1

FILED ELECTRONICALLY 

e-ORI@dol.gov 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655

U.S. Department of Labor

200 Constitution Ave., NW 

Washington, DC 20210 

July 21, 2015

Re: Proposed Conflict of Interest Rule [RIN-1210-AB32]

The Pension Rights Center (“the Center”) submits the following comments on the Department of 

Labor’s proposed regulations on conflicts of interest and the definition of investment advice. 

The Center is a nonprofit consumer organization that has been working since 1976 to protect and 

promote the retirement security of American workers, retirees, and their families. The Center 

believes that the Department of Labor has produced an elegant and workable regulatory structure

that protects retirement investors while also accommodating the reasonable and legitimate 

concerns of the financial industry. As we make clear in these comments, the regulations still 

have room for improvement to strengthen protections for consumers. 

The proposed regulations would replace current ones, adopted in 1975, that tightly circumscribed

the circumstances under which a person or entity becomes a fiduciary when providing 

investment advice to a plan or participant for a fee. The result of the original regulations is that 

ERISA failed to regulate much of the investment advice industry, allowing many financial 

advisers to provide workers and retirees with advice tainted by the conflicting interests of 

advisors or the firms for which they work. Too often this has meant that advisors focus on the 

fees generated by the advice, rather than on whether the advice is in the best interests of the 

saver.

In 2010, the Department of Labor recognized that these regulations were inadequate for

protecting participants in the retirement savings systems as it has evolved since 1975, so it

proposed a new rule on this subject. However, after reviewing comments from a broad array of 

stakeholders and a multi-day hearing, the DOL withdrew the proposed rule for further study,

The proposed regulations on which this letter comments is the result of several years of 

thoughtful consideration of comments on the withdrawn proposal; of serious study of the 

underlying economics of conflicted investment advice; of active coordination and consultation 

with other governmental agencies and the legislative branch; and of engagement with the 

investment industry, academics, and organizations concerned with consumer protection and 

retirement security. With all of this input and study, the Department has now produced more 

nuanced regulations that should improve the quality of investment advice for the tens of millions 

of participants in our tax-subsidized retirement savings system, while maximizing industry 
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flexibility to pursue legitimate business goals and to continue using historical compensation

models for people who provide investment advice. 

The Center disputes industry criticism that the rule is “unworkable.” It appears that the 

Department of Labor has taken into account industry concerns in developing new principlesbased prohibited transaction exemptions and in the careful structure and language of the 

proposed rule itself. The agency has threaded the regulatory needle to weave together a

carefully-crafted proposal that should satisfy the majority of stakeholders. 

The 1975 regulation on investment advice was not compelled by the statute. In our view, it was

not faithful to the language and purpose of ERISA, and it improperly narrowed the definition of 

fiduciary. In addition, as the Department suggests in the preamble to the proposed rule, 

economic and legal developments in the fields of investments and employee benefit plans have 

rendered the 1975 position anachronistic and, at times, at cross-purposes with the statute. The 

new proposed regulations are much-needed and will mitigate structural conflicts that 

compromised the integrity of investment advice and resulted in unnecessarily high fees. Over 

time, the new rule should materially improve the retirement security of American workers. 

These comments are divided into five sections: the first section provides background on ERISA

and the 1975 regulations; the second section discusses why revision of the regulations is 

warranted, including a review of the Department’s impact analysis; the third section comments 

on particular provisions of the proposed rule and also suggests some modifications of those rules; 

the fourth section considers exemptions from the prohibited transaction rules; and the fifth 

section responds to the Department’s query on alternative proposed “best interest” proposals. 

I. Background 

When Congress passed ERISA in 1974, it included rules governing the conduct of fiduciaries. 

Senator Harrison Williams, Chair of the Senate Labor Committee and a key co-sponsor of 

ERISA in the Senate, explained the need for these rules when he presented the ERISA 

Conference Committee resolution reconciling the House and Senate versions of pension 

reform legislation: “Despite the value of full reporting and disclosure, it has become clear that 

such provisions are not in themselves sufficient to safeguard employee benefit plan assets from 

such abuses as self-dealing, imprudent investing, and misappropriation of plan funds.”1

In other words, fiduciary standards were essential for the protection of participants in 

employee benefit plans. Congress crafted rules applying fiduciary standards not only to plan 

trustees, but to a range of individuals and entities whose actions affect the security and use of 

plan funds and the benefits of participants. These rules of conduct applied to “fiduciaries,” 

which Congress defined as any person who fits one of the following categories:

(1) exercises any discretionary authority or discretionary control respecting management 

of a plan;

2

 

1

Comments of Senator Harrison Williams, Legislative History of the Employee Retirement Income Security Act of

1974, Vol. III, at 4741(Aug 22, 1974)(comments concerning the Committee of Conference on H.R. 2).

2

ERISA § 3(21)(A)(i).
3

(2) exercises any authority or control respecting management or disposition of a plan’s 

assets;3

(3) renders investment advice for a fee or other compensation, direct or indirect, with 

respect to any monies or other property of a plan, or has any authority or responsibility to do so;

4

or

(4) has any discretionary authority or discretionary responsibility in the administration of 

a plan.5

The 1975 regulations addressed the third aspect of the definition – a person who renders 

investment advice for a fee. The regulations narrowed the statutory language (which broadly 

provided that a person is a fiduciary if he/she renders investment advice “for a fee or other 

compensation, direct or indirect, with respect to any moneys or other property of” a plan) to two 

narrow circumstances: first, if a person has discretionary authority or control with respect to 

purchasing or selling securities or other property for a plan;6and second, if a person renders 

investment advice to a plan on a regular basis, pursuant to an agreement or understanding that 

the advice will be a primary basis for the plan’s investment decisions, and that the advice is 

individualized to the particular needs of the plan.7

This rule is often described as a five-part test, with a person found to be a fiduciary only if all 

five parts of the test are met. A person who provided investment advice could thus easily avoid 

being characterized as a person “who renders advice under the statute” fiduciary responsibility 

simply by indicating that he did not intend his recommendations to be the primary basis for an 

investment decision or by not providing advice on a regular basis.

The regulations also provided, in effect, a definition of the type of advice that concerned plan 

investments: advice concerning the value of securities or property, or advice concerning the 

advisability of investing in, purchasing, or selling securities or other property. 

A year after the 1975 regulations were promulgated, the Department held that a consultant who 

provided an evaluation of employer securities for an ESOP was not a fiduciary under the 

regulatory definition, because the valuation would not “involve an opinion as to the relative 

merits of purchasing the particular employer securities in question as opposed to other 

securities,” and would thus not serve as a “primary basis” for plan investment decisions nor 

“constitute advice as to the value of securities.” 

The 2010 proposed regulations offered a simpler and more easily understood, enforceable, and 

administrable test that bore increased fidelity to the statutory language and was designed in part 

to address developments over the intervening 35 years in the areas of retirement plans and 

investments. The new test would have provided that a person renders investment advice for a fee 

 

3

ERISA § 3(21)(A)(i)

4

ERISA § 3(21)(A)(ii)

5

 ERISA § 3(21)(A)(i

6 We note that a person who has such authority would be an investment adviser even without the “investment advice 

for a fee” component of the statutory definition, since the person would be exercising discretionary control of a plan 

asset.

