mission, that 

middle-income families require someone to help them to focus on 

their financial needs. That was true then and it’s just as true 

today, and we feel like at Primerica we’ve made some headway. 

We insure 4 million lives with our term life insurance. This year, 

we will pay $1.2 billion in death benefits to families. Those checks, 

which we deliver every day—and will deliver multiple checks 

today—keep a personal tragedy from becoming a financial one. 

We’ve helped our clients save almost $50 billion in our investment accounts. Most of our accounts are very small by industry 

standards, but they’re hugely important to the families who opened 

them. 

Investment choices with us are very simple and appropriate for 

our market. We do no individual stocks, we do no options, we do 

no commodities, but mainly mutual funds and annuities. You can’t 

buy Google from us, but you can buy 700 mutual funds from top 

companies, like Invesco and Legg Mason. 

Our clients’ household income is between $30,000 and $100,000 

a year. There’s usually two parents working in those homes, and, 

frankly, all too often, the homes are headed by a single mother. 

We strongly believe in retirement savings, and our clients have 

opened 1.2 million IRAs with us. You can start one with Primerica 

for as little as $50 a month. Even that amount is hard to find in 

the families that live paycheck to paycheck. What we sometimes 

say is they have too much month at the end of the money. 

We provide face-to-face help from licensed representatives who 

live and work in the communities. These representatives begin 

with education. They teach the fundamentals of how money works, 

dollar cost averaging, time in the market, emergency cash acVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6601 S:\DOCS\95692.TXT CAROL
30 

counts. That’s all important. Oliver Wyman’s study, just released, 

found that advised individuals accumulate 38 percent more assets 

than the non-advised, and at age 65, they have 114 percent more. 

Our clients benefit from our presence in their financial lives. A 

comment letter was submitted by Shelly Rosen, one of our reps. 

Fifteen years ago, she sat down with a railroad worker and his 

wife. They had a lot of debt and no savings, and they were very 

generous, so generous that they ran up debt on credit cards buying 

gifts for their friends. We helped teach them other ways to be generous. Today, they’re debt free and financially independent. 

The Department of Labor rule will stop Shelly Rosen from helping folks like that railroad engineer. The proposal subjects our client interactions to the prohibited transaction rules in ERISA and 

the IRS code, which effectively make the brokerage model, chosen 

by 98 percent of accounts under $25,000, illegal. 

The department tried to write an exemption in their best contract exemption. It’s so complex, so onerous, and so costly that it’s 

unworkable. They attempted to make it principal-based, but instead introduced uncertainty, which makes the exemption unusable 

in a world of ERISA, where there is strict liability. No firm we 

know of intends to use it. That makes this rule more punishing 

than the one that was withdrawn in 2011. 

In prior testimony, the Department of Labor has suggested these 

robo-advisors will fill the gap and help the millions stranded by the 

rule. We disagree. Our company believes in biorhythms, not algorithms. They need a person, not a personal computer, to navigate 

a financial landscape that’s unfamiliar to them. Without a helping 

hand, they worry about a mistake, and they won’t hit the send button. 

In the households we serve, there is a struggle going on. It’s not 

between Investment A or B or C. It’s a fight between saving and 

spending, a fight to put an extra $50 away. We all agree we must 

act in a client’s best interest. Inadequate retirement savings is the 

overriding issue facing the middle class, and this rule is another 

obstacle. 

We don’t doubt the DOL’s good intentions. It’s such an important 

issue, everyone needs to be involved, and we look forward to working with everyone, and we’re glad the Senate is involved with this 

issue. 

Thank you very much for listening to me. 

[The prepared statement of Mr. Schneider follows:] 

PREPARED STATEMENT OF PETER SCHNEIDER

Mr. Chairman, Ranking Member Franken and members of the subcommittee, my 

name is Peter Schneider and I am president of Primerica, Inc., headquartered in 

Duluth, GA. Thank you for inviting me to testify today about the U.S. Department 

of Labor’s (Department) proposed new rules governing retirement savings investment advice (Proposed Rule). This is an issue of enormous consequence to our representatives and clients. Having access to quality help in managing household finances is critical in the middle income communities we serve. 

Primerica is a leading distributor of basic savings and investment products to 

middle-income households throughout the United States. Our representatives educate their Main Street clients about how to better prepare for a more secure financial future. We address clients’ needs through term life insurance, which we underwrite, and mutual funds, annuities and other financial products, which we distribute. We conduct our securities business through PFS Investments Inc. (‘‘PFSI’’), 

a registered broker-dealer and an indirect wholly-owned subsidiary of Primerica, 

31 

1 As of January 2013, both our sales force and our customer base are generally more diverse 

than the U.S. general population. Approximately half of our life insurance customers and a 

quarter of our securities customers are either African American or Hispanic American. Mirroring the population we serve, a slight majority of our securities customers are female. 

Inc. As of December 31, 2014, Primerica insured more than 4 million lives and had 

over 2 million client investment accounts. This year we will pay approximately $1.2 

billion in death claims to the beneficiaries of our policies and over time have assisted our clients to save about $50 billion in their accounts. Though most of these 

accounts are relatively small by industry standards, they are hugely important to 

the families who have opened them. 

Primerica’s typical clients are squarely situated in this country’s middle class, de- fined by us as households with an annual income of $30,000 to $100,000, a category 

that represents approximately 50 percent of all U.S. households. Our business model 

is designed to allow us to provide exceptional client service to the middle-income 

families, and to do so in a sustainable manner. Our representatives are able to concentrate on the smaller-sized transactions typical of middle-income consumers. We 

will gladly open an Individual Retirement Account (IRA) account for an individual 

with as little as $250 to invest or $50 per month. We maintain over 1.2 million 

IRAs. 

We offer investment products that are most appropriate for our middle-income clients. We offer open-end mutual funds and variable and fixed annuities, all from 

well-known and respected companies, as well as different savings vehicles, including 

non-qualified accounts, IRAs, and college savings plans. Our platform includes offthe-shelf products with commissions on par with commissions paid to other product 

distributors. 

We are believers in educating the households we serve about fundamental financial concepts. Our investment education and philosophy is geared toward the needs 

of middle-income households, who often are new or less-experienced investors. In 

that regard, we produce easy to understand educational pieces teaching fundamental investing concepts including the critical importance of taking the steps needed to start along the path of financial security. Our primary investing principle is 

the long-term benefit of dollar cost averaging through systematic investing into a 

diversified investment portfolio. We also teach the importance of starting an investment plan early and sticking to it. The issue for our clients is time in the market, 

not timing the market. 

At Primerica, our representatives reflect and serve the communities in which they 

live. Accordingly, they are well-acquainted with the financial challenges facing the 

middle-income households. The diversity of our sales force, which mirrors the demographics of the middle class, continues to be a primary strength of our company.1

This afternoon, PFSI will be filing comments in connection with the Proposed 

Rule. Our comments make clear that we agree that financial service firms and their 

representatives should act in each client’s best interest and frankly that is why we 

believe the rules needs to be withdrawn. We respectfully submit that the Proposed 

Rule would cause significant harm to middle-income individuals and families by restricting their ability to save for retirement through IRAs. 

We draw this conclusion first and foremost because the Department’s expanded 

definition of fiduciary turns into a fiduciary act in almost every conversation about 

an IRA that a financial professional might have. ERISA and the Internal Revenue 

Code prohibit fiduciaries from receiving commissions and other traditional forms of 

variable compensation in connection with a covered benefit plan such as an IRA unless what is known as a ‘‘prohibited transaction exemption’’ applies and provides relief. Effectively, the DOL’s expanded definition of fiduciary makes an exemption 

from the prohibited transactions rules necessary to continue to effectively serve individuals investing in IRAs. Unfortunately, the exemption the Department has proposed to preserve the commission-based services for IRAs—the Best Interest Contract Exemption (BIC)—is not operational. 

Our concern is not the imposition of a ‘‘best interest standard.’’ We agree that 

firms and their representatives should always act in their clients’ best interests. In 

fact, we believe that acting in clients’ best interests is critical to our business’s longterm success. When our clients can see that they are on the path toward achieving 

their retirement and other goals, they are more likely to return to us and our representatives, and are more likely to refer their friends and family members to us. 

Instead, our primary concern is that the requirements and uncertainties of the 

BIC exemption are so complex and burdensome that the exemption is neither administratively nor operationally feasible. The trouble is that, from start to finish, 

the BIC exemption fails to offer certainty. In operating our business, ‘‘certainty’’ 

with respect to regulatory compliance matters is critical because a failure to satisfy 

32 

2Oliver Wyman, Standard of Care Harmonization: Impact Assessment for SEC (October 2010) 

(stating 88 percent of investors choose commission-based services). 3Quantria, Unintended Consequences: Potential of the DOL Regulations to Reduce Financial 

Advice and Erode Retirement Readiness, at 29. See also, NERA, Comment on the Department 

of Labor Proposal and Regulatory Impact Analysis, (July 20, 2015) at 17 (finding that, based on a conservative estimate of the minimum balance for advisory accounts being $25,000, the 

new fiduciary standard would cause a loss of access to professional advice for 40.49 percent of 

retirement account holders resulting in an aggregate cost of $46 billion per year.) 4FINRA, Comment on Proposed Conflict of Interest Rule and Related Proposals, RIN–1210– 

AB32 (July 17, 2015). 5Waddell, Melanie, FINRA’s Ketchum Criticizes DOL Fiduciary Plan, Think Advisor (May 1, 

2015). 

the proposed exemption may result in steep prohibited transaction penalties, including the forfeiture of compensation and excise taxes, as well as consumer lawsuits 

for breaches of contract, and potentially even class action lawsuits. Critically, the 

technical implementation of the exemption promises to be a substantial burden, and 

to cause a significant disruption of services to our clients, with no true added benefits in the way of investor protections. As a result, we believe firms will not use it. 

Instead, they will restructure their businesses because they cannot rely on the BIC 

exemption. 

This restructuring will mean most firms will move their commission-based brokerage IRAs to fee-based accounts, known as advisory accounts, or sometimes as ‘‘wrap 

accounts’’ or ‘‘managed accounts’’. Fee-based accounts typically have account minimums, usually beginning at $25,000, and the annual fees are costlier for buy and 

hold investors than fees associated with commission-based accounts. These higher 

costs for advisory accounts are due to the higher attendant legal liability, more active nature of portfolio management and greater reporting analytics provided to advisory clients. Further, these higher costs will be imposed on clients who have already determined that they neither want nor need fee-based advisory relationships. 

They have the choice now of one or the other or both. But 88 percent of all IRA 

clients, and 98 percent of the smaller ones, prefer brokerage relationships.2

This shift to advisory services is likely to cause millions of small balance IRA 

owners to lose access to the financial professional of their choice, or any at all. 

Those with enough investments to meet the account minimums will face higher 

costs and experience losses in retirement savings. These resulting losses by some 

estimates could be as high as $68–$80 billion each year.3

There is no doubt that the consequence will be negative to Main Street retirement 

savers, particularly to long-term buy and hold retirement investors and those with 

smaller accounts. 

We note that our securities regulator, the Financial Industry Regulatory Authority (FINRA), recently stated that, 

‘‘Many broker-dealers will abandon—small accounts, convert their larger accounts to advisory accounts, and charge them a potentially more lucrative assetbased fee.’’ 4

FINRA’s Chairman and CEO, Richard Ketchum also has observed the exemption’s 

conditions that the DOL imposes on commission-based accounts ‘‘are very narrow 

from the standpoint of broker-dealer activity, and don’t really describe a brokerdealer model that I’m aware of from the standpoint of safe harbors.’’ 5

We note that this would not be the first time the DOL has put forth an exemption 

with conditions so impractical as to be unusable. In 2011, the Department finalized 

rules for the 408(g) statutory exemption that were intended to provide prohibited 

transactions relief for the thousands of investment fiduciaries. Though the DOL predicted that ‘‘quality, affordable expert investment advice [would] proliferate’’ as a result of the 408(g) exemption, to our knowledge, firms have not chosen to rely on the 

rule. 

The reality is that Main Street consumers—families saving what they can each 

month—will lose access to the beneficial commission-based business services for retirement savings accounts that have benefited them so well and to their chosen financial professional. Tax-advantaged IRAs may no longer be readily available for 

those with less than $25,000 to invest. As the Proposed Rule only applies to qualified accounts, these households are likely to be limited to investing in non-qualified 

accounts, or be left with no in-person financial professional to encourage them to 

save at all. 

For a Main Street saver, this will not be good news. Non-qualified savings accounts lack the tax advantages of IRAs, though they are preferable to not saving 

at all. As a result, middle-income savers will experience lower retirement savings, 

all else being equal. In fact, in a comment to the DOL, Compass Lexecon, one of 

33 

6Oliver Wyman, ‘‘The role of financial advisors in the US retirement market,’’ July 6, 2015. 

(p.3). 7 EBRI 2012 Retirement Confidence Survey—‘‘. . . just 10 percent of [workers and retirees] 

say they are comfortable obtaining advice from financial professionals online.’’ http:// 

www.ebri.org/pdf/surveys/rcs/2012/EBRIlIBl03-2012lNo369lRCS.pdf (See last bullet 

point on page 1). 8Matthew Greenwald Survey—‘‘Despite their familiarity with technology, the Generation X 

and Generation Y populations prefer traditional means when it comes to retirement education.’’ 