7

C.F.R. § 2510.3-21(c)(1)(ii)(B).
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under ERISA if the person gives certain types of advice to a plan, plan fiduciary, or plan 

participant or beneficiary, and also falls within certain categories of persons. 

The Pension Rights Center was generally supportive of the 2010 regulations, although we

criticized some provisions of the regulation, especially a seller’s exemption, which we argued 

should be restricted in scope to fiduciaries of large plans. The regulations also asked for 

comments on whether advice on plan distributions should be characterized as investment advice, 

a position that the Center and other consumer groups generally supported. 

Some segments of the investment industry criticized the proposed regulation, arguing that it 

would prohibit certain common compensation arrangements, which might result in retirement 

savers with small account balances losing access to investment advice. 

They also argued that the proposed 2010 regulation could create fiduciary status in unintended 

situations -- for example, when employees of a plan sponsor help the plan sponsor review

investment and potential investment options for the sponsor’s 401(k) plan. There were also 

comments that argued that individuals who valued property for plans, particularly employer 

stock and employee real property, were already adequately regulated by state law and industry 

standards and that enveloping them in fiduciary status would add costs to plans without adding 

commensurate value for plan participants.

Over the next several years, the Department considered these and other comments and also 

conducted a thorough analysis of the benefits and costs of a new rule. On April 14, 2015, after 

concluding that the rule’s benefits vastly exceeded its costs, it proposed a new carefully-crafted 

rule. 

The new rule reflects many of the comments on the withdrawn rule. For example, it generally 

limits the seller exemption to sales presentations to certain fiduciaries of larger plans, who would 

have the sophistication to evaluate the merits of particular investments and to make their own 

informed judgments about the merits of particular investments. The rule also specifies that 

advice on plan distributions is investment advice. The rule further adds new principles on the 

distinction between investment education and investment advice to prevent attempts to

camouflage investment advice as investment education.

The proposed rule also includes changes prompted by concerns raised by industry. The new 

rule, for example, has an expanded list of carve-outs, and is accompanied by new prohibited 

transaction exemptions and amendments to existing prohibited transactions -- most significantly 

an exemption for investment advisers and financial institutions who enter into a contract with a 

retirement saver and agree to act in the client’s best interest and to mitigate and control conflicts. 

The Best Interest Contract exemption permits financial firms considerable flexibility with respect 

to how they compensate investment advisers and institutions, including the use of indirect 

compensation, such as revenue sharing and 12b-1 fees. One of the new fiduciary carve-put 

provides that appraisers are not fiduciaries when they render appraisals, fairness opinions, or 

statements of value to an ESOP. The preamble to the regulations indicates that the Department 

is separately considering issues related to ESOPs. 
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II. Revision of the 1975 Regulations is Warranted 

a. The 1975 Regulations Improperly Narrowed the Meaning of Investment Advice under 

the Statute

The centerpiece of Title I of ERISA is its definition of fiduciary and the rules that govern a 

fiduciary’s conduct. In particular, fiduciaries are required to act in the exclusive interest of plan 

participants and their beneficiaries and to exercise prudence in the exercise of their plan 

responsibilities. Title I of ERISA also prohibits a fiduciary from causing a plan to engage in a 

prohibited transaction with a party in interest, and the Internal Revenue Code imposes a 

significant tax on the amount involved in a prohibited transaction. An important effect of the 

rules governing fiduciary behavior is to limit self-dealing and other conflicts of interest of 

fiduciaries, which Congress determined was critical to the goals it enacted ERISA to advance. 

Who is a fiduciary is critical to the statutory scheme. 

Section 3(21)(A) of ERISA defines the term fiduciary and plainly states that a person is a 

fiduciary if he or she “renders investment advice for a fee or other compensation, direct or 

indirect, with respect to any moneys or other property of such plan, or has any authority or 

responsibility to do so.” The 1975 regulations narrowed the scope of this language by limiting it 

to investment advice that was “regular,” rather than one-time or episodic; advice that was 

rendered pursuant to an agreement or understanding that it would be a “primary basis” for 

investment; and advice that is “individualized” to the particular needs of the plan. 

These limitations are not consistent with the plain meaning of the term “investment advice,” and,

given the remedial character of ERISA, can be said to have impeded rather than to advance the 

congressional goals of limiting self-dealing and of assuring prudent investment of plan assets. 

The regulatory definition is also inconsistent with judicial language indicating that Congress 

generally intended the term fiduciary to be “broadly” construed.8

b. Speculation on the Reasons for the 1975 Regulatory Constriction on the Statutory 

Language

The preamble to the 1975 regulations did not provide a clear explanation for why the Department 

narrowed the statutory meaning of investment advice. If there was any additional explanatory 

material, it no longer exists. It is possible that the Department wished to reassure banks and 

other financial institutions that the new statute did not create new legal uncertainty when they did 

routine work for plans. Moreover, 1975 predated the line of Supreme Court decisions that held 

that relief against non-fiduciaries was limited to traditional equitable remedies, so the question of 

who was a fiduciary would have appeared to be less consequential than it does today. 

Moreover, as we discuss further below, the retirement plan world was different in 1975 from 

what it is today. Forty years ago, defined benefit plans held most retirement assets, covered the 

majority of plan participants, and almost always paid benefits in annuity form. And in 1975, 

defined contribution plans were typically invested in pooled, professionally managed portfolios 

 

8

See, e.g., LoPresti v. Terwilliger, 126 F.3d 34, 40 (2nd Cir. 1997). 
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rather than in assets selected by individual participants. Thus, even in the defined contribution

employer plans of yore, participants were generally shielded by plan fiduciaries and their 

advisors from individual responsibility for investments. At the time, Individual Retirement 

Accounts were still curiosities and comprised a small portion of total national retirement savings. 

And Congress had not yet added section 401(k) to the Internal Revenue Code.

The Department of Labor would have had to display nearly perfect clairvoyance to predict that 

the intervening 40 years would make the individual participant the fulcrum for investment and 

retirement distribution strategies and a significant consumer of investment advice. It did not and 

thus did not foresee the regulations’ negative future effects.

And two other points are relevant here: first, the Department of Labor employees who wrote the 

1975 regulations had only limited experience in fiduciary regulation, having been transferred to 

the Pension Welfare Benefits Administration from the Fair Labor Standards Administration after 

the enactment of ERISA. Second, consumer-oriented and labor organizations apparently did not

comment on the regulations, so there was little counterpoint to industry support for the rule.

As a result, in 1975, the Department may well have perceived that the rule would reassure the 

financial industry about the impacts of the new statute while imposing few if any costs on the 

ability of American workers to build financial security for retirement. The view about costs, as 

we now know, was a wildly inaccurate perspective with destructive consequences. The 

regulations were not only inconsistent with the statute but have, as the Department of Labor’s 

regulatory impact study now clearly demonstrates, diminished the financial security of millions 

of Americans.

c. The Evolution of the American Retirement System Since 1975

There have been significant changes in the retirement plan and investment landscape that have 

undermined whatever arguable justification there might have been in 1975 for the regulations’ 

cramped scope. As the preamble to the new rules note, there has been a seismic shift in the 

retirement plan world from defined benefit plans—in which investment advice was generally 

rendered to sophisticated plan fiduciaries—to self-directed defined contribution plans—in which 

investment advice is issued to individual participants, who often lack significant investment 

experience and knowledge. Mutual funds, and sellers and brokers for mutual funds, who played 

a relatively small role in retirement plans when ERISA was enacted, have become dominant 

players in the new economic order. The variety and complexity of investment products has also 

increased markedly over the last four decades.

There have also been significant and unanticipated legal developments since the 1975 regulations 

were promulgated. As we noted, the Supreme Court in 1993 ruled that a participant generally is 

entitled to legal relief under ERISA only against a defendant who is a fiduciary whose breach of 

duty caused monetary loss to a plan. Legal relief is not available against a non-fiduciary even 

when a non-fiduciary knowingly and for personal profit assisted a fiduciary in the commission of 

such a breach. A participant can sue a person other than a fiduciary only for traditional forms of 

equitable relief. The DOL, which filed amicus briefs arguing against these positions, could not 

have known in 1975 that the combination of its narrowly drawn regulation, the limitation on 

available remedies, and ERISA preemption would effectively create an ineffectively regulated
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playing field for so many actors who have a direct and substantial impact on plan investment 

performance. 

Another important change is simply the growth of assets held by qualified retirement plans. In 

1975, defined benefit plans and defined contribution plans held $300 billion in assets. In 

2015, these plans held about $8.6 trillion dollars of assets. Individual Retirement Accounts 

account for another $7.4 trillion, and insurance annuities an additional $2.9 trillion.9 Clearly, 

retirement plans are today a critical market for virtually all serious capital market participants. It 

is, simply, where the money is.

Thus, in today’s new order, the people and institutions who help individual participants and 

small 401(k) plans navigate the complex geography of investing for retirement are essential to 

helping Americans prepare financially for retirement. Where in 1975 they may have stood on 

the periphery of the statutory scheme, today they stand in its epicenter. To exempt them from 

the statute’s prohibitions against conflicts and self-dealing undermines Congress’ goals in 

enacting ERISA and in encouraging plans with generous tax subsidies.

d. The Negative Costs of the 1975 Regulations Have Been Substantial

Because of the 1975 regulations’ artificial constriction of the meaning of investment advice, 

many individuals and institutions that provide investment advice have been effectively 

immunized from meaningful ERISA regulation. While they have been subjected to regulation 

under other regimes, those other regimes do not always impose a best-interest standard or 

prohibit conflicts of interest. As a result, many vendors of investment recommendations have 

operated under conflicts of interest. 

Conflicts of interest can incentivize investment advisors to recommend investments that 

maximize fees to the advisor, when the client is better served by investments that generate lower 

fees. Conflicts of interest can also lead advisors to recommend that retirement savers take 

distributions from plans in which fees are low and roll over the distribution into Individual 

Retirement Accounts, where fees are typically higher and legal protections reduced. Similarly, 

investment advisors have financial incentive to encourage pension plan participants to take lumpsum payments in lieu of a plan annuity, foregoing the substantial benefits of an annuity. 

Moreover, exotic, complex investments often pay higher fees to those who recommend and sell

them, even though such investments may be expensive and present risks that make such 

investments suboptimal for many retirement savers. Actively managed funds designed to 

maximize income generate higher fees for brokers who recommend and sell them, but such funds 

often invest in riskier assets than other funds and thus may not be optimal for older investors 

who should not bear such risk. Yet the Center has seen cases in which octogenarians have been 

advised to invest a majority of their assets in volatile funds or in other high-risk securities.

Relying significantly on independent research, the Department documented substantial gains to 

retirement investors from the proposed rule, perhaps as high as $1 trillion over a 20-year period. 

 

9

Federal Reserve Board of Governors, Flow of Fund Accounts of the United States, Table L.226, pg. 127, June 11, 

2015. 
8

Even if a fraction of these gains were realized for participants, the revised rule’s benefits would 

dwarf the compliance and other costs associated with it. 

We anticipate several arguments being raised against the regulatory analysis. First, we believe 

that some commentators will argue that the research relied upon by the analysis is inconclusive 

and that the potential benefits are speculative, because there is no way to determine whether most 

investment advisors in fact act on conflicts of interest. But the notion that a class of actors—in 

this case investment advisors—are immune from conflicts of interest, is a counterintuitive 

assertion with virtually no empirical support. While there are certainly some investment advisors 

that successfully resist yielding to conflicts of interest and/or are subject to business models and 

compensation structures that control them, many advisors who receive higher compensation for 

selling certain products than others will act, consciously or not, to maximize their own 

compensation at a significant cost to their clients. Moreover, advisors who do not act on such 

conflicts should not incur substantial costs from complying with the proposed rules.

Some have also argued that the rules will result in investment firms deciding to withdraw from 

offering advice to investors with small account balances and from providing assistance to smaller 

plans. But such predictions are speculative, based on selective and questionable assumptions 

and/or manipulated “survey” data. One study commissioned by a “coalition” of unidentified 

businesses concludes that 30 percent of small-plan employers will drop their plan if the new 

regulations take effect. However that survey suggested to respondents that they will be unable to 

obtain assistance from financial firms if the proposed rule is adopted before it asked if they will 

continue to sponsor their plans. 

Moreover, the “best interest contract” exemption from the prohibited transaction rules will 

permit firms to continue to compensate advisors with various forms of commission and indirect 

payments. In addition, our market economy is remarkably resilient and has a genius for creating

innovative mechanisms to serve markets. The proposed rule will not reduce the demand for 

investment advice, and innovative firms will continue to find efficient ways to service and profit 

from that demand. We have confidence that financial advisors can provide investors with good 

advice at least as efficiently as it can provide conflicted advice.

We also note that some opponents of the new rule display a chameleon-like assessment of the 

sophistication of the average investor. On the one hand, they argue that investors are 

sophisticated enough to evaluate the impact of conflicts of interest of their advisors, but on the 

other hand implying that the same investors may be unwilling to pay for investment advice 

unless the cost of that advice is hidden from them. 

e. The Current Regulations Create Legal Uncertainty 

The 1975 regulations incorporate inherently vague concepts into the definition of investment 

advice, which impede enforcement efforts under the statute. The regulations do not define what 

is meant by providing advice on a “regular basis,” what is meant by advice that will be “a 

primary basis” for the plan’s investment decisions, nor what is meant by advice that is 

“individualized to the plan’s” needs. These must be determined on a case-by-case basis. The 

inherent ambiguity and subjectivity of these concepts creates uncertainty in the law and strains 
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Departmental, judicial, and private resources in litigation of issues not related to the core 

concept of investment advice. 