‘‘Younger Workers Want In-person Education.’’ http://www.benefitnews.com/news/retirement/ 

younger-workers-want-in-person-education-2746146–1.html. 9 ‘‘The 60 million Americans who don’t use the Internet, in six charts’’ https:// 

www.washingtonpost.com/blogs/the-switch/wp/2013/08/19/the-60-million-americans-whodont-use-the-internet-in-six-charts/. 10Pew Internet & American Life Project Surveys, March 2000-May 2013; Pew 2012 Research 

Report ‘‘Digital Differences’’—20 percent of U.S. Adults Do Not Use the Internet . . . Senior citizens, Spanish-speaking adults, the disabled, the less educated, and lower earners are among the 

least likely to go online. Forty percent of Americans do not have broadband access at home. 

http://www.pewinternet.org/2012/04/13/digital-differences/. 

the world’s leading economic consulting firms, reports that a median 30-year-old investor would experience a 62.6 percent greater effective tax rate relative to a Roth 

IRA and a 158.0 percent greater rate relative to a traditional IRA if the DOL’s Proposed Rule caused him to save for retirement in a taxable savings account. Compass 

Lexecon provides a rough estimate that across the potentially 7.0 million households 

that could effectively be cut off from access to IRAs as a result of the Proposed Rule, 

the total reduction in retirement savings would be between $147 and $372 billion 

if they all opened taxable savings accounts. This calculation illustrates that the Proposed Rule may have very substantial costs which the DOL did not consider. Having 

one standard for individual retirement accounts and a different standard for all 

other individual investment accounts will create even more confusion and complexity for individuals than already exists. 

The irony is that the Department is missing an opportunity to truly help middleincome families. Our experience in serving middle-income families has shown us 

that the issue for them is not one of conflicted advice. Rather, it is that far too many 

of them simply have failed to take the critical ‘‘first steps’’ necessary to accumulate 

meaningful retirement savings. The real conflict they face is between spending and 

saving. 

Saving for retirement is for most people a hard choice, especially for people with 

finite disposable income, where the decision to allocate a portion of limited resources 

to saving often means passing on some other purchase or activity. Busy workers and 

families also often lack the time or confidence to navigate their finances. Yet the 

DOL’s Proposed Rule will make it more difficult for our representatives—who are 

on the frontlines and living in these most affected communities—to continue to effectively educate middle-income families on the benefit of retirement saving and 

how to take these important steps toward retirement security. 

The value that face-to-face financial assistance can bring to a household is substantial. In a recent study, Oliver Wyman6 found that advised individuals with 

$100,000 or less in annual income have at least 38 percent more assets saved than 

non-advised individuals, and those of retirement age have more than double the assets of the non-advised. These differences translate into significant improvements in 

retirement living. The same study also reported that advised individuals more often 

display investing practices associated with long term investing success. Again, we 

believe that the Proposal will harm middle-income savers by unnecessarily disrupting the relationship between the client and her chosen financial professional. 

In fact, the Department repeatedly, and again today, has dismissed the Proposed 

Rule’s potential to cut off help for small savers by suggesting that self-help online 

investment tools—what the Department refers to as ‘‘innovation’’—are a satisfactory 

alternative to personal help. We disagree. 

Studies consistently confirm that the percent of Americans comfortable obtaining 

financial products online is quite low, typically below 10 percent.7 Even younger 

generations strongly prefer personal interactions when it comes to retirement investing.8

Also troubling is that nearly 60 million Americans remain without access to online 

investment options,9 and these are predominantly lower wealth families and minorities, yielding some disturbing differences that should be concerning to policymakers. 

Internet usage by Hispanic and African American households still lags behind white 

and Asian households.10 There is also a notable geographic gap among rural versus 

urban households. 

While we acknowledge that a computer may be immune to human self-interest, 

we are puzzled as to why the Department seems to believe that computer-generated 

34 

11 Compass Lexecon, An Evaluation of the Department-Impact Analysis of Proposed Rules Relating to Investment Advisor Fiduciary Status, (July 20, 2015) at Par 3. 12 Ibid, at Par. 33. 13 NERA, at 28. 

recommendations, calculated without knowing the client, are in the client’s ‘‘best interests’’ and lack bias. For example, Wealthfront asks investors five questions before 

its software makes a wrap account recommendation. Absent from these are questions regarding short-term liquidity needs, life cycle events, lifetime income options, 

employment, short- and long-term goals, need for qualified retirement savings vs. 

taxable investments, and a host of others personal to each family. 

Unfortunately, the Department’s cost/benefit analysis of the Proposed Rule failed 

to take into account the real-world unintended consequences we are discussing here 

today that can serve to substantially increase costs. Compass Lexecon, in a report 

it is filing with the Department, found the Department’s conclusions as to the costs 

of the Proposal to be ‘‘fatally flawed.’’ 11 It also determined that the Department’s 

economic analysis of the Proposed Rule ‘‘grossly overstates the benefits it purports 

to measure.’’ 12 Importantly, the Department also failed to acknowledge that the 

costs likely will be passed on to investors in the form of higher fees, particularly 

to IRA investors with account balances under $25,000. 

We would like to note that among the unintended consequence could be the elimination of variable annuities as an option for IRAs. The BIC exemption does not provide a practical pathway for firms to offer variable annuities to IRAs if they also 

offer any other products, such as mutual funds. Variable annuities typically come 

with both living and enhanced death benefits. These lifetime benefits are often critical to protecting the best interests of retirement investors. During the market upheaval of the recent recession, they saved many of our clients’ retirements. We are 

greatly concerned about the potential elimination of this important investment option for retirement investors. 

As we have explained, the high cost of compliance with the Proposed Rule, and 

the substantial time and resources required to develop and implement the Proposed 

Rule, will have broad consequences by affecting the decisions firms make in responding to the rule. While we do not have time to discuss those costs in detail, 

we do not believe that the marginal fixes that the Department now seems open to 

considering will sufficiently ease those enormous burdens. For example, even if the 

DOL makes some adjustments to the rule such as changing the timing of when 

newly required contracts must be signed, those contracts would have to be prepared 

for new and existing clients, new systems would have to be developed and integrated (in some cases with third-parties) to create and manage new disclosures, and 

compliance policies and procedures would need to be updated. At our firm alone, 

over 80,000 representatives would need to be trained to comply with the rule. Nor 

would we expect the changes to resolve the numerous ambiguities within the Impartial Conduct Standards that give rise to potential forfeiture of compensation and excise taxes, as well as consumer lawsuits for breaches of contract and class action 

lawsuits. 

In his testimony today, the Secretary drew the analogy of investment professionals to doctors and lawyers. While we agree that many people regard their financial professional highly, we think it is useful to draw the analogy out to fit the circumstances. We question what doctors or lawyers would do if faced with similar regulation. As with the financial industry, we would not expect the objections to be to 

the standard of care. But would doctors continue to serve patients if they were required to sign a contract guaranteeing fees and projecting results over 1, 5 and 10 

years, give warranties on loosely defined standards that could be challenged by trial 

attorneys in hindsight, and report volumes of personal patient data, as well as their 

own compensation, so that it is publicly displayed? We think they would not. We 

also wonder whether the Department would believe that on-line medical services 

would be a sufficient alternative for those who were cut off from face-to-face interaction as a result of their rule. 

As indicated, a possible outcome of the Proposed Rule is that nearly half of middle-income consumers—those with amounts to invest below advisory account minimums—will be left with no option to save in an IRA.13 For many families this may 

result in decisions to spend rather than to save. For those who choose saving, only 

a few can be expected to use online investment options. The others may unknowingly forgo the tax benefits available to IRAs and instead invest through non-qualified accounts. Obviously, this would be contrary to congressional intent of encouraging retirement savings. 

Overall, we believe that the Proposed Rule will harm rather than help middleincome retirement investors. The added litigation and penalty risks will drive inVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6621 S:\DOCS\95692.TXT CAROL
35 

creased compliance costs and lead financial institutions and representatives to curtail the services they offer to those families with more limited means. 

For the record, we favor a single best interest standard for all the types of accounts and clients we serve. The best policy is a best interest standard that respects 

the different choices broker-dealers and registered investment advisers offer Americans. In short, it is a standard that helps people save rather than one that sets up 

narrow guardrails in the middle of the road that effectively serve as a retirement 

roadblock for the middle-class. 

We believe the DOL is sincere in trying to help protect investors from conflicts 

of interest. That is a goal we share. But the DOL lacks the tools to do the job right. 

The authority it has to define the word ‘‘fiduciary’’ is insufficient to rewrite the rules 

governing the entire securities industry in this area. 

You should know that it will be the clients, not the companies that are hurt most 

by this rule. Companies are resilient, and many firms will figure out how to go 

upscale and focus on a new customer base. The clients are the ones who will lose 

most. The war being waged every day in the homes we serve—by people not robots—is where the family can find $100 a month, $50 even, to start saving for college and retirement. The real problem with the Proposed Rule is it makes what is 

now an extremely difficult task into an impossible one. 

On behalf of Primerica’s 101,000 representatives and 2,000 employees dedicated 

to providing a more secure financial future to our clients, I’d like to thank you for 

letting me share our perspectives on this critically important matter. 

Senator ISAKSON. Thank you, Mr. Schneider. 

Ms. Miller. 

STATEMENT OF DARLENE MILLER, PRESIDENT AND CEO, 

PERMAC INDUSTRIES, BURNSVILLE, MN 

Ms. MILLER. Thank you, Chairman Isakson and Ranking Member Franken—and thank you for the kind introduction—and members of the Subcommittee on Employment and Workplace Safety 

and members of the full committee. I am here representing myself 

and my employees and also the Chamber of Commerce, of which 

I am a board member, and I chair the U.S. Chamber’s Small Business Council. 

Permac opened in 1966, and I purchased it in 1993 and 1994 and 

started with seven employees. We now have almost 30, and we’re 

looking to expand. In order to expand, my company must be able 

to compete with much larger companies for talented employees. 

One way we’re able to do so is by offering employee benefits, including a retirement savings plan. 

As an owner of a business, I am very focused on the details of 

my core business function, and I use outside professionals to help 

me with supplemental business functions. For example, I use a 

CPA to assist me with tax issues, an attorney to assist me with 

legal issues, and a financial advisor to help me with my retirement 

savings plan. 

In 1999, Permac implemented a SARSEP, now known as a SEPIRA. The plan was recommended to me by an advisor who I had 

worked with previously to provide medical benefits for my employees. 

Several years later, my advisor advised me that I was in danger 

of violating the 25-employee limit for a SARSEP. At that point, I 

worked with him to determine how to continue to provide retirement benefits for my employees. We decided a 401(k) plan was the 

best option for my company, and in 2008 we implemented that 

plan. 

We have a 96 percent enrollment rate in our plan. Almost all of 

our employees participate in that plan. Of the eligible ones, there 

36 

is only one who is close to retirement who does not participate, and 

a couple that are part-time are not quite yet eligible. 

Under the 401(k) plan, employees receive a matching contribution equal to 100 percent of their first 3 percent that they contribute, and then 50 percent of the next 2 percent of contributions. 

Also and just as important is Permac provides substantial investment education to all of its employees. 

I look forward to continuing to provide competitive benefits. My 

current employees are like family to me, and I want to be able to 

help them, especially with their retirement. Just as importantly, I 

want to be able to attract new employees. Eighty-two percent of our 

association, PMPA, Precision Machined Products Association, say 

that they also need to be able to provide this benefit to their prospective new employees. I am very concerned that the proposed 

rule will impact our ability to do so. 

Last week, the Chamber submitted a comment letter to the Department of Labor enumerating many ways in which the proposed 

rule is unworkable. In my testimony, I’d like to highlight three 

issues that will have a particularly negative impact in small business plans. 

First, the seller’s carve-out discriminates against small businesses and will decrease access to much-needed guidance. Under 

the proposal, there is a carve-out for the advisors that are selling 

or marketing materials. However, that carve-out does not apply to 

advisors to small businesses. The DOL seems to believe that small 

business owners, such as myself, are not as sophisticated as large 

businesses and, therefore, need additional protection. 

When I work with my financial advisor, I am aware that he is 

providing a service for a fee and selling a product. I wouldn’t be 

able to run a successful business if I were not able to understand 

when I’m involved in a sales discussion. 

Second, the changes to the education carve-out will restrict access to investment education for both small business owners and 

their employees. My employees really truly value the investment 

education provided to them, specifically providing investment recommendations in various asset classes. This information allows 

them to make informed investment decisions, and many of my employees could not afford to pay for this investment education separately and might be discouraged from investing in the plan at all 

if my company did not provide this benefit. 

And, third, the best interest contract exemption will increase the 

cost of services to small businesses and possibly eliminate access. 

There is some question about whether advisors to small business 

plans are even able to use the BIC exemption. Even assuming that 

they are, there are certain to be additional costs associated with 

these changes. As a business owner who relies on outside professionals to help me manage my plan, any additional cost imposed 

by the regulation will be passed on to me. 

In conclusion, I’m very concerned that the proposal will not 

achieve the department’s goals of better protecting workers and retirees but will instead make it harder for small business employers 

and employees to access the financial advice and increase their retirement services. 

37 

Thank you for the opportunity to testify before you today, and I 

look forward to any questions you might have. 

[The prepared statement of Ms. Miller follows:] 

PREPARED STATEMENT OF DARLENE MILLER

Thank you Chairman Isakson, Ranking Member Franken and members of the 

Subcommittee on Employment and Workplace Safety and members of the Senate 

Committee on Health, Education, Labor, and Pensions. 

I am Darlene Miller, president and CEO of Permac Industries in Burnsville, MN. 

I am here representing the U.S. Chamber of Commerce of which I am a board member and chairperson of the U.S. Chamber Small Business Council. 

Permac Industries is a precision machining manufacturer that services the global 

aerospace, defense, medical, high-reliability industrial and commercial industries. 

When I purchased Permac in 1993 there were 7 employees. We now have almost 

30 employees and are looking to expand. In order to expand, my company must be 

able to compete with much larger companies for talented employees. One way that 

we are able to compete is by offering employee benefits, including a retirement savings plan. As the owner of a business, I am focused on the details of my core business function—sales, finance, and manufacturing oversight—and use outside professionals to help me with supplemental business functions. For example, I use a CPA 

firm accountant to assist with tax issues, attorneys to assist with legal issues, and 

a financial advisor to help me with my retirement savings plan. 

In 1999, Permac implemented a SARSEP—a Simplified Employee Pension plan 

which is now known as a SEP–IRA. The plan was recommended to me by a broker 

whom I worked with to provide medical benefits for my employees. This broker was 

a trusted adviser that I had worked with previously and had provided valuable assistance. Several years later, my broker advised me that I was in danger of violating 

the SARSEP rules because my employee population was exceeding the 25 employee 

limit. At that point, I worked with him to determine how to continue to provide retirement benefits for my employees. We decided that a 401(k) plan was the best option for my company and in 2008 we implemented the new plan. Through the 401(k) 

plan, Permac provides the opportunity to save, a matching contribution, and investment education. There is 93 percent participation in the plan and, annually, the 

company provides an investment seminar. All employees—even those who don’t participate in the plan—are encouraged to participate in the investment seminar. 

My broker helped me implement the SARSEP, notified me when I was about to 

be in violation of the rules and guided my transition to a 401(k) plan. My current 

employees are like family and I want to be able to help them. Just as importantly, 

I want to be able to attract new employees. Providing retirement benefits has been 

important to help my current employees and to attract new employees. As my company continues to grow, I look forward to providing competitive benefits. I am very 

concerned that the proposed rule will prevent my ability to do so. 

The Chamber has earlier submitted a comment letter to the Department of Labor 

enumerating many ways in which the proposed rule is unworkable. In my testimony, I would like to highlight three issues that will have a particularly negative 

impact on small business plans: 

1. The seller’s carve-out discriminates against small businesses and will decrease 

access to much-needed guidance. 

2. The changes to the education carve-out will restrict access to investment education for both small business owners and their employees. 

3. The Best Interest Contract Exemption will increase the costs of services to 

small businesses and possibly eliminate access. 

The seller’s carve-out discriminates against small businesses and will decrease access to much-needed guidance. Under the proposal, there is a carveout for advisors that are selling or marketing materials (‘‘Seller’s Carve-Out’’). However, this carve-out does not apply to advisors to small businesses. The DOL seems 

to believe that small business owners, such as me, are not as sophisticated as large 

businesses and, therefore, need additional protections. The validity of this rationale 

is based on faulty assumptions, and does not justify discriminatory treatment. When 

I work with my financial adviser, I am aware that he is providing a service for a 

fee and selling a product. I would not be able to run a successful business if I were 

not able to understand when I am involved in a sales discussion—particularly, if 

it follows a basic disclosure that an advisor is selling a proprietary financial product, 

that the advisor is paid to sell the product, and the advisor is not providing fiduciary advice. This disclosure, similar to that the Department requires in the large 

plan carve out, is readily understandable to any recipient. 

38 

1 However, the new exemption proposed by DOL may not apply to small business plans. It 

does apply to individual owners of IRAs, but it is not clear whether this exemption is available 

for retirement plans—including SEP and SIMPLE IRAs—that are being offered by the employer. 

Further, even if it does apply, the new exemption—called the Best Interest Contract (‘‘BIC’’) Exemption—would itself substantially increase costs for advisors due to its many conditions and 

requirements. 

The assumption that small plans, participants and IRA owners cannot understand 

the difference between sales and advice does not match my real world experience. 

The Department can protect participants, IRA owners and small plans with the 

same kind of disclosures that it requires of large plans under the large plan carve 

out, but without eliminating their right to choose the services and products that 

best fit their needs. 

The changes to the education carve-out will restrict access to investment 

education for both small business owners and their employees. While the 

Proposal expressly permits education to be provided to plans, participants, and 

IRAs, the redefinition of asset allocation models that reference the plan’s investment 

options as fiduciary advice will significantly disrupt plan sponsor efforts to educate 

their plan participants and retirees about investment options. Many small businesses, including mine, rely on trusted third parties to provide investment education 

to their employees. These efforts include providing asset allocation models that provide a recommendation on investments in various asset classes based on a plan participant’s age, expected retirement and risk tolerance. However, under the Proposal, 

any party who provides specific investment options for each asset class would be 

deemed an ERISA fiduciary. This significant modification from current rules, which 

allows for such information on a non-fiduciary basis, would harm investors, and particularly small business plan participants that likely have access to fewer resources. 

My employees value the investment education provided to them—specifically providing investment recommendations in various asset classes. This information allows them to make informed investment decisions. Many of my employees cannot 

afford to pay for investment education separately and might be discouraged from 

investing in the plan at all if the company did not provide this benefit. By disallowing any party to make the link between asset classes and specific investment 

options, the Department of Labor is forcing plan participants into the tenuous position of figuring out how to invest their own retirement savings and risk making poor 

choices. 

The Best Interest Contract Exemption will increase the costs of services 

to small businesses and possibly eliminate access. Because advisors to small 

businesses are not carved out of the fiduciary definition, they must change their fee 

arrangements, or qualify for a special rule called an ‘‘exemption’’ in order to provide 

services on the same terms as before.1 The reason the DOL regulatory package 

causes such significant change is that a fiduciary investment advisor under ERISA 

generally has engaged in a prohibited transaction if the advisor recommends investments that either pay the advisor a different amount than other investments, or 

that are offered by affiliates (for example, the advisor is connected with the insurance company that offers the investment). There are certain exceptions to these 

rules, called ‘‘prohibited transaction exemptions’’ but as DOL has proposed the new 

rules, the exemptions generally won’t help financial advisors who are working with 

small businesses to set up plans. Therefore, it may be illegal for those advisors to 

get commissions or to recommend certain investments. 

This problem is highlighted in services for SEP and SIMPLE IRAs. One way advisors might try to comply is by charging a flat fee for their SEP or SIMPLE IRA 

services. Even though Permac no longer provides a SEP–IRA, we might never have 

offered one if the fees had been too high. Without that introduction into providing 

a retirement savings program, we might not have moved onto a 401(k) plan. Consequently, it is extremely important to consider the negative impact that increased 

costs will have—particularly in the small business plan market. 

In conclusion, for the reasons stated above, we are very concerned that the Proposal will not achieve the Department’s goals of better protecting workers and retirees, but will instead make it harder for small business employers and employees 

to access financial advice and to increase retirement savings. I appreciate that the 

DOL is looking to work with the industry to resolve our concerns. However, I am 

very concerned that the current timeline does not allow enough time for proper discussions. If the final rule does not properly resolve the issues raised above, the unintended consequences will have substantial negative repercussions on my employees, as well as the employees of many other small businesses. 

Thank you for the opportunity to testify before you today and I look forward to 

any questions you may have. 

39 

Senator ISAKSON. Thank you, Ms. Miller. 

Before we go to Mr. Puritz, I want to apologize. Senator Roberts 

and I both have an Ethics Committee hearing which involves nobody on the dais, I might add, at 4 o’clock. We have to be there. 

Showing the good-natured spirit that I am and also a spirit of bipartisanship, I’m going to turn over the rest of the hearing to our 

acting chairman but Ranking Member, Al Franken. 

Senator ROBERTS. Good grief. 

Senator Franken [presiding]. Unprecedented. 

[Laughter.] 

Senator ROBERTS. Mr. Acting Chairman, I don’t know what to 

say. You again. 

[Laughter.] 

Senator FRANKEN. May I help you? OK. This is an old Jack 

Benny thing. Let’s just go right to Mr. Puritz. 

[Laughter.] 

STATEMENT OF SCOTT PURITZ, MANAGING DIRECTOR, 

REBALANCE IRA, BETHESDA, MD 

Mr. PURITZ. Thank you, Chairman Isakson, Ranking Member 

Franken, and members of the subcommittee, for this opportunity to 

provide Rebalance IRA’s views about the Department of Labor’s 

proposed conflict of interest rules. 

I’m Scott Puritz, the co-founder and managing director of Rebalance IRA. My firm is a registered investment advisor with approximately $275 million of assets under management, and we serve approximately 500 clients. Rebalance IRA is a relatively new national 

investment advisory firm that combines top-quality retirement expert investment advisors, real human beings, with low-cost, highly 

diversified retirement portfolios for everyday Americans. 

Our firm’s Investment Committee includes financial luminaries, 

Professor Burton Malkiel from Princeton; Dr. Charlie Ellis, who 

chaired the famed Investment Committee at the Yale Endowment; 

and Jay Vivian, who managed IBM’s $100 billion corporate pension 

fund. 

Rebalance IRA embraces a fiduciary legal standard, and we always put the interest of our clients front and center. We provide 

retirement investment advice without commissions and without 

conflicts. This makes it very easy to embrace a fiduciary standard. 

Rebalance IRA is part of a broad trend of investment advisory 

firms that seek to provide consumers with a fundamentally better 

set of retirement investment options. This new generation of firms 

is offering retirement investment advice to clients at all income levels for very modest fees. The group of innovators includes new 

firms, such as my own, Rebalance IRA; Wealthfront; and Personal 

Capital, but also includes established industry players such as 

Vanguard and Schwab. 

This trend of retooling the financial service industry is about 3 

years old and has met with considerable success in the marketplace. Tens of thousands of clients have switched over. This group 

of investment innovators is growing very fast and manages over 

$15 billion of client assets. Imagine what would happen if there 

was a level playing field. Imagine. 

40 

These investment innovators have three common features. First, 

we harness technology to make the process more efficient. Second, 

we harness new business models. And, finally, we deploy new investing vehicles, typically best-of-breed, proven, endowment-style 

investing portfolios of low-cost ETFs. The results are considerable—lower cost, superior asset allocation, superior investment vehicles, superior transparency, and, finally, we are building profitable, successful business models. 

At Rebalance IRA, our clients seek our help because they need 

advice about how to manage their retirement savings and how to 

better understand the increasingly complex world of investment 

products. Our clients come from all walks of life—nurses, school 

teachers, plumbers, lawyers, welders, professors, police, firemen, 

government employees—regular Americans. 

We’re in the marketplace every day dealing with everyday Americans as they struggle to find the best way to manage their retirement investment savings. If you will, we see how the sausage is 

made, and sometimes, frequently, it is not a pretty sight. Over 30 

percent of our clients come to us directly from having, for lack of 

a better phrase, a suboptimal relationship with a brokerage firm. 

At our firm, we sometimes refer to these clients as brokerage refugees. 

The story we see over and over again is all too familiar: a client 

at a brokerage firm who is stunned to find out that their so-called 

trusted retirement investment advisor does not have a fiduciary responsibility. In addition, the vast majority of these clients are surprised, and shocked, to discover that there is almost always a second layer of fees at the investment management level which frequently adds 1 percent or more to the fee burden. 

The brokerage refugees that we see at our firm average 2.37 percent of fees all in per year. That may not sound like a lot of money. 

But over several decades, that extra fee burden can eat away at 

over half, half of a consumer’s retirement nest egg, over half. 

When Rebalance IRA takes on these brokerage refugees as clients of our firm, we immediately reduce their retirement investment fee structure by an average of 68 percent. In addition, we put 

in place for these clients a comprehensive retirement plan, and we 

provide our clients with best-of-breed, endowment-style, retirement 

investment portfolios. And, finally, we pair all of our clients with 

a highly qualified, two-person—real heartbeat—retirement investing team. 

American inventiveness and entrepreneurial spirit are alive and 

well in the financial services industry. For all consumers to reap 

the full benefit of this truly extraordinary surge of innovation, 

there needs to be three things: greater transparency; greater flow 

of information, particularly regarding cost; and a greater alignment 

of economic interests. 

We believe that a regulatory level playing field will dramatically 

accelerate the retooling of the financial services industry and provide everyday Americans with a fundamentally cheaper and fundamentally better way to save for retirement. It’s time to hold all 

financial professionals accountable by consistently requiring them 

to act in the best interest of their clients and establish a level playing field. This is what the Department of Labor’s rule can do. 