The problems of the regulatory definition are illustrated in judicial decisions. In Farm King 

Supply, Inc. Integrated Profit Sharing Plan and Trust v. Edward D. Jones & Company, 884 

F.2d 288 (7th Cir. 1989), a plan followed a brokerage firm’s conflicted investment advice and 

suffered a loss, but the court held that the brokerage firm was not a fiduciary because “there 

was no mutual understanding that Jones' advice would be a primary basis for Plan 

investments.” In another case, Bhatia v. Dischino, 2010 WL 1236406 (N.D. Tex. March 30, 

2010), the trial court held that an actuarial consulting firm was not a fiduciary under the 

regulations, because the plaintiffs did not plead adequate facts to show that the firm “rendered 

advice on a regular basis as part of a mutual agreement that such advice serve as the primary 

basis of investment decisions.” 

The Department has explained that developing proof of the elements of the regulations, even 

where proof exists, has slowed and impeded enforcement of ERISA for the Department of Labor. 

The lack of support in the statute for the conditions in the regulation and the difficulties for 

enforcement are reasons enough for the regulation. But the Center would like to point out that 

Congress intended that ERISA would be enforceable by ordinary participants and beneficiaries 

who, unlike the Department of Labor, do not have subpoena power and have no ready access to 

the documents and testimony that would demonstrate fiduciary status under the detailed existing 

regulation. This has always been a severe impediment to enforcement of fiduciary responsibility 

by private plaintiffs, but it has been greatly exacerbated in recent years because the Supreme 

Court has adopted a “plausibility” standard for the evaluation of complaints on a motion to 

dismiss. 

As a consequence, complaints alleging fiduciary status may be dismissed if they fail to allege 

factual support for some element of the regulation, and factual support will typically be 

unavailable or limited without discovery. See e.g. Glen Ridge Surgicenter, LLC v. Horizon Blue 

Cross Blue Shield of New Jersey, Inc., No. 08-6160 (JAG), 2009 WL 3233427, at *6 (D.N.J. 

Sept. 30, 2009) (“[P]roof of [defendant]’s fiduciary status is an element of the fiduciary duty 

claim, and ‘a formulaic recitation [in the complaint] of the elements of a cause of action will not 

do.’” (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ); see also Braden v. Walmart 

Stores, Inc., 588 F.3d 585, 598 (8th Cir. 2009) (discussing the problem that participants are often 

without access to information that would allow them to plead factual support for each element of 

a claim). 

III. Comments on Proposed Regulations

The Center strongly supports the Department’s proposed rule generally and has the following 

specific comments.

a. Distribution Advice and Management of Securities

The Department of Labor’s current position is that advice on whether to take a distribution from 

a plan does not in itself result in fiduciary status for the person rendering such advice. Section 

2410.3-21(a)(1) of the proposed rule would reverse this position by providing that “. . . a 
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recommendation to take a distribution of benefits” is investment advice. See also Section 

2410.3-21(a)(2) (“a recommendation as to the management of securities or other property to be 

rollover over or otherwise distributed from the plan or IRA” is investment advice). We believe 

that this aspect of the rule is critical to the retirement security of millions of Americans and that 

such advice should meet the dictionary meaning of investment advice.

We note that the decision on whether to take a lump-sum distribution from a plan can have 

profound effects on someone’s future financial security in retirement. In some cases, the 

decision to move assets from a defined contribution plan to an individual retirement account by 

rollover or direct transfer can result in the retirement saver paying higher fees for similar 

investment assets and can also result in loss of access to plan investment options that may not be 

available in an IRA. The effects of such a decision can be especially profound in a pension plan, 

where a participant loses the benefits of having benefits paid as an annuity or, in the case of a 

married participant, a joint-and-survivor annuity. 

While there are certainly situations in which a distribution of benefits from a plan, defined 

benefit or defined contribution, is warranted, in many situations -- if not the great majority of 

situations -- such a decision will have significant costs to the participant taking the distribution. 

The person providing advice to take a distribution, however, typically has strong financial 

incentive to recommend taking the distribution. In a draft paper, which we attach as an appendix 

to these comments, the authors provide an example of how conflicts of interest can lead to poor 

advice in the context of rollovers. 

We thus strongly support this proposed change to current law. 

b. Circumstances Under Which a Person Renders Investment Advice

The proposed rule provides that a person who provides investment advice is a fiduciary if the 

person either represents or acknowledges fiduciary status or if the advice is rendered “pursuant to 

a written or verbal agreement, arrangement or understanding that the advice is individualized to, 

or that such advice is specifically directed to the advice recipient for consideration in making 

investment or management decisions with respect to securities or other property of the plan or 

IRA.” Proposed Rule Section 22510.3-21(a)(2)(ii). 

We are concerned that the reference to an agreement, arrangement, or understanding may be 

interpreted as required bilateral or shared understanding by both the retirement investor and the 

advisor that advice is being directed toward the advice recipient. We believe that a person or 

entity may provide investment advice even in the absence of such a bilateral or shared 

understanding. More specifically, we believe that a person offers investment advice if, under the 

totality of circumstances, it appears that a person is offering advice to another person regarding 

an investment or management decision related to assets of a plan or IRA, regardless of whether 

there is a bilateral, common, or shared understanding that advice is being provided. 

c. Sales Carve-out

The 2010 proposed regulations provided that a person shall not be considered to be a fiduciary 

investment adviser if such person can demonstrate “that the recipient of the advice knows or, 
11

under the circumstances, should have known, that the person is providing the advice or making 

the recommendations in its capacity as a purchaser or seller of a security or other property, or as 

an agent of, appraiser for, such a purchaser or seller, whose interests are adverse to the interests 

of the plan or its participants or beneficiaries, and that the person is not undertaking to provide 

impartial investment advice.” We believe that this accommodation is appropriate when a 

“sales” presentation is provided to a sophisticated plan fiduciary, but not when it is given to 

individual participants or their beneficiaries. 

In our experience, most plan participants will not be able to discern whether advice is impartial 

or conflicted. In addition, even if there is disclosure, in a one-to-one meeting, whether in 

person or by phone, an unsophisticated investor will often regard the adviser as acting in his 

interest. This is particularly true if the participant does not have access to other advisers. 

Indeed, an adviser’s success may depend on a client’s belief that the adviser is interested 

primarily in the customer’s welfare, despite a declaration of self-interest. There is the further 

fact that most participants will not be knowledgeable about the types of fees and benefits that 

can accrue to the purchaser or seller of securities. 

The new proposed rule eliminates the sales exception for individual participants. The sales 

exception remains as part of a carve-out for counterparty transactions, but this carve-out is 

appropriately limited to sophisticated plan fiduciaries. Eliminating the sales exception for 

individuals is a critically important revision to the proposed rule and we urge the Department to 

retain it in the final rule.

d. Investment Education Carve-out

The proposed rule, like the 2010 proposed rule before it, provides that a person does not become 

a fiduciary when that person only provides investment education. The 2010 proposed rule 

referred to previous guidance distinguishing investment education from investment advice. See 

DOL IB 96-1. That guidance permitted investment education to include references to investment 

products (as illustrations) sold by the provider of the education. Research has shown that such 

references can have powerful anchoring effects, and this can be expected to influence recipients 

favorably to the products referenced. In effect, such educational activities comprise a 

sophisticated sales presentation and should be regarded as such. Thus, we believe the proposed

regulations, which do not allow investment education to refer to specific products, are far more 

protective by creating a stronger line between investment education and invest advice, and this 

distinction is critical and should be retained in the final rule.

e. Applicability of Proposed Rule to IRAs

As a general comment, we laud the clarity with which the proposal states that the proposed rules 

will apply equally to IRAs as well as ERISA plans. IRA assets now constitute about one third of 

all private retirement savings. While plan participants continue to earn their private retirements 

benefits almost entirely in employer plans, the investment of those savings after termination of 

employment, including the distribution of those benefits throughout their retirement years, is 

increasingly being made from IRAs to which they have rolled the lump sum benefit they earned 

under their traditional pension plan or their 401(k)-type plan. After such a rollover, there is no 

ERISA protection or employer support, and this has led to some high-fee abuses The argument 
12

that the Department should not be regulating IRAs ignores that Reorganization Act No. 4 of 

1978 expressly granted the Department of Labor regulatory authority to define the term 

“fiduciary” for purposes of both the Internal Revenue Code and ERISA. 

f. Carve-out for ESOP Advisors

The proposed rule generally provides that an appraisal, fairness opinion, or similar opinion is 

investment advice and a person who provides it generally a fiduciary. Prop. Rule Section 2510-

21(a)(1)(ii). The rule, however, includes a carve-out for persons who provide such investment 

advice to an ESOP. The Labor Department indicates that it is separately studying issues relating 

to ESOPs and presumably the issue of whether appraisers of employer securities. 

The carve-out, even if only temporary, is unfortunate, since proper valuation of stock in an ESOP 

maintained by a closely-held corporation is critical to the fairness of such ESOPs. Whether 

incorrect valuations are frequent or infrequent is a contested issue, but when it happens 

participants in plans suffer and should have recourse if the appraiser acted improperly. There is 

no reason to grant ESOPs a special agency exemption from an essential part of ERISA’s 

fiduciary structure.

In any event, there is no clear evidence that ERISA fiduciary liability would result in 

significantly higher costs to plans, especially given the procedural and substantive obstacles that 

private parties and the Department of Labor face in ERISA fiduciary litigation. We would urge 

the Department to either remove the carve-out or provide that the carve-out will sunset within a 

reasonable period of time.

g. Carve-Out for Platform Providers

The proposed rule includes a carve-out for providers of investment platforms, so that they do not 

become fiduciaries when a person “merely markets and makes available to an employee benefit 

plan... a platform or similar mechanism from which a plan fiduciary may select of monitor 

investment alternatives, including qualified investment alternatives.” Yet marketers of 

investment platforms can limit the investment options from which a fiduciary may choose and

may be influenced by the payments they will receive from the vendors of the investment 

products available on the platform. We thus believe the broad carve-out may permit conflicts 

that should be controlled. We suggest eliminating this carve-out and substituting a prohibited 

transaction exemption that requires disclosure and mitigation of conflicts.

IV. Comments on Prohibited Transaction Exemptions

The proposed rule was accompanied by a package of new prohibited transaction exemptions and 

amendments to existing exemptions. The package is meticulously constructed, and the heart of it 

-- the Best Interest Contract exemption -- succeeds in mitigating the impact of conflicts while 

preserving substantial flexibility for financial institutions to market their products and 

compensate those persons who recommend and sell them. Notwithstanding the Department’s 

success in creating the package, there is room for improvement at the margins and we provide 

some comments to this end. We also respond to the Department’s request for comments on 

whether it should adopt a streamlined exemption for low fee, quality investment vehicles.
13

a. The Best Interest Contract Exemption Should Be Amended to Clarify that It Applies to 

Rollover Advice Provided by Either a Third-Party Call Center or Advisors Not Affiliated 

with the Plan.

Some comments on the proposed Best Interest Contract exemption suggest that it is not 

applicable to advice concerning plan distributions. While we read the exemption to clearly cover 

such advice, the Department should make the language more specific to clarify that it applies to 

distribution and rollover advice, which as detailed earlier, is critical to protecting workers and 

retirees. The Department should also consider whether special contract formation rules might be 

appropriate when advice is being provided through persons at a call center, although any such 

rules should be tailored to ensure that the participant fully understands the nature of the contract 

at the point of initial communication with the call center and that the execution of the written 

contract occurs within a reasonably short period following the initial communication.

b. The Exemption Should Not Endorse Arbitration When Fiduciary Advice is Rendered 

to a Plan or to a Participant or Beneficiary in a Plan.

The proposed Best Interest Contract exemption requires the contract to provide for resolution of 

disputes and explicitly sanctions binding arbitration for individual claims. In our view, this 

undercuts ERISA’s private enforcement scheme and the express Congressional purpose of 

“providing ready access to federal courts.” ERISA Section 1(b), 29 U.S.C. 1001(b). 

The exemption should be amended to bar mandatory arbitration clauses in disputes involving a 

plan fiduciary and a plan participant or beneficiary. Such clauses should be limited to disputes 

regarding investment and management decisions related to an existing Individual Retirement 

Account, where there are no existing federal remedies other than the imposition of the Section 

4975 tax on amounts involved in prohibited transactions. The exemption should also prohibit 

contractually modifying the ERISA statute of limitations for claims against fiduciaries and 

should similarly prohibit contractual restrictions of other ERISA jurisdictional, remedial, or 

substantive provisions.

c. Thoughts on the Appropriateness of a Streamlined Exemption for Certain Investment 

Options.

The Department of Labor has asked for comments on whether it should provide a streamlined 

version of the Best Interest Contract exemption for advisors offering high-quality, low-fee 

investment products. In our view, there would be several difficult conceptual problems to 

negotiate in order to create such an exemption. Such difficulties include defining the concepts of 

low-fee and high-quality for investment products. 

We are also concerned that such designation may itself become the equivalent of a consumer seal 

of approval, which may result in investors focusing only on such products and perhaps not 

developing appropriate investment strategies. Such designation might also have profound 

consequence in future product development, stifling innovation. Nevertheless, the notion of a 

streamlined exemption is intriguing and is worth exploration but perhaps not on the same time 

track as this proposed rule.
14

V. Alternative “Best Interest” Standards

SIFMA and others have offered alternative proposals that they characterize as based on a “best 

interest” standard that they argue would not impose unnecessary burdens on the industry nor 

result in unintended consequences. These proposals, however, are at best an uneasy, uncertain,

and inadequate compromise between suitability-type and true best-interest standards. The 

proposals tolerate disclosure as a remedy to conflicts of interest – which we know does not work; 

and the factors that would be used to measure compliance are sufficiently numerous that the 

overall effect is one of vagueness and subjectivity and not dissimilar from the standards now 

used to measure compliance with a suitability standard. 

In short, the proposals require identification of conflicts rather than meaningful mitigation of 

conflicts. While they reflect a minor shift in emphasis, at their heart the proposals wrap a 

suitability standard in more attractive packing. Such proposals are not suited toward ensuring 

that the tens of millions of retirement savers are given advice unfiltered through the myriad 

conflicts that distort its quality in the current world. 