41 

Americans struggling to save for a dignified retirement should no 

longer be subjected to the conflicts of interest that are draining 

their retirement investments. If the traditional brokerage firms 

cannot live by a simple fiduciary standard and refuse to serve modest savers, so be it. Other firms who embrace this client-first approach stand ready to help—— 

Senator FRANKEN. Mr. Puritz, I would ask you to wrap up. 

Mr. PURITZ [continuing]. All Americans at all income levels prepare for a secure retirement. 

Thank you. 

[The prepared statement of Mr. Puritz follows:] 

PREPARED STATEMENT OF SCOTT PURITZ

Thank you Chairman Isakson, Ranking Member Franken, and members of the 

subcommittee for the opportunity to provide Rebalance IRA’s views about the Department of Labor’s proposed Fiduciary Duty Rule. 

I am the co-founder and managing director at Rebalance IRA. There, I have assembled the infrastructure and service delivery methods that bring our firm’s clients 

sophisticated retirement investment advice and the personalized treatment offered 

by top-tier wealth management firms, for a fraction of the cost. I also am a longtime member of the board of directors of the North Carolina Outward Bound School, 

sitting on its Finance Committee, which oversees the School’s $14 million endowment. In addition, I helped establish an Outward Bound scholarship program for 

inner-city teens, giving them the opportunity to develop critical life skills. I received 

my B.A. in economics, with distinction, from Tufts University, and an M.B.A. from 

Harvard Business School. I am a registered Investment Representative and I hold 

a Series 65 securities license. 

Rebalance IRA is a registered investment advisor firm with approximately $275 

million AUM, and serves more than 500 clients. It is a relatively new, national investment advisory firm that combines top-quality retirement expert investment advisors with low-cost, highly diversified retirement portfolios for everyday Americans. 

Our firm’s Investment Committee includes Professor Burton Malkiel (Princeton University), Dr. Charles Ellis (who chaired the Investment Committee of the famed 

Yale Endowment), and Jay Vivian (who managed IBM’s $100+ billion corporate pension fund). Our firm embraces a fiduciary legal standard, always putting the interest of our clients front and center. We provide retirement investment advice without 

commissions and without conflicts between our interests and those of our clients. 

Rebalance IRA is part of a broad trend of new investment advisory firms that 

seek to provide consumers with a fundamentally better set of retirement investment 

options, offering retirement investment advice to clients at all income levels for very 

modest fees. This trend of disrupting the established investing order is about 3 

years old and has met considerable success in the marketplace. Tens of thousands 

of clients have switched over to firms like ours from brokerage firms and others. 

These ‘‘investment innovators’’ are growing quickly, and, by some measures, to date 

this group of firms collectively manages more than $15 billion in client assets. 

I would like to share the Rebalance IRA perspective on the Department of Labor’s 

proposed update to its fiduciary duty rule, discussing our clients’ experiences, the 

problem in the retirement investment advice industry, the need for an updated fiduciary duty rule, and our firm’s business model. 

WHO WE SERVE

At Rebalance IRA, our clients seek our help because they need advice about how 

to manage their retirement savings and how to understand the increasingly complex 

world of investment products. Our clients come from all walks of life including 

nurses, school teachers, plumbers, lawyers, welders, professors, police, doctors, farmers, government employees—i.e., regular Americans. 

We are in the marketplace every day, dealing with everyday Americas as they 

strive to find the best way to manage their retirement investing savings. We see 

firsthand the shortcomings of the current regulations governing advice given to retirement savers. 

I would like to begin by telling a story about one of our clients, and her experience 

with conflicted advice. She is a 37-year-old woman from California, married with 

three children. In managing her family’s retirement investments, she had ‘‘inherited’’ a stockbroker from her family. She used this broker for some time, believing 

42 

1 ANGELA HUNG, ET AL., INVESTOR AND INDUSTRY PERSPECTIVES ON INVESTMENT ADVISERS AND

BROKER-DEALERS 89 (2008). 

she was only paying the typical 1 percent fee for investment advice and entrusted 

him with her family’s retirement nest egg. 

Later she was introduced to Rebalance IRA, and reached out to learn more about 

our firm’s services. Upon our review of her retirement investment statements, we 

found that her broker had invested her retirement funds in actively managed mutual funds, which contained a significant second level of fees. In addition, her stockbroker had recommended a new actively managed mutual fund, with a front-end 

load that took 5 percent off the top. When all was said and done, she was paying 

over 2.3 percent in annual fees, not the typical 1 percent. What’s worst—she had 

no idea. Her broker never disclosed the fees or conflicts to which her accounts were 

subject. In the end, Rebalance IRA was able to reduce the annual ‘‘all-in’’ cost for 

this client’s retirement accounts by nearly 70 percent, or by over $5,000 per year. 

We also invested her funds in a more appropriate diversified set of retirement investment portfolios and implemented a disciplined risk management rebalancing 

system. 

This client isn’t alone. In fact, more than 30 percent of the Rebalance IRA client 

base comes to our firm directly following a ‘‘suboptimal’’ relationship with a brokerage firm. We refer to these clients as ‘‘brokerage refugees.’’ Just like her, these clients usually are shocked to find out that their ‘‘trusted’’ retirement investment advisor does not have a fiduciary obligation. In addition, these brokerage refugees consistently are surprised to discover that the investments in their retirement accounts 

frequently are burdened with a second level of fees at the investment vehicle level 

or fund-level fees. The brokerage refugees that we see at our firm average over 2.37 

percent per year of total (all-fee) fees in their brokerage retirement accounts. 

It is important to keep in mind that, as with investment returns, investment fees 

compound over time and can eat away at retirement savings. While 2.37 percent per 

year may not sound like a large amount of money, over several decades this increasingly compounding fee burden can reduce a consumer’s retirement nest egg by half 

if not more. 

When Rebalance IRA takes on these brokerage refugees as clients of our firm, we 

immediately reduce their retirement investing fee structure by an average of 68 percent. In addition, our firm provides meaningful retirement investment advice to all 

of our clients. Rebalance IRAs’ advisors put in place a comprehensive retirement investing plan, and we provide our clients with best-of-breed, endowment-grade, lowcost retirement investment portfolios. And finally, we pair all of our clients with a 

highly qualified, two-person retirement investing team. 

THE HEART OF THE PROBLEM

The lack of a consistent best interest advice is at the heart of the debate that we 

are having today. We have seen it firsthand, and we are troubled that others in the 

advisory industry are legally allowed to act in this manner, sometimes putting their 

own interest, or their firm’s, ahead of their clients. 

Consumers that we see typically thought that their investment advisor was acting 

in their best interest, which studies have supported. One study found 49 percent 

of investors assumed that investment advisors were required to act under a fiduciary standard, while 59 percent believed ‘‘financial advisors or financial consultants’’ had the same requirement.1 Inconsistent and weaker standards should not be 

the norm for retirement savers, yet they are. 

The current rules governing the standards for investment advice under the Employee and Retiree Income Security Act (ERISA) are outdated and filled with shortcomings and loopholes. These rules, first promulgated 40 years ago in 1975, were 

written when the retirement landscape consisted primarily of defined benefit plans, 

also known as traditional pensions. At that time IRAs had just been created a year 

prior and 401(k)s had yet to exist. Advice was not something that was in demand, 

because pensions were managed professionally for employees through their employer. 

Today, that is not the case. Plans available to workers and retirees are dominated 

not by pensions, but by defined contribution plans such as 401(k)s and IRAs. These 

plans require workers and retirees to invest their savings on their own, yet many 

lack the level of expertise necessary to properly manage their retirement savings. 

This is why we are here—and why many others are in this industry—to specialize 

in providing people with advice necessary to invest and manage their retirement 

savings. 

43 

Unfortunately, the ‘‘help’’ many receive often is not in their best interest. The 40- 

year-old rules allow brokers, insurance agents, and others offering retirement investment advice to put their own interest ahead of their clients. The investment 

products sold to retail investors can generate attractive commissions for these firms, 

yet has the potential to leave clients with underperforming investments and layers 

of fees. 

THE SOLUTION

The Department of Labor has proposed a ‘‘fiduciary rule’’ requiring all financial 

professionals to avoid and mitigate conflicted advice when it comes to retirement investments. The proposed rule would better cover advice largely unprotected today— 

especially in the $7 trillion individual retirement account (IRA) market. Expectedly, 

this has generated strong opinions on both sides of the issue, with a portion of the 

advisory industry who provide conflicted advice endeavoring to make this muchneeded rule update a difficult battle. 

Rebalance IRA strongly supports the proposed rule because it successfully follows 

a fiduciary standard that we feel investors and firms across the board should embrace. Committing to a best interest standard can be done, and it should be done, 

because American workers and retirees deserve advice given in their best interest. 

Rebalance IRA provides retirement investment advice without commissions and 

without conflicts, which allows our firm to put each of our clients front and center. 

That is why we find it troubling that many who label themselves as financial advisors find this standard a difficult one to adopt, call the rule ‘‘unworkable,’’ and claim 

that they are for a best interest standard without willing to commit to one at the 

end of the day. Unfortunately, this segment of the advice industry defends the status quo. 

Millions of hardworking Americans simply want to be sure that they can make 

ends meet during their golden years. The Labor Department’s proposed rule would 

give them the chance to do that by requiring those giving retirement investment advice to act in the best interest of their clients and comply with the fiduciary standard already embraced by Rebalance IRA and other investment innovators. A universal fiduciary standard, combined with full and fair disclosure, will help consumers make truly informed decisions about how best to manage their retirement 

investments. 

OUR BUSINESS MODEL WORKS

Currently, many brokerage firms and others providing retirement investment advice outside of a fiduciary standard are structured to maximize the sale of investment ‘‘products’’ and maximize profits, regardless of the implications for their clients. Often, they claim that small savers and small businesses will be the ones who 

lose out on the retirement investment advice that they need. Yet this ignores the 

fact that what small savers often get from brokers is not true advice, but rather 

a sales pitch disguised as advice. And, because retail investors by and large are not 

financial experts, they often cannot tell the difference between the two and, as a 

result, are susceptible to suffering harm from the recommendations they receive. Industry claims that small savers and small businesses will lose out on retirement investment advice also ignore the ever-growing options available today for individuals. 

Rebalance IRA and other investment innovators such as Wealthfront, Personal 

Capital, and Financial Engines, are striving to provide retirement investors with 

fundamentally different and better investing options. Established industry companies, such as Vanguard and Schwab, are joining in this movement to find innovative 

ways to deliver high-quality, low-cost options to retirement savers to make the best 

of their nest egg. 

This investment innovation trend already is delivering tangible benefits to consumers. For example, at Rebalance IRA our services are 50–75 percent lower than 

traditional brokerage models. It must be noted that costs are the most accurate predictor of investment success over time. The second predictor of success is asset allocation. At Rebalance IRA, our highly skilled financial advisors spend considerable 

time with new clients to strive for the optimal balance of risk and reward, unbiased 

by commissions. Third, our firm provides a high level of transparency, regarding 

‘‘all-in’’ investing costs to consumers and fiduciary responsibilities to clients. And finally, we pair all of our clients with a highly qualified, two-person retirement investing team. Put together, this has resulted in a business model that is successful 

for investors, as well as profitable. Bottom line: Advisors can provide best interest 

advice to investors of all incomes and run a successful business. 

Because our firm runs free of conflicts, we do not have concerns about litigation. 

We believe that when we put our clients front and center, without conflict, and proVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 S:\DOCS\95692.TXT CAROL
44 

vide them with high caliber services under our business model, we can leave concerns about regulatory risk at the door. We take our fiduciary obligation seriously, 

just as any advisor should, and that results in relief from worries of legal costs. 

CONCLUSION

It is time to hold all financial professionals accountable by consistently requiring 

them to act in the best interests of their clients, and establish a level playing field. 

That is what the Department of Labor’s rule can do. Americans struggling to save 

for a dignified retirement should no longer be subjected to the conflicts of interest 

that are draining their retirement investments. And, if traditional brokerage firms 

cannot live with the simple fiduciary standard and refuse to serve modest savers, 

so be it. Other financial firms who embrace the client-first approach, new and established, stand ready to help all Americans prepare for a secure retirement. 

Thank you again for the opportunity to appear before you today. I look forward 

to answering your questions. 

Senator FRANKEN. Thank you. Since I’m, I guess, the acting 

chairman now, I will be here until the end. I’ll go to Senator Warren to ask her questions. 

Senator WARREN. Thank you, Mr. Acting Chairman. As we have 

discussed, it is now perfectly legal for retirement advisors to give 

advice that boosts their own incomes by selling lousy products to 

their clients. According to the best available data, data that are not 

paid for by the industry, this bad advice costs Americans about $17 

billion a year. The Department of Labor has proposed a rule that 

would put a stop to this retirement savings drain and require all 

investment advisors to put their customers first—a level playing 

field. 

Mr. Schneider, you’re the CEO of Primerica, a large investment 

advisory firm, and you’ve testified today that the Department of 

Labor’s rule is—and I think these are your words—complex and 

burdensome, and you said that one thing that’s ‘‘critical’’ to your 

success is that Primerica always operates in its clients’ best interests. 