They are a last-ditch effort by the industry to defeat a well-crafted rule that was developed over 

years with the input of all stakeholders. They are no substitute for the rule.

Conclusion

Our nation depends on employee plans and individual retirement plans to help Americans build 

financial security for their retirement. At the individual level, the success of this enterprise 

means comfort and dignity in retirement; at the aggregate level, it serves and implements vital 

societal goals. 

It is for these reasons that Congress subsidizes the retirement system with generous tax subsidies,

and it is for these reasons that Congress enacted ERISA to ensure that the system serves and 

protects the interests of plan participants.

Some have argued that our securities laws can adequately protect the interests of retirement 

savers and, by implication, that the more protective ERISA regime was neither needed nor 

intended by its Congressional authors. This is simply wrong and misguided. Securities law is 

intended to ensure honesty in markets and to check fraud and sharp practices. It is based on 

disclosure and honest behavior.

ERISA, on the other hand, was designed to ensure that Americans can build adequate financial 

security for that period in their life when they no longer participate in the workforce and to 

ensure that their reasonable expectations are protected. It is for these reasons that ERISA is 

organized around a fiduciary standard—the highest standard of behavior in law—to eliminate 

rather than merely to disclose conflicts of interest. As Harrison Williams, one of ERISA’s two 

principal sponsors in the Senate, observed about the statute’s fiduciary anatomy, “...despite the 

value of full reporting and disclosure, it has become clear that such provisions are not in 
15

themselves sufficient to safeguard employee benefit plan assets from such abuses as self-dealing, 

imprudent investing, and misappropriation of plan funds.”10 

The Department has worked mightily to construct a regulatory regime consistent with this 

purpose. It has modified its 2010 proposal to reflect legitimate industry concerns. It has 

consulted and coordinated with the Securities Exchange Commission and others to ensure that its 

rules do not undermine the SEC’s own mission nor create unnecessary burdens for business. The 

Department deserves high praise for its efforts to date, and we encourage it now to complete its 

work -- so essential to the protection of the American worker -- with due expedition. 

Respectfully Submitted,

Norman Stein Karen Friedman

Senior Policy Advisor Executive Vice President and Policy Director

 

10 Comments of Senator Harrison Williams, supra, note 1. 
Financial Illiteracy Meets Conflicted Advice:

The Case of Thrift Savings Plan Rollovers

John A. Turneri

Pension Policy Center

Bruce W. Klein

Pension Policy Center

Norman P. Stein

Drexel University

May 2015

Contact Author: John A. Turner

 Jaturner49@aol.com

 3713 Chesapeake St. NW

 Washington, DC 20016

Abstract

Bad financial decision-making can be due to a combination of lack of financial literacy and

conflicted advice from advisers who know that many people are insensitive to differences in 

fees. The paper examines rollovers from the Thrift Savings Plan (TSP) for federal government 

workers. It focuses on the TSP because it has the lowest fees of any plan in the United States, 

charging less than 3 basis points. By analyzing issues related to TSP rollovers, this paper sheds 

light on the broader topic of rollovers to IRAs and the yet broader topics of the quality of 

financial advice that people receive and how that is affected by the fiduciary standard. The two 

leading models of choice—the traditional price theory model with rational decision makers and 

behavioral economics with its emphasis on inertia both predict that rollovers from the TSP would 

generally not occur. We argue that these rollovers can be explained by a model of financially 

illiterate consumers facing conflicted advice, which is a type of agency problem model. While 

the fiduciary standard is considered to be the highest standard for conduct under the law, the 

paper is to our knowledge the first paper to test the effect of a fiduciary standard on the quality of 

advice. It undertakes a small survey to find out what advice participants receive concerning TSP

rollovers and to test the hypothesis that having a fiduciary duty does not affect the quality of 

advice provided. Because of the extremely low fees the TSP charges, the strategy of assessing 

advice concerning rollovers from the TSP provides a strong test of the hypothesis that the 

standard used by many financial advisers for quality of advice is low. Participants in a very low 

fee plan are being advised to roll over to high fee products. While we find a statistically 

significant difference between the advice provided by advisers with a suitability standard and the 

SEC fiduciary standard, even advisers with that fiduciary standard often appear to be insensitive 

to large differences in fees, focusing instead on the benefits of their advice. They provide selfinterested analysis that justifies their self-interested advice. Thus, the SEC fiduciary standard 

does not appear to be adequate by itself, without robust enforcement, to overcome the problem

arising from the advisers’ conflict of interest, combined with the information asymmetry 

between advisers and clients.
2

“One of the best things you can do as an investor is to keep the costs that you can control as low 

as possible.” Wes Moss (2014)

Because many people lack financial literacy, they seek financial advice. Information asymmetry 

is inherent in that situation. The information asymmetry creates the potential for an agency 

problem, where the agent or adviser may not act in the best interest of the client. The financial 

adviser has a financial incentive to take advantage of his informational advantage because he has 

a conflict of interest. Because of the way the adviser is compensated, the advice that yields the 

adviser the most income is not the best advice for the client. This financial incentive results in 

clients not receiving the best advice. As a result, government has stepped in to regulate financial 

advice in order to protect the interests of clients. This regulation sometimes involves imposing a 

fiduciary standard, requiring that the advice be the best advice for the client.ii Because of the 

large amount of money at stake for financial advisers, they have attempted to influence the 

regulators, sometimes referred to when it is successful as regulatory capture. 

This paper applies the framework just described to analyze the market for financial advice. It 

does so by focusing on pension rollovers to Individual Retirement Accounts (IRAs). In the 

market for financial advice, people with low levels of financial literacy (demand side) encounter 

advisers with conflicts of interest (supply side). In 2013, 38.3 percent of families reported 

obtaining information about investing from bankers, brokers and other sellers of financial 

services, and 31.3 percent of families reported obtaining information from lawyers, accounts and 

other financial advisers (Bricker et al. 2014).

Individual Retirement Accounts (IRAs) are the largest type of pension plan in the United States, 

having overtaken 401(k) plans. Rollovers are the primary source of funding for IRAs, with 

relatively few people contributing to IRAs (Investment Company Institute 2015b). Thus, the 

topic of rollovers is one of the most important topics in pension policy, involving issues that 

determine the fundamental structure of the way retirement savings is provided. Because of the 

importance of the rollover decision, many people seek financial advice. One survey finds that 61 

percent of the people with rollover IRAs received advice from a financial adviser in connection 

to the rollover (Investment Company Institute 2015b). 

In a rollover, the person receives a check from the pension plan of a former employer, then

deposits the check with the IRA. In a transfer, the pension plan sends the check directly to the 

IRA. We follow common practice and refer to both as rollovers.

We argue that if participants are receiving bad advice where it is least likely, which is a plan with 

extremely low fees, it is likely that bad advice is occurring in less extreme situations. Similarly, 

if the financial regulators fail to take action in this situation, it is likely that they will fail to take

action in less extreme situations that would still warrant action. 

We focus on advice concerning rollovers from the Thrift Savings Plan because it has the lowest 

fees of any plan in the United States. The Thrift Savings Plan (TSP) is a 401(k)-type defined 

contribution plan for federal government workers, the military, and Members of Congress. The 
3

TSP is the largest pension fund in the United States (Towers Watson 2014) and the largest 

defined contribution plan in the world (White 2011). It has more participants than the social 

security systems of more than 90 countries (World Bank 2014). It charges extremely low fees—

less than three basis points for each of its funds. With fees of 3 basis points, someone investing 

$100,000 would pay $30 in fees annually. By comparison, the same person having the money 

managed by an adviser charging one percent per year would pay $1,000 to the adviser, on top of 

the fees for the investments, and someone with a high fee adviser charging two percent per year 

would be paying $2,000, and probably with the costs of the investments thus paying more than 

70 times as much in fees. Yet, as documented in this paper, advisers charging as much as two 

percent a year are advising clients to rollover their TSP accounts so that the adviser can manage 

it. 

We focus on the TSP because it charges extremely low fees, making a rollover to an IRA

generally a bad decision. In 2014, the fees charged to participants in the Thrift Savings Plan were 

2.9 basis points (TSP 2014b), compared to 83 basis points as the participant-weighted average 

for a survey of 401(k) plans (Deloitte 2011), 58 basis points for an asset-weighted average of 

401(k) plans and 74 basis points for the asset-weighted average of equity mutual funds held in 

IRAs (Investment Company Institute 2015b). IRAs have on average higher fees than do 401(k) 

plans, reflecting that retail fees for IRAs tend to be higher than institutional fees for 401(k) plans. 

While it is possible to find investments with very low fees, on average fees were roughly 25 

times higher in IRAs than for the TSP, with the difference being substantially larger if the person 

who rolled over also started using a financial adviser, where fees are often 100 basis points or 

more. 

This paper analyzes financial advice as a reason why rollovers are occurring. By focusing on 

advice, we do not claim that that is the only reason for rollovers or that it is the most important 

reason for all the rollovers that have occurred. Nonetheless, based on a survey of TSP

participants who made a withdrawal, in 2013, an estimated 16,400 participants (about one-third 

of those making withdrawals) made a withdrawal of all or part of their TSP account because they 

were advised by their financial adviser to do so (AonHewitt 2014). In this paper, we make a 

preliminary attempt to assess the extent to which participants who receive advice from financial 

advisers are receiving bad advice.

After providing introductory material further describing the TSP, the paper discusses a few 

situations where it has been argued that a rollover from a TSP may be advantageous. Next, based 

on a survey we conducted, it assesses advice that clients receive concerning rolling over their 

TSP accounts to IRAs. The paper addresses the issue of whether having a fiduciary duty makes a 

difference in the advice received. To our knowledge, our paper is the first to empirically study 

whether having a fiduciary duty makes a difference in the quality of advice received.

INTRODUCTION

The market for TSP rollovers is complex, involving the activities of five parties: (1) TSP 

participants, (2) the TSP, (3) IRA providers, (4) advisers and (5) regulators. In this paper, we 

focus on the behavior of participants and advisers, commenting briefly on regulators and 
4

describing the characteristics of the TSP and IRAs but not focusing on the activities of the TSP 

and of IRA providers. 

Previous Literature

Relevant to this paper on the quality of advice is a small but growing literature on the quality of 

advice that people receive as a factor leading to poor outcomes. This literature is a subset of a 

larger literature on the agency problem, where agents may have a conflict of interest and not act 

in the best interests of their clients. Mullainathan et al. (2012) in an audit study find that people 

with low-fee, well-diversified portfolios are advised to invest in higher-fee, less diversified 

portfolios. Dvorak (2015) compares the 401(k) plan investment options in the plans of financial 

advisory firms with the plans of the companies they advise. He finds that the investment options 

that are in the advisee firms’ plans but not in the adviser firms’ plans tend to have high fees, with 

the advisers not putting the high fee funds in their own plans. Christoffersen et al. (2013) find 

that brokers tend to sell higher-cost funds that give them higher compensation. The Council of 

Economic Advisers (2015) surveys the literature on financial advice and conflicts of interest, but 

fail to recognize that the issues relating to pension rollovers differ from those relating to advice 

as to investments for an established client. Concerning the low end of the quality of advice

people receive, the SEC has issued an Investor Alert concerning fraudulent advice that some 

participants in Self-Directed IRAs have received (SEC 2011).

Three approaches have been taken in law to deal with conflicts of interest: prohibition, disclosure 

and the fiduciary standard. A fourth approach in public policy is financial literacy and financial 

education campaigns. The law and economics literature discusses the role of a fiduciary standard 

as one way of dealing with the agency problem where the agent has a conflict of interest and 

superior knowledge, and it is difficult for the client to assess the output of the agent (Sitkoff 

2011). With the fiduciary standard, the agent is supposed to act solely in the best interest of the 

client. Agency problems are common because in a modern economy people must rely on experts 

to assist them. In our paper, the monitoring problem is due to asymmetric information, with the 

advisers having superior knowledge to the clients. Clients have a lack of financial sophistication 

and are unable to evaluate the quality of the advice they receive. For this reason, they play a 

weak role in the enforcement of regulations protecting them. We test for whether having a 

fiduciary standard affects the quality of advice. Thus, our paper relates to the effect of a fiduciary 

standard in dealing with the agency problem.

Rollovers from the Thrift Savings Plan, and indeed from most 401(k) plans (Turner and Klein 2014), are 

surprising from an economics perspective. The two main choice models in economics –traditional price 

theory, based on rational decision-makers, and behavioral economics, with its emphasis on inertia—

cannot explain rollovers from the TSP. 

From the perspective of traditional price theory, most rational decision-makers presumably would not roll 

over from the Thrift Savings Plan to an IRA because of the large difference in fees. In addition, pension 

participants have fiduciary protections in the TSP, but lose those protections when they transfer their 

assets to an IRA. Loss of fiduciary protections can be particularly important at advanced older ages when 

the risk of cognitive impairment is greater (Barlyn 2010). IRAs are not protected from judgments in civil 

law suits (TIAA-CREF 2013), and thus are subject to greater risk than is the TSP. The weakness of this 

model may be due to participants not knowing how much they are paying in fees, which is due at least in 

part to the lack of salience of these fees. A 2013 survey of civilian TSP participants who were separated 
5

but had not started taking benefits indicated that 18 percent expected to rollover from the TSP because of 

lower fees elsewhere (AonHewitt 2013), suggesting that they did not know the fees that TSP charges. 

That survey found that 42 percent of participants rated the TSP as about the same (37 percent) or below (5 

percent) other plans. In addition, generally, people tend to think that their financial adviser is providing 

advice in their best interest, with roughly three out of four indicating that in a survey, while most advisers 

have a suitability standard for the advice they provide (Schoeff 2015).

From the perspective of behavioral economics, rollovers are surprising because some studies have 

documented the tendency for pension participants to exhibit inertia (Madrian and Shea 2001, Choi et al. 