I was interested to read a news report this morning that outlines 

lawsuits brought against your advisors in Florida. According to the 

article, at least 238 firefighters, teachers, and other career public 

workers who were near retirement age accused your company of 

providing bad advice that drained their retirement savings. You did 

it by advising them to move their retirement savings out of a guaranteed government pension into riskier private investments. 

Primerica was poised to make a lot of money, but only if you 

could convince Florida firefighters who were near retirement age to 

cash out their guaranteed pensions. Mr. Schneider, I just want to 

understand your company’s advice in these cases. Do you believe 

that people like these firefighters from Florida who are near retirement and have secure pensions with guaranteed monthly payments 

should move their money into riskier assets with no guarantees 

just before they retire? 

Mr. SCHNEIDER. First of all, Senator Warren, I appreciate the 

promotion. I’m actually the president of the company, not the CEO. 

Senator WARREN. Oh, OK. 

Mr. SCHNEIDER. I’m familiar with the matter of which you speak, 

and it doesn’t have any application, actually, to the rule before the 

committee, because in that particular case, none of those individuals were clients of Primerica. 

Senator WARREN. Whoa, whoa, whoa. 

Mr. SCHNEIDER. They paid us no compensation. Let me go to—— 

45 

Senator WARREN. No, no. Let’s just stop right there, Mr. Schneider. The article didn’t say the workers were your retirement clients. It says you gave them bad advice, and here exactly is the 

quote. 

‘‘Once these workers retired and moved out of their government plans, Primerica agents stood to profit from managing 

their retirement assets. Had they stayed in the pension programs, retirees would have simply collected their monthly payments, leaving nothing for Primerica to manage and no commissions for Primerica agents to harvest.’’ 

My question is not how you were paid. My question is whether 

you think it is sound investment advice to encourage public employees to move their money out of their pensions and into riskier 

assets with no guarantees just before they retire. 

Mr. SCHNEIDER. Senator, in that particular matter, first of all, 

regulators looked at that. They found the firm had acted properly, 

and the case was dismissed by the court. 

Senator WARREN. Let me stop you right there. The question 

about the regulators is the question about is it legal to do that, and 

that’s exactly the problem we’ve got. It is legal to do that, and I 

think that’s what the regulators say. It’s legal. 

My question, once again, is about the advice that Primerica 

agents gave. Is it a good idea for firefighters on the front edge of 

retirement to move out of a guaranteed benefit plan that was going 

to cover them for all their lives and move into a risky investment 

that would make a lot of fees for your agents? 

Mr. SCHNEIDER. Each situation is really very different. If you are 

in a defined benefit plan, and you’re sick, what happens is in the 

State of Florida, for example, were you to retire and then die 2 or 

3 weeks later, you have no ability to leave your money to your 

loved ones. 

Senator WARREN. I’m sorry. Are you suggesting that these 238 

people were weeks away from dying and that’s why they all got 

this advice? 

Mr. SCHNEIDER. Senator, the courts dismissed those cases, and, 

frankly, this illustrates one of the problems—— 

Senator WARREN. Because it is legal activity. I think we’ve established that, Mr. Schneider, that no one broke the law. The question 

is whether the law should be changed. 

Mr. SCHNEIDER. It illustrates one of the issues, though, with the 

rule, because we’re here to talk about the rule. One problem with 

the rule is, as everyone in the financial services industry knows, 

especially after the financial crisis, you can be sued, sometimes appropriately, but also sometimes frivolously. 

Under the best interest contract exemption, you enter into a contract with the client, and they can sue you, and you can lose the 

benefit of the exemption. It’s not just a contract—— 

Senator WARREN. I understand, Mr. Schneider, that you don’t 

want to be sued. I totally get that. The question I keep trying to 

ask is whether it’s generally a good idea for workers like firefighters and teachers on the eve of their retirement to move their 

money from guaranteed defined benefit plans into riskier investments. 

46 

Let me ask you that question, Mr. Puritz. You’re the managing 

director of Rebalance IRA. You have a large investment management firm. Would you advise 50-year-old, 60-year-old clients to 

cash out of a defined benefit pension plan and move money into an 

IRA managed by your company? 

Mr. PURITZ. As a general rule, the answer is no. 

Senator WARREN. So you’d say no. Why not? 

Mr. PURITZ. In a traditional pension, a defined benefit plan, 

there’s safety and predictability. My answer would be different if 

it was a defined contribution plan. 

Senator WARREN. That’s not what we have here. We have a defined benefit plan that guarantees that these people are going to 

be covered for their entire lives. Is that right? There’s a lot of research around this, I understand. Are there circumstances in which 

it is a good idea for someone right on the threshold of retirement 

to move from a defined benefit plan that will protect them for the 

rest of their lives to a much riskier plan? 

Mr. PURITZ. There are circumstances, but they’re very rare. 

Senator WARREN. You would describe them as very rare. I must 

say I took a look at the research on this and wanted to get some 

more experts’ opinions on this. It seems to me the research is pretty clear. 

Alicia Munnell, the director of the Center for Retirement Research at Boston College, has said, 

‘‘Only those with serious illnesses who believe they do not 

have much time left should even consider cashing out a defined 

benefit pension,’’ 

and even that isn’t obvious, because, as she puts it, even sick people may live longer than they think. 

Mr. Puritz, let me ask you one more question. Do you think it 

is—and I want to use the correct quote here—‘‘complex and burdensome’’ to offer advice that is in the best interest of the client, 

as Primerica claims? 

Mr. PURITZ. No. 

Senator WARREN. I didn’t think so. Frankly, the suggestion that 

it’s too expensive to provide people with sound financial advice is 

ridiculous. Millions of financial advisors do it every day. Hardworking Americans like the Florida firefighters and teachers who 

devoted their careers to protecting the public and who were targeted by Primerica shouldn’t have to worry about whether their financial advisors are planning to get rich by playing roulette with 

their customers’ retirement savings. 

Hardworking advisors, like Mr. Puritz, shouldn’t have to compete 

with these schemes. I am glad the Department of Labor is working 

to fix this problem. 

Thank you, Mr. Chairman. 

Senator FRANKEN. Thank you, Senator. 

Mr. Puritz, in both your spoken testimony and your written testimony, you referred to something called a brokerage refugee. I think 

that’s someone who fled a brokerage and had a bad experience, I 

guess, right? 

Mr. PURITZ. That’s right. 

Senator FRANKEN. OK. You mentioned in your written testimony 

a married 37-year-old mother of three who was paying excessive 

47 

fees on a new mutual fund recommended by a broker she inherited 

from her family. How do the services you provide and the fees you 

charge under your duty as a fiduciary differ from those that this 

woman experienced with her inherited broker? 

By that—it was that her family had been using this broker for 

years or something. What does that mean for retirement investors’ 

nest egg or their ability to retire after, say, 30 years of working and 

saving? 

Mr. PURITZ. Senator, that’s a great question. It really gets to the 

heart of the issue—— 

Senator FRANKEN. She literally means raising the microphone to 

your lips or to your mouth, not to your lips, but—— 

Mr. PURITZ. How’s that? Is it on? 

Senator FRANKEN. Thank you. There we go. 

Mr. PURITZ. Senator, thank you. That’s an excellent question, 

and it really gets to the heart of this matter from an economic 

point of view, from a return point of view. In the example that we 

cited of a client, we’re talking about an extra fee burden. 

Charlie Ellis, who is a member of our Investment Committee, 

has a phrase he says, that ‘‘the dirtiest word in finance is only,’’ 

only 1 percent. We think of 1 percent as—what’s the big deal? We 

pay 15 percent for tips, 20 percent if you’re generous. One percent 

seems inconsequential. 

In the scenario that we’ve run into consistently with clients who 

come from brokerage relationships, that extra fee burden is 2.37 

percent. If you trend line that out over 30 years—— 

Senator FRANKEN. That’s additional, or that’s what they’re paying? 

Mr. PURITZ. That’s what they’re paying per year. 

Senator FRANKEN. OK. I got it. 

Mr. PURITZ. In the current environment with plenty of good 

lower-cost alternatives, it’s really an unnecessary fee burden. 

Senator FRANKEN. Isn’t that essentially—that’s compounded? Is 

that the—— 

Mr. PURITZ. Fees compound just like return, exactly, Senator. I’ll give you an example. If someone had $100,000, and they were in 

an all growth stock, which historically has returned—our magic 

number is 7.2 percent a year. At that number, in a tax deferred 

account, that account would double every 10 years. In the 30-year 

timeframe, $100,000 would become $800,000—real considerable 

wealth creation. 

By contrast, if you reduce that down to 5 percent, which is really the fee delta that we see in the marketplace, that $100,000 only 

grows to $400,000 or half the amount of money. That’s what’s at 

stake here. It’s about a doubling of the return. 

Senator FRANKEN. OK. How are you able to provide your service 

at such a lower—my computations—32 percent of 2.37 percent is 

about .75 percent. 

Mr. PURITZ. That’s correct. 

Senator FRANKEN. How do you do that? 

Mr. PURITZ. We use technology to make everything we do more 

productive. We use exclusively low-cost ETFs, index funds—— 

Senator FRANKEN. Is that what was called, disparagingly, I 

think, robo? 

48 

Mr. PURITZ. Robo is a phrase for a new generation of investment 

advisors who use technology. There are some advisors who are 100 

percent computerized, and that’s where the term, robo, comes from. 

There are some very successful ones, including Wealthfront—that 

is the market leader—and they’re really targeting millennials and 

people in their 20s and 30s, for whom—— 

Senator FRANKEN. They’re familiar with working—— 

Mr. PURITZ. They’re familiar with computers, and their retirement is a relatively small part of their overall life. Their whole career is ahead of them. 

By contrast, there’s other firms, such as Personal Capital and my 

own firm, Rebalance IRA, where we have similar investment philosophies and similar use of technology, but we have real live investment advisors who deal extensively with clients and match 

them with the right asset allocation, low-cost underlying portfolios, 

very low-cost, and disciplined rebalancing, which is really an essential risk management and return tool. 

Senator FRANKEN. I have a lot of questions, but I’ll submit them 

for the record. 

We’ll keep this open—I would imagine—I didn’t come here thinking I would adjourn this. When I say we’ll keep it open—for a certain period of time. Is that 10 days? Ten business days. I was right. 

I was in the majority on one point. 

[Laughter.] 

Thank you all for your testimony, and this hearing is adjourned. 

[Additional Material follows.] 

49 

* Due to the high cost of printing, the White House Counsel of Economic Advisors (CEA) report: The Effects of Conflicted Investment Advice on Retirement Savings to be included for the 

record can be found at: https://www.whitehouse.gov’sites/default/files/docs/cealcoilreportl final.pdf. 

ADDITIONAL MATERIAL* 

DOL FACT SHEET—EMPLOYEE BENEFITS SECURITY ADMINISTRATION, U.S. DEPARTMENT OF LABOR

Department of Labor Proposes Rule to Address Conflicts of Interest in 

Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year 

‘‘Today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above 

their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.’’—President Barack 

Obama, February 23, 2015 

SUMMARY OF TODAY’S ACTION TO PROTECT RETIREMENT SAVERS

BY THE DEPARTMENT OF LABOR

Today, the Department of Labor issued a proposed rulemaking to protect investors 

from backdoor payments and hidden fees in retirement investment advice. 

• Backdoor Payments & Hidden Fees Often Buried in Fine Print Are 

Hurting the Middle Class: Conflicts of interest cost middle-class families who receive conflicted advice huge amounts of their hard-earned savings. Conflicts lead, on 

average, to about 1 percentage point lower annual returns on retirement savings 

and $17 billion of losses every year. • The Department of Labor is protecting families from conflicted retirement advice. The Department issued a proposed rule and related exemptions that 

would require retirement advisers to abide by a ‘‘fiduciary’’ standard—putting their 

client’s best interest before their own profits. 

• The Proposed Rule Would Save Tens of Billions of Dollars for Middle 

Class and Working Families: A detailed Regulatory Impact Analysis (RIA) released along with the proposal and informed by a substantial review of the scholarly 

literature estimates that families with IRAs would save more than $40 billion over 

10 years when the rule and exemptions, if adopted as currently proposed, are fully 

in place, even if one focuses on just one subset of transactions that have been the 

most studied. 

• The Administration Welcomes Feedback: The issuance of a notice of proposed rulemaking and proposed exemptions begins a process of seeking extensive 

public feedback on the best approach to modernize the rules of the road on retirement advice and set new standards, while minimizing any potential disruption to 

the many good practices in the marketplace. The proposal asks for comments on a 

number of important issues. We look forward to hearing from all stakeholders. Any 

final rule and exemptions will reflect this input. 

Middle class economics means that Americans should be able to retire with dignity after a lifetime of hard work. Loopholes in the retirement advice rules have allowed some brokers and other advisers to recommend products that put their own 

profits ahead of their client’s best interest, hurting millions of America’s workers 

and their families. 

A system where firms can benefit from backdoor payments and hidden fees often 

buried in fine print if they talk responsible Americans into buying bad retirement 

investments—with high costs and low returns—instead of recommending quality investments isn’t fair. A White House Council of Economic Advisers analysis found 

that these conflicts of interest result in annual losses of about 1 percentage point 

for affected investors—or about $17 billion per year in total. To demonstrate how 

small differences can add up: A 1-percentage point lower return could reduce your 

savings by more than a quarter over 35 years. In other words, instead of a $10,000 

retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500. 

In February, the President directed the Department of Labor to move forward 

with a proposed rulemaking to require retirement advisers to abide by a ‘‘fiduciary’’ 

standard—putting their client’s best interest before their own profits. Today, the Department of Labor is taking the next step toward making that a reality, by issuing 

50 

a Notice of Proposed Rulemaking (NPRM) to require that best interest standard 

across a broader range of retirement advice to protect more investors. 

Today’s proposal is the result of years of work and reflects feedback from a broad 

range of stakeholders—including industry, consumer advocates, Congress, retirement groups, academia, and the American public. The proposal includes broad, flexible exemptions from certain obligations associated with a fiduciary standard that 

will help streamline compliance while still requiring advisers to serve the best interest of their clients. 

In the coming months, the Administration welcomes comments on the proposal 

and looks forward to working with all stakeholders to achieve the commonsense 

goals of the rule while minimizing disruptions to the many good practices in industry. Many advisers already put their customers’ best interest first. They are hardworking men and women who got into this work to help families achieve retirement 

security. They deserve a level playing field, and their clients deserve the quality advice that this rule will ensure. 

UPDATING OUR OUTDATED RETIREMENT PROTECTIONS

Since 1974, the Employee Retirement Income Security Act (ERISA) has provided 

the Department of Labor (DOL) with authority to protect America’s tax-preferred 

retirement savings, recognizing the importance of consumer protections for a basic 

retirement nest egg and the significant tax incentives provided to encourage Americans to save for retirement. The basic rules governing retirement investment advice 

have not been meaningfully changed since 1975, despite the dramatic shift in our 

private retirement system away from defined benefit plans and into self-directed 

IRAs and 401(k)s. That shift means good investment advice is more important than 

ever. Today, DOL is proposing a new rule that will seek to: 

• Require more retirement investment advisers to put their client’s best 

interest first, by expanding the types of retirement investment advice covered by fiduciary protections. Today large loopholes in the definition of retirement investment advice under outdated DOL rules expose many middle-class families, and especially IRA owners, to advice that may not be in their best interest. 

Under DOL’s proposed definition, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for 

consideration in making a retirement investment decision is a fiduciary. Such decisions can include, but are not limited to, what assets to purchase or sell and whether to rollover from an employer-based plan to an IRA. The fiduciary can be a broker, 

registered investment adviser, insurance agent, or other type of adviser (together referred to as ‘‘advisers’’ here). Some of these advisers are subject to Federal securities 

laws and some are not. Being a fiduciary simply means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments 

creating conflicts of interest unless they qualify for an exemption intended to assure 

that the customer is adequately protected. DOL’s regulatory impact analysis estimates that the rule and related exemptions would save investors over $40 billion 

over 10 years, even if one focuses on just one subset of transactions that have been 

the most studied. The real savings from this proposal are likely much larger as conflicts and their effects are both pervasive and well-hidden. 

• Preserve access to retirement education. The Department’s proposal carefully carves out education from the definition of retirement investment advice so 

that advisers and plan sponsors can continue to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary 

duties. 

As an example, education could consist of general information about the mix of 

assets (e.g., stocks and bonds) an average person should have based on their age, 

income, and other circumstances, while avoiding suggesting specific stocks, bonds, 

or funds that should constitute that mix. This carve-out is similar to previously 

issued guidance to minimize the compliance burden on firms, but clarifies that references to specific investments would constitute advice subject to a fiduciary duty. 

• Distinguish ‘‘order-taking’’ as a non-fiduciary activity. As under the current rules, when a customer calls a broker and tells the broker exactly what to buy 

or sell without asking for advice, that transaction does not constitute investment advice. In such circumstances, the broker has no fiduciary responsibility to the client. 

• Carve out sales pitches to plan fiduciaries with financial expertise. 

Many large employer-based plans are managed by financial experts who are themselves fiduciaries and work with brokers or other advisers to purchase assets or construct a portfolio of investments that the plan offers to plan participants. In such 

circumstances, the plan fiduciary is under a duty to look out for the participants’ 

51 

best interest, and understands that if a broker promotes a product, the broker may 

be trying to sell them something rather than provide advice in their best interest. 

Accordingly, the proposed rule does not consider such transactions fiduciary investment advice if certain conditions are met. 

• Lead to gains for retirement savers in excess of $40 billion over the 

next 10 years, even if one focuses on just one subset of transactions that have been 

the most studied, according to the regulatory impact analysis released with the 

NPRM. These gains would be particularly important for the more than 40 million 

American families with more than $7 trillion in IRA assets, as advice regarding IRA 

investments is rarely protected under the current ERISA and Internal Revenue 

Code rules. Moreover, hundreds of billions of dollars are rolled over from plans to 

IRAs every year. Consumers are especially vulnerable to bad advice regarding rollovers because they represent such a large portion of their savings and because such 

transactions are also rarely covered under the current rules. 

COMPLYING WITH THE PROPOSED RULE

At present, individuals providing fiduciary investment advice to employer-based 

plan sponsors and plan participants are required to act impartially and provide advice that is in their client’s best interest. Under ERISA and the Internal Revenue 

Code, individuals providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners are not permitted to receive payments creating conflicts 

of interest without a prohibited transaction exemption (PTE). Drawing on comments 

received and in order to minimize compliance costs, the proposed rule creates a new 

type of PTE that is broad, principles-based and adaptable to changing business 

practices. This new approach contrasts with existing PTEs, which tend to be limited 

to much narrower categories of specific transactions under more prescriptive and 

less flexible conditions. The ‘‘best interest contract exemption’’ will allow firms to 

continue to set their own compensation practices so long as they, among other 

things, commit to putting their client’s best interest first and disclose any conflicts 

that may prevent them from doing so. Common forms of compensation in use today 

in the financial services industry, such as commissions and revenue sharing, will 

be permitted under this exemption, whether paid by the client or a third party such 

as a mutual fund. To qualify for the new ‘‘best interest contract exemption,’’ the 

company and individual adviser providing retirement investment advice must enter 

into a contract with its clients that: 

• Commits the firm and adviser to providing advice in the client’s best 

interest. Committing to a best interest standard requires the adviser and the company to act with the care, skill, prudence, and diligence that a prudent person would 

exercise based on the current circumstances. In addition, both the firm and the adviser must avoid misleading statements about fees and conflicts of interest. 

These are well-established standards in the law, simplifying compliance. 

• Warrants that the firm has adopted policies and procedures designed 

to mitigate conflicts of interest. Specifically, the firm must warrant that it has 

identified material conflicts of interest and compensation structures that would encourage individual advisers to make recommendations that are not in client’s best 

interests and has adopted measures to mitigate any harmful impact on savers from 

those conflicts of interest. Under the exemption, advisers will be able to continue 

receiving common types of compensation. 

• Clearly and prominently discloses any conflicts of interest, like hidden 

fees often buried in the fine print or backdoor payments, that might prevent the adviser from providing advice in the client’s best interest. The contract must also direct the customer to a Web page disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their 

right to complete information on the fees charged. 

In addition to the new best interest contract exemption, the proposal proposes a 

new, principles-based exemption for principal transactions and maintains or revises 

many existing administrative exemptions. The principal transactions exemption 

would allow advisers to recommend certain fixed-income securities and sell them to 

the investor directly from the adviser’s own inventory, as long as the adviser adhered to the exemption’s consumer-protective conditions. 

Finally, the proposal asks for comment on whether the final exemptions should 

include a new ‘‘low-fee exemption’’ that would allow firms to accept payments that 

would otherwise be deemed ‘‘conflicted’’ when recommending the lowest-fee products 

in a given product class, with even fewer requirements than the best interest contract exemption. 

52 

STRENGTHENING ENFORCEMENT OF CONSUMER PROTECTIONS

Existing loopholes mean that many retirement advisers do not consider themselves fiduciaries. As a result, consumers have limited, if any, recourse under 

ERISA and the Internal Revenue Code if their retirement adviser recommends products that are in the adviser’s interest rather than the consumer’s. The proposal will 

not only make more advisers fiduciaries but also ensure they are held accountable 

to their clients if they provide advice that is not in their client’s best interest, because: 

• DOL currently has the right to bring enforcement actions against fiduciary advisers to plan sponsors and participants who do not provide advice 

in their client’s best interest. As under current law, the plan sponsor or plan 

participant harmed by the bad advice can also bring their own action. • The ‘‘best interest contract exemption’’ allows customers to hold fiduciary advisers accountable for providing advice in their best interest 

through a private right of action for breach of contract. In other words, if an adviser 

isn’t putting their client’s interest first, the client can take action to hold them accountable. This option is especially important for advice regarding IRA investments 

because otherwise neither DOL nor the saver who is harmed can hold the adviser 

accountable for the losses the saver suffered. The contract can require that individual disputes be handled through arbitration but must give clients the right to 

bring class action lawsuits in court if a group of people are harmed. This feature 

of the best interest contract exemption is modeled on the rules under FINRA, which 

is a non-governmental organization that regulates advice by brokers to invest in securities but not other types of retirement savings covered by ERISA. • The IRS can impose an excise tax on transactions based on conflicted 

advice that is not eligible for one of the many proposed exemptions. As under current law, the Internal Revenue Code imposes an excise tax and can require correction of such transactions involving plan sponsors, plan participants and beneficiaries, and IRA owners. 

PROCESS GOING FORWARD

The Administration invites stakeholders from all perspectives to submit comments 

during the 75-day notice and comment period or through the public hearing to be 

scheduled shortly after the close of the initial public comment hearing. The public 

record will be reopened for comment after the public hearing is held. Only after reviewing all the comments will the Administration decide what to include in a final 

rule—and even once the Department of Labor ultimately issues a final rule, it will 

not go into effect immediately. 

HOW IS THIS RULE DIFFERENT FROM THE PROPOSAL IN 2010?

In 2010, DOL put forward a proposal to require more retirement investment advice to be in the client’s best interest. While many championed the goals of the proposal, some stakeholders expressed concerns during the notice and comment period 

and at a public hearing. 

Mindful of these criticisms, and wanting to arrive at the right answer, DOL decided to withdraw the rule and go back to the drawing board. Since 2011, both DOL 

and the White House have engaged extensively with stakeholders, meeting with industry, advocates, academics—anyone who can help us figure out the best way to 

craft a rule that adequately protects consumers and levels the playing field for the 

many advisers doing right by their clients, while minimizing compliance burdens. 

The proposal released today has improved upon the 2010 version in a number of 

ways, both in process and substance: 

• DOL has improved the process to better incorporate stakeholder feedback. 

• DOL is issuing proposed exemptions simultaneous with the proposed 

rule. Responding to comments received in 2010, DOL is publishing the proposed exemptions alongside the rule so interested parties have a better sense 

of how the fiduciary requirements and exemptions work together. 

• DOL has consulted extensively with the Securities and Exchange 

Commission (SEC) and other Federal stakeholders. Secretary Perez and 

Chair White have had numerous meetings and conversations, and SEC staff 

has provided technical assistance and will continue these discussions. 

• DOL is releasing a more rigorous analysis of the anticipated gains to 

investors and costs of the rule. Since 2010, the body of independent research on the costs and consequences of conflicts of interests in retirement investment advice has grown significantly. Today, DOL is releasing a ReguVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 S:\DOCS\95692.TXT CAROL
53 

latory Impact Analysis (RIA) alongside the rule that reflects that substantial 

body of research and estimates the gains to investors and costs of the proposed rule. 

• The rule’s substance has changed based on comments received since 

2010. Specifically, the proposal: 

• Provides a new, broad, principles-based exemption that can accommodate and adapt to the broad range of evolving business practices. 

Industry commenters emphasized that the existing exemptions are too rigid 

and prescriptive, leading to a patchwork of exemptions narrowly tailored to 

meet specific business practices and unable to adapt to changing conditions. 

Drawing on these and other comments, the best interest contract exemption 

represents an unprecedented departure from the Department’s approach to 

PTEs over the past 40 years. Its broad and principles-based approach is intended to streamline compliance and give industry the flexibility to figure out 

how to serve their client’s best interest. 

• Includes other new, broad exemptions. For example, the new principal 

transactions exemption also adopts a principles-based approach. DOL is asking for comments on whether the final regulatory package should include a 

new exemption for advice to invest in the lowest-fee products in a given product class, that is even more streamlined than the best interest contract exemption. 

• Includes a carve-out from fiduciary status for providing investment 

education to IRA owners, and not just to plan sponsors and plan participants as under the 2010 proposal. It also updates the definition of education 

to include retirement planning and lifetime income information. In addition, 

the proposal strengthens consumer protections by classifying materials that 

reference specific products that the consumer should consider buying as advice. 

• Determines who is a fiduciary based not on title, but rather the advice rendered. The 2010 rule proposed that anyone who was already a fiduciary under ERISA for other reasons or who was an investment adviser under 

Federal securities laws would be an investment advice fiduciary. 

Consistent with the functional test for determining fiduciary status under 

ERISA, the proposal looks not at the title but rather whether the person is 

providing retirement investment advice. 

• Limits the seller’s carve-out to sales pitches to large plan fiduciaries 

with financial expertise. This responds to comments that differentiating 

investment advice from sales pitches in the context of investment products is 

very difficult and, unless the advice recipient is a financial expert, the carveout would create a loophole that would fail to protect investors. 

• Excludes valuations or appraisals of the stock held by employee-stock 

ownership plans (ESOPs) from the definition of fiduciary investment 

advice. The proposed rule clarifies that such appraisals do not constitute retirement investment advice subject to a fiduciary standard. DOL may put 

forth a separate regulatory proposal to clarify the applicable law for ESOP 

appraisals. 

PREPARED STATEMENT OF FINANCIAL ENGINES

RESTRICTING ADVICE AND EDUCATION: DOL’S UNWORKABLE INVESTMENT PROPOSAL FOR

AMERICAN FAMILIES AND RETIREES

Thank you for the opportunity to submit this statement for the record. We appreciate the committee’s and subcommittee’s interest in the important topic of investment advice and education. 

The American retirement landscape has changed dramatically. Updating the current retirement plan rules crafted 40 years ago is critical to improving protections 

for retirement investors. In this regard, Financial Engines supports the Department 

of Labor’s (‘‘DOL’’) proposal to update the definition of fiduciary (‘‘fiduciary proposal’’). Since it launched its first service in 1998, Financial Engines has provided 

high quality services in a fiduciary capacity to large numbers of plans and participants; we are proud to serve as an example that it can be done. We believe that 

the proposed rule is workable—for providers of advice services, and beneficial—for 

recipients of those services. 

54 

FINANCIAL ENGINES

Financial Engines was founded to accomplish the vision of its co-founder and 

Nobel Prize winner Bill Sharpe: To provide high-quality independent investment advice to everyone, regardless of their wealth or investment experience. Today, Financial Engines provides personalized investment advice to 9.6 million employees of 

large employers, including 146 companies of the Fortune 500. Financial Engines is 

not affiliated with any other financial services entity, does not manufacture or sell 

products, and does not accept commissions. 

Financial Engines assists individuals with developing a personalized and comprehensive savings, investing, and retirement income plan. For example, Financial 

Engines provides advice to individuals near retirement on the advantages of delaying social security in order to maximize monthly benefits. Financial Engines uses 

sophisticated technology to deliver services that help individuals set a risk level appropriate for when they plan to retire, and to design a diversified investment portfolio from among the investment choices available in their employer’s 401(k) plan 

to help them reach their retirement income goals. Financial Engines can also manage the employee’s, or their spouse’s, IRA assets, affording holistic management of 

all sources of retirement income. 

Financial Engines can either professionally manage an employee’s account or provide online advice through expert recommendations and interactive tools. Financial 

Engines provides a retirement-readiness assessment, including estimated annual retirement income from Social Security, their 401(k), IRAs, and pension, if applicable, 

to all employees in the plans we serve. With the Income+ feature of Financial Engines’ Professional Management service, Financial Engines will manage the portfolio 

to be ready to generate retirement income, and can generate steady payouts that 

are designed to last for life (with the purchase of an optional out-of plan fixed annuity). Members are not locked in, can vary the amount of payouts to suit changing 

circumstances, and can cancel at no charge at any time. 

CRITICAL NEED FOR RETIREMENT INVESTMENT ADVICE

The American retirement landscape has changed dramatically since the current 

retirement plan rules were crafted 40 years ago. Professionally managed pension 

plans have given way to individually managed 401(k) and Individual Retirement Accounts (‘‘IRAs’’). Individual investors with these accounts need help, and with more 

than 88 million individual investors now largely responsible for managing their own 

retirement assets, there has never been greater demand for high-quality investment 

advice. 

The need for new rules is clear since potential conflicts of interest do exist in the 

retirement business. Financial ‘‘advisors’’ too often steer investors toward products 

that offer higher fees and commissions for the ‘‘advisor,’’ not what will provide the 

best retirement outcome for the investor. Complex fee-sharing arrangements, commission structures, and other conflicts of interest create pressures—sometimes 

overt, sometimes subtle—to shade recommendations in the interests of the ‘‘advisor.’’ Often investors are unaware that these conflicts of interest even exist. Workers 

end up with investments that have lower returns and higher fees, siphoning off tens 

of thousands of dollars in savings from the average person’s retirement account. Advisors may also have incentives to move investors from low-cost 401(k) plans to 

more expensive retail IRAs. 

The potential harm to consumers from these conflicts of interest is significant. A 

2013 study published in the Journal of Finance entitled ‘‘What do Consumers’ Fund 

Flows Maximize? ’’ showed that even brokers who are unaffiliated with a mutual 

fund company—whom you might expect to be unbiased—steer their clients toward 

mutual funds that pay the brokers more, but that underperform by over 1 percent 

annually on average. While 1 percent might not sound like much, this annual 

underperformance can translate into a retirement balance that is tens of thousands 

of dollars lower over a 30-year career. 

DOL FIDUCIARY PROPOSAL

Given the changes in the retirement arena, Financial Engines supports the DOL’s 

fiduciary proposal. Current regulation may not adequately protect the interests of 

retirement investors and may limit unnecessarily the scope of ERISA’s fiduciary 

protections. ERISA’s fiduciary standards provide important protections against conflicts of interest and self-dealing and, particularly in light of changes in the financial 

industry, it is crucial now more than ever to re-examine the types of relationships 

that should give rise to fiduciary duties under ERISA and to apply these protections 

broadly. 

55 

Moreover, our experience has demonstrated that financial advisors can provide 

independent, conflict-free investment advice, putting the interests of customers first, 

even when investors have smaller balances and still produce solid business results. 

Technology has allowed for the provision of high-quality, objective, and personalized 

investment advice at a much lower cost and much broader scale than was possible 

40 years ago. Financial Engines is now the Nation’s largest independent registered 

investment advisor, a public company, and an industry leader managing over $100 

billion in retirement assets, providing personalized investment advice to millions of 

401(k) investors. It is important to note that half of the 9.6 million participants with 

access to Financial Engines’ services have less than $32,000 in retirement savings. 

Some have as little as a few hundred dollars in their accounts. We are proud to 

serve as an example that it can be done. 

CONCLUSION

We appreciate the opportunity to submit this statement for the record. We look 

forward to working with the committee and subcommittee as they consider the important issues of retirement security. 

[Huffington Post, July 20, 2015] 

SENATE REPUBLICANS THINK HERBALIFE IS A GOOD MODEL FOR

YOUR RETIREMENT SAVINGS

(By Zach Carter, Senior Political Economy Reporter) 

GOP HEARING SHOWCASES PRESIDENT OF PRIMERICA, A MULTI-LEVEL

MARKETING COMPANY

WASHINGTON—In 2010, Citigroup decided to sell what was widely regarded as one 

of its dodgiest operations. The struggling Wall Street titan was trying to streamline 

its management structure and upgrade its reputation after a massive government 

bailout, and one line of business its executives could live without was Primerica. 

Primerica, now an independent company, is a financial services operation modeled 

on multi-level marketing enterprises like Amway, Nu Skin and Herbalife. Unlike 

traditional retirement and insurance firms that employ a relatively small number 

of highly paid financial professionals, Primerica had more than 98,000 people enlisted in its sales force last year, recruited through feel-good videos and pitches to 

the family and friends of existing salespeople. 

If you’re willing to work hard enough, Primerica tells prospective ‘‘entrepreneurs,’’ 

you can run your own successful business selling insurance or retirement packages. 

Primerica agents get paid a commission on each sale, and—just like Amway and 

Herbalife—also earn commissions for sales their recruits make. A commission on 

their recruits’ recruits, and their recruits’ recruits recruits. And so on. 

Like other multi-level marketing operations, Primerica holds huge splashy motivational conferences for its sales team, where executives fete top earners amid fireworks and flowers. As with Herbalife, Nu Skin and similar platforms, the pitch to 

prospective Primericans is a vague, highly emotional appeal that suggests not only 

financial rewards, but the revitalization of a lifestyle. In one promotional video, Rob 

Cooper of Fort Worth, TX, encourages his audience not to settle for ‘‘a mediocre life 

like everybody else does.’’ 

‘‘One of the greatest thing[s] Primerica has to offer is they encourage goals, they 

encourage dreams,’’ Cooper says. ‘‘And you really know—man, if you’re willing to go 

out there and work hard, then you can actually achieve everything you ever wanted 

to achieve.’’ 

‘‘The same life. The same boring routine,’’ says Houston’s David Farmer in another video. ‘‘I didn’t want that life . . . I saw Primerica as my way to take back 

control of my life.’’ 

‘‘I always wanted to be somebody,’’ says Jeff Fieldstad of Las Vegas in another. 

‘‘I always wanted to do something great.’’ 

Of course, for most people, it doesn’t quite work out that way. More than 190,000 

new recruits paid a fee to sign up for Primerica in 2014, according to the company’s 

annual report with the Securities and Exchange Commission. Primerica only boosted its total licensed sales force by 3,700 that year, and each member of the sales 

team earned an average of $6,030. 

Senate Republicans are apparently sold. The GOP has called on Primerica President Peter Schneider to testify against a new Obama administration retirement seVerDate Nov 24 2008 17:00 Jul 20, 2017 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6621 S:\DOCS\95692.TXT CAROL
56 

* Mr. Malkiel is the chief investment officer and Mr. Nash is chief executive officer of 

Wealthfront, an automated investment service. 

curity proposal at a Tuesday hearing before the Senate Committee on Health, Education, Labor, and Pensions. 

The Department of Labor rule would impose a ‘‘fiduciary duty’’ on investment advisers, requiring them to act in the best interests of their clients. It would bar account managers from steering people into financial products that maximize benefits 

for investment specialists, rather than retirees. The Obama administration calculates that Americans lose $17 billion a year to hidden fees and conflicted investment advice. 

In other words, the rule is designed to prevent exactly what 238 Florida workers 

said Primerica did to them in the years leading up to the financial crisis—steer 

them into inappropriate financial products for the personal financial gain of the 

sales team. 

In 2012, lawsuits began pouring in, alleging that Primerica reps had convinced 

Florida firefighters, teachers and other public workers to invest in inappropriate retirement products. Even though the workers were near retirement, Primerica representatives encouraged them to ditch their government pension plans for much 

riskier government 401k accounts, which do not guarantee a minimum monthly payout in retirement. Dumping a pension plan for a 401k on the verge of retirement 

is frowned upon in the investment advice world. It needlessly jeopardizes retirement 

security, while offering little potential benefit. 

The scheme posed major potential profits for Primerica’s sales reps. Once these 

workers retired and moved out of their government plans, Primerica agents stood 

to profit from managing their retirement assets. Had they stayed in the pension programs, retirees would have simply collected their monthly payments, leaving nothing for Primerica to manage, and no commissions for Primerica agents to harvest. 

In January 2014, Primerica set aside $15.4 milliom to settle allegations involving 

238 such cases. 

Primerica told HuffPost that Florida State regulators did not object to its agents’ 

actions. The company also said that the retirees it settled with never actually signed 

up for Primerica products after taking the company’s investment advice. Indeed, the 

workers were so steamed by the lousy advice that they did not ultimately ask 

Primerica to manage their now-diminished assets in retirement. 

It’s not terribly shocking that a financial company run like Amway would run into 

trouble. It is perhaps surprising that Senate Republicans seem to think Primerica 

makes for a sympathetic ally in their public campaign against a financial reform 

proposed by President Barack Obama. 

‘‘The unintended consequences of the DOL’s proposed rule will be to make it more 

difficult for these households to receive desperately needed retirement guidance,’’ 

Primerica told HuffPost in a written statement. 

The GOP’s disdain for the fiduciary duty rule is clear from the hearing’s title: ‘‘Restricting Advice and Education: DOL’s Unworkable Investment Proposal for American Families and Retirees.’’ Unworkable, apparently, because Americans might 

miss out on the opportunity to receive investment advice from someone looking to 

cash in on a get-rich quick operation. 

[The Wall Street Journal, May 4, 2015] 

CREATIVE DESTRUCTION AT A BROKER NEAR YOU

(By Burton G. Malkiel and Adam Nash)* 

TECHNOLOGY IS CHANGING THE GAME FOR SMALL INVESTORS. HERE’S HOPING

THAT REGULATION DOESN’T DERAIL PROGRESS

Technology is fundamentally altering the investment landscape, and it may have 

a profound influence on the quality of service that individual investors receive. This 

change also is relevant for evaluating the controversy currently roiling the securities 

industry. 

After 4 years of study, the Labor Department announced in April a proposed 

amendment to the definition of ‘‘fiduciary’’ under the Employee Retirement Income 

Security Act. The rule would impose a strict fiduciary standard on those providing 

retirement advice to individual retirement account (IRA) holders, and also clarify 

and add to existing standards for advisers to 401(k) and other retirement plans. 

In short: Anyone who receives compensation for providing retirement advice must 

put their clients’ ‘‘best interest’’ first, as opposed to recommending products that are 

deemed to be broadly ‘‘suitable’’ but that compensate advisers more than competing 

57 

low-fee investment funds. While it might seem obvious that investors deserve advice 

that puts their interests first, the proposal has engendered a storm of protest. 

The guiding principle of the Labor Department’s proposal is absolutely correct and 

long overdue. All too often investors in retirement plans pay higher fees than they 

should, and their accounts contain high-cost funds that reward the provider of advice rather than the client. 

Still, the devil is in the details—and the Labor Department’s 400-plus page proposal requires careful scrutiny. The government must be careful not to prevent institutions from giving investment advice as long as all conflicts and fees are revealed to clients. It also is important to consider if there are unintended consequences that could leave some investors less well off. 

The U.S. Chamber of Commerce and Sifma (the Securities Industry and Financial 

Markets Association), along with others, see significant problems with the Labor Department’s proposal. They argue that the new fiduciary standard will force investors 

to move from commission-based accounts to costlier, fee-based advisory accounts. 

The result, they believe, is that investor choice and access to financial education regarding retirement accounts will be limited—and that small investors will be badly 

harmed. 

Currently a broker may recommend a high-expense mutual fund for a client investing in a 401(k) rollover or a new IRA. The broker is compensated by receiving 

a commission for selling the fund, and is only required to ensure that the fund is 

a ‘‘suitable’’ investment. Many fee-based advisers require minimum investments in 

the six figures, and they charge fees that would be prohibitively expensive for small 

and medium-size investors. Large brokerage and insurance firms argue that only a 

commission-based model can work for the average investor. 

Missing in this controversy is how technology will upend the current brokerage 

model. The only question is whether technology also will be the bridge that allows 

the industry to adapt to new fiduciary rules and provide individual investors lowcost advice that does not pit the interests of advisers against clients. 

Over the past few years a number of software-based, automated investment advisers have been established, and they are growing rapidly. Firms such as Future Advisor, Rebalance IRA, and our own firm, Wealthfront, now provide low-cost, highquality alternatives to antiquated investment models. Even large traditional incumbent firms, like Charles Schwab and Vanguard, are investing heavily in technology 

to provide high-quality, fiduciary service to small investors. 

These automated investment services are able to provide sophisticated portfolio 

management to small investors at incredibly low cost by leveraging the same type 

of technology that has helped companies like Facebook and Google scale to billions 

of users. Some automated advisers will even manage accounts of less than $10,000 

without charging any advisory fee. Accounts over $10,000 might pay a management 

fee of only 25 basis points (one-quarter of 1 percent), a fraction of the typical 1 percent that traditional investment managers charge. 

Investments are made in portfolios of low-cost, exchange-traded index funds tailored to the needs and risk tolerance of the client. No trading commissions are 

charged, and conflicts of interest can be avoided. If we are in an era of future lowgross investment returns, as many investment managers believe, rock-bottom fees 

are especially important. 

The services offered by the new computer-based advisers are not second rate. Client accounts can receive daily monitoring and management rather than the quarterly or annual reviews provided by many traditional advisers. Accounts can be 

automatically rebalanced and moved to somewhat safer asset-class allocations as 

the investor’s financial situation evolves. Every trade is automatically vetted against 

the investment strategy promised to the client. 

The securities industry is correct to worry that a strict fiduciary standard is likely 

to result in massive changes in traditional ways of doing business. Business models 

that depend on selling high-cost, low-value proprietary products to clients will be 

threatened, with the result that there may be fewer broker-dealers and investment 

advisers to choose from. 

The best firms will invest heavily in the technology to better address the needs 

of small investors. Investors will pay less, not more, for the services they receive, 

and what they get will be better, not worse. Capitalism has always involved a painful process of creative destruction. The financial-services industry will be stronger 

and more effective because of innovation, and the fiduciary standard will accelerate 

the process of changing outmoded and ineffective financial business models. 

58 

SAVE OUR RETIREMENT, 

JULY 20, 2015. 

Hon. LAMAR ALEXANDER, Chairman, 

Committee on Health, Education, Labor, and Pensions, 

U.S. Senate, 

Washington, DC. 20510. 

HON. PATTY MURRAY, Ranking Member, 

Committee on Health, Education, Labor, and Pensions, 

U.S. Senate, 

Washington, DC. 20510. 

DEAR CHAIRMAN ALEXANDER AND RANKING MEMBER MURRAY: As organizations 

that want to see protections for retirement savers strengthened, we write to express 

support for the Department of Labor’s proposed rule—now out for public comment— 

that would close loopholes and update the standards for retirement investment advice under the Employee Retirement Income Security Act (ERISA). 

Americans who save and invest for a secure and independent retirement should 

be able to trust that the retirement investment advice they receive is in their best 

interest. Workers and retirees are more dependent than ever on financial professionals to help them navigate the complex decisions they must make to fund a secure and independent retirement. Unfortunately, because of loopholes in rules specifying who is a ‘‘fiduciary’’ under ERISA, many of the financial professionals whom 

retirement savers rely on for advice are legally allowed to put their own financial 

interests ahead of the interests of their customers. While many of these professionals nonetheless seek to do what is best for their customers, others take advantage of gaps in the regulations to steer their clients into high-cost, substandard investments that pay the adviser well but eat away at retirement savers’ nest eggs 

over time. This is a particular problem for small savers who are disproportionately 

served by nonfiduciary advisers and receive conflicted advice. 

After years of thoughtful analysis and consultation with all stakeholders, the Department of Labor has drafted a comprehensive proposal that closes loopholes in the 

definition of investment advice so that anyone who provides individualized investment recommendations to retirement savers—whether they are saving through a 

traditional or defined contribution pension plan, such as a 401(k), or an Individual 

Retirement Account (IRA)—would be required to provide best interest advice to 

their clients. Importantly, the proposed rule would eliminate outdated requirements 

that advice must be ‘‘regular’’ or serve as the ‘‘primary basis’’ for an investor’s decision, before the best interest standard applies. In a significant improvement over 

the 2010 proposal, it covers advice about recommendations to roll money out of a 

pension or 401(k) plan and into an IRA. This is the most important financial decision many people will ever make, with a potential to seriously affect their standard 

of living in retirement, and is a special area of concern given extremely troubling 

practices identified in a GAO report. 

By updating these standards and closing these loopholes, retirement savers will 

undoubtedly experience better investment outcomes. At the same time, the proposed 

rule would provide sufficient flexibility for financial professionals and their firms so 

they can continue to charge commissions and other sales-based compensation. This 

reflects a balanced approach that preserves the broker-dealer business model while 

ensuring that retirement investors of all incomes and portfolio sizes will receive advice that is in their best interest. 

We encourage you to stand with your constituents—who are saving for retirement 

and deserve to have the best financial advice for their future—and support the Department of Labor’s rulemaking process as it moves forward. 

Sincerely, 

AARP; AFL–CIO; Alliance for Retired Americans; American Association for Justice; American Association of University Women (AAUW); American Federation of 

Government Employees (AFGE); American Federation of State, County and Municipal Employees (AFSCME); Americans for Financial Reform; Better Markets; Center 

for Community Change Action; Center for Economic Justice; Center for Global Policy Solutions; Center for Responsible Lending; Certified Financial Planner Board of 

Standards; Consumer Action; Consumer Federation of America; Consumers Union; 

Financial Planning Association; Fund Democracy; Garrett Planning Network, Inc.; 

International Association of Machinists and Aerospace Workers; International 

Union, United Automobile, Aerospace & Agricultural Implement; Workers of America (UAW); Justice in Aging; Leadership Conference on Civil and Human Rights; 

Main Street Alliance; National Active and Retired Federal Employees Association 

(NARFE; National Association of Social Workers; National Committee to Preserve 

59 

Social Security and Medicare; National Consumers League; National Council of La 

Raza; National Employment Law Project; National Women’s Law Center; Pension 

Rights Center; Personal Capital; Public Citizen; Public Investors Arbitration Bar 

Association; Rebalance IRA; The Committee for the Fiduciary Standard; U.S. PIRG; 

Wider Opportunities for Women. 

RESPONSE BY SCOTT PURITZ TO QUESTIONS OF SENATOR ISAKSON

AND SENATOR FRANKEN

SENATOR ISAKSON

Your testimony says: 

‘‘Our clients come from all walks of life including nurses, school teachers, 

plumbers, lawyers, welders, professors, police, doctors, farmers, government employees—i.e., regular Americans.’’ 

Question. As noted, these regular Americans must have at least $100,000 in savings in order to be a customer. Also, Rebalance IRA says that it has approximately 

$275 million in assets on behalf of more than 500 clients. That is an average account size of $550,000, not exactly average Americans. Your client base appears to 

be significantly more financially sound, than those who DOL’s proposal purports to 

protect. 

Why would you so outspokenly support a proposal which your clients have such 

an ability to absorb if they were to lose access to advice or education? 

Answer. Rebalance IRA is part of a broad trend of new investment advisory firms 

that seek to provide consumers with a fundamentally better set of retirement investment options, offering retirement investment advice to clients at all income levels 

for very modest fees. Several of these advisory firms have account minimums as low 

as $500. Generally, those requiring the lowest minimums rely on software to lead 

the advisory process, with human input as a secondary feature as needed. 

At Rebalance IRA, our clients seek the added assurance of human-led advice enhanced by technology because they feel they need advice about how to holistically 

manage their retirement planning and how to understand the increasingly complex 

world of investment products. Our clients do come from all walks of life, including 

nurses, school teachers, plumbers, lawyers, welders, professors, police, doctors, farmers, and government employees—i.e., regular Americans. Averages, as you know, 

can be misleading. Our target client has considerably less than the figure cited. In 

fact, 43 percent of the Rebalance IRA-client base has retirement account balances 

in the range of between $100,000 and $250,000. 

SENATOR FRANKEN

Question. How would you respond to claims that: the new technologies that have 

produced low-cost, computer-generated retirement investment models have only operated during the bull market of recent years, and their ability to manage funds, 

or respond to investor concerns when the market changes has yet to be tested? 

Answer. Rebalance IRA is part of a broad trend of new investment advisory firms 

that seek to provide consumers with a fundamentally better set of retirement investment options, offering retirement investment advice to clients at all income levels 

for very modest fees. 

Rebalance IRA and many of the other ‘‘investment innovators’’ harness an investment methodology known as modern portfolio theory (MPT). Developed through finance research dating back decades and across multiple bear markets of the past, 

MPT seeks to increase investment return while lowering risk. The heart and soul 

of the concept is diversification. The idea is to own a variety of asset classes, thus 

avoiding the concentration of risk into any given single investment. 

MPT has been the gold standard for prudent institutional investment for decades. 

Finance research experts, major endowments, pension funds, and private investment professionals broadly agree that MPT is a safe, solid, repeatable method for 

managing an investment portfolio in both bull and bear markets. 

Diversification is more than simply putting your eggs into different baskets. It actively lowers risk. That is because asset classes generally are ‘‘uncorrelated,’’ that 

is, as one declines in value, another rises. The stabilizing effect of diversification is 

amplified by adding up to six asset classes to an investment portfolio. A thoughtful 

collection of asset classes thus offers a lower investment risk than any single asset. 

Interestingly, research shows that adding asset classes that some might perceive as 

‘‘risky’’ in fact lowers the overall risk in a portfolio. For this reason, diversification 

rightly has been described as ‘‘the only free lunch in the investment game.’’ 

Using MPT, investments are statistically measured in terms of both their expected long-term rate of return and their short-term volatility. A portfolio is then 

60 

created that combines assets in such a way that the return is the weighted average 

of the assets held within. 

In a given year, different asset classes perform differently, making it difficult to 

predict which asset will perform best. By combining assets whose returns are 

uncorrelated, MPT seeks to reduce the total variance of the portfolio. A reliable return with lower risk and lower cost, compounding over time, creates a winning retirement portfolio. 

In practice, MPT is the opposite of ‘‘stock picking.’’ Analysts who pick stocks attempt to find a small group of stocks or bonds that they believe will outperform entire markets represented by a corresponding index, such as the S&P 500. Instead 

of analyzing and purchasing single companies or sectors, however, MPT counsels investors to buy the index itself. 

Dr. Charles D. Ellis is a highly respected investment expert, a former chairman 

of the Yale Endowment, a former board member of Vanguard Group and today a 

member of the Rebalance IRA Investment Committee. In August 2014, Dr. Ellis 

published a landmark article in the well-respected Financial Analysts Journal entitled ‘‘The Rise and Fall of Performance Investment’’ in which he documents the fact 

that the majority of active investment managers now underperform the market. 

This powerful conclusion is corroborated by decades of academic research. He makes 

the case for a viable alternative to active management—MPT implemented using 

low-cost index funds. 

Historically, however, MPT-based advice has been available only through highend financial advisors who typically require minimum account sizes of $1 million 

and who charge annual fees of at least 1 percent of assets under management. Rebalance IRA, and other investment innovators seek to democratize modern portfolio 

theory by bringing this level of investment advice to everyone for a fraction of the 

cost. 

[Whereupon, at 4:17 p.m., the hearing was adjourned.] 

Æ