2002; see, however, Muller and Turner 2013). Inertia would cause TSP participants to not roll over 

because that is the “path of least resistance.” Rollovers would seem to be even more unlikely when 

considering that many participants presumably would be overwhelmed by the large number of options as 

to IRA providers and then as to investment choices. However, the force of inertia may be less for workers 

at the point of job change or retirement, when the worker’s attention is focused on choices related to the 

change in employment, than for workers who are continuing in the same job. 

We propose the decision-making model of financial illiteracy with conflicted advice, which is an aspect 

of agency theory. This model dominates the traditional economics model and the behavioral economics 

model in the problem we analyze in that it predicts that TSP rollovers will occur, while the other two 

models predict the opposite for most participants. The effects of inertia and differences in fees are offset 

by conflicted advice. The client is not able to judge the quality of the advice and trusts the expertise and 

motivations of the adviser. We thus argue that the explanation for rollovers from the TSP, at least to some 

extent, is bad financial advice, both generalized advice provided through widespread advertising to 

rollover your “old” 401(k) plan, and advice provided to individuals. 

Why do price theory and behavioral economics fail to explain TSP rollovers? We present evidence in this 

paper suggesting that in financial markets people often do not know what the prices are. We also suggest 

that the force of inertia may be less at job change than while working at a job and that inertia has been 

overcome at that point by advice.

THE MARKET FOR RETIREMENT SAVINGS VEHICLES AND THE DERIVED 

DEMAND FOR FINANCIAL ADVICE

Participants in the TSP face the choice of whether to continue in the TSP at job change or to 

transfer their TSP account to an IRA. Thus, they presumably consider the relative merits of the 

two forms of retirement savings. In addition, because they tend to lack financial literacy, they 

may seek the assistance of a financial adviser. 

The TSP

The TSP is administered by the Federal Retirement Thrift Investment Board--an independent 

board whose members are nominated by the President and confirmed by the Senate. The TSP 

provides the same type of savings and tax benefits that are offered by 401(k) plans. Participants 

can make either Roth or traditional contributions. Its 4.6 million participants make it the largest 

defined contribution plan in the United States. The Thrift Savings Plan as of May 2014 had 

assets of $412 billion (Long 2014b) and in early 2015 was up to $440 billion (Money 

Management Intelligence 2015). The participation rate of 88.6 percent for employees in the 

Federal Employees Retirement System (FERS) (Thrift Savings Plan 2013) is higher than is 

typical for 401(k) plans, which tends to be less than 70 percent (U.S. Department of Labor 2014).
6

Participants in the TSP pay extremely low fees. The fees for all the TSP funds were 2.9 basis 

points or less in 2013 and 2014 (Thrift Savings Plan 2014b). The fees in 2013 were less than 

one-twentieth the average cost of a stock index fund (Zweig 2013), and one-thirtieth the average 

cost of target date funds (Vanguard 2014). Its fees are low primarily because of its large size and 

in part because some administrative costs are borne directly by the Federal government (Boccia 

2014). The advantage of these low fees can be passed on to a surviving spouse, who can 

maintain an account in the TSP.

While 401(k) participants tend not to know how much they are paying in fees (Turner and 

Korczyk 2004), TSP participants may particularly be uninformed about their plan fees because 

all the funds charge essentially the same fee, making the level of fees irrelevant in the choice of 

funds. 

Inertia Has Been Overcome

Inertia, which plays a key role in pension policy based on behavioral economics and choice architecture, 

has been overcome in the case of TSP rollovers. The default is to remain in the TSP. A survey in 2008 

indicated that relatively few TSP participants (14.0 percent) planned to rollover their TSP to an IRA when 

they left government service (Watson Wyatt 2009). The intention to roll over was more prevalent among 

participants with small account balances at the time of the survey, with 15.7 percent of those with account 

balances of between $5,000 and $25,000 indicating that they planned to rollover to an IRA, versus 12.7 

percent for those with account balances of $100,000 or more. One-fifth (22.5 percent) of participants 

planned to not take withdrawals until required to at age 70 1⁄2. That percentage rises with age, and among 

those already retired, 40.7 percent planned to not take a withdrawal until age 70 1⁄2.

Five years later, in 2013, 47,836 TSP participants requested transfers. Of those who separated 

from service in 2012, by the end of 2013, 45 percent had withdrawn all their funds (Long 

2014b). The total amount rolled over to IRAs or other plans in 2013 was roughly $7.2 billion. 

Thus, the average rollover was about $150,000, which is slightly lower than the median account 

balance for someone with more than 20 years of tenure, which in 2011 was $155,119 and 

somewhat lower than the average account balance for that group, which was $185,741 (Thrift 

Savings Plan 2012). These figures compare to a median account balance for families with 

retirement accounts in 2013 of $59,000 (Bricker et al. 2014). In the age group where the family 

head was 55 to 64, the median value of assets in retirement accounts for households with a 

retirement account was $105,000 (Bricker et al. 2012). Thus, the rollovers are considerably 

larger than typical 401(k) account balances for those near retirement, which may make them a 

desirable target for financial advisers. In 2012, transfers of the full account balance to an IRA or

another plan accounted for 65 percent of the money withdrawn from the TSP (Long 2014c).iii 

A beneficial aspect of maintaining a TSP account rather than rolling it over is that participants 

can roll in money from plans from previous or subsequent employers or IRAs. The ability to roll 

in from subsequent employers is rarely if ever found in 401(k) plans. In 2014, $1 billion was 

rolled into the TSP (Steyer 2015). The roll ins suggest that the traditional, rational economic 

analysis still applies for some participants, who are financially astute and realize that the low fees 

in the TSP make it a desirable place to hold retirement savings.
7

Among those responding to a survey conducted by the Federal Retirement Thrift Investment 

Board, the primary reason for withdrawing money (rollovers and withdrawals) was a life event 

or major expenditure (36 percent), wanting greater withdrawal flexibility in benefits options (27

percent), wanting other investment options (23 percent), and wanting a managed account, 

wanting investment advice, receiving advice from a financial adviser, or other factors such as 

account consolidation or required minimum distributions (20 percent) (Long 2014b). Workers 

age 59 1⁄2 and older can take a one-time partial or full withdrawal from the TSP while still 

working for the Federal government. A survey found that 23 percent of persons taking an inservice withdrawal were doing so because a financial adviser recommended that they do so 

(Long 2014b). Reacting to the situation that participants are being advised to roll over from the 

TSP the TSP has undertaken a policy of active retention, meaning that it is attempting to 

encourage participants to remain in the plan.

Are IRAs a Good Alternative?

In terms of fees, two types of rollovers to IRAs can be identified. In one type, the participant is 

advised by an adviser to rollover and the adviser manages the account for a fee, which is added 

to the fees charged by the underlying investments. In the second type, the participant is not 

charged an ongoing advisory fee, but only pays the investment fees. Advisory fees generally are 

at least one percent of assets, but in one rollover we encountered involving a major financial 

adviser in the Washington, DC area fees are two percent. 

As indicated earlier, in 2013, $7.2 billion was rolled over from the TSP to other pension plans 

and IRAs (Long 2014b). If the other pension plans had the average fee of 74 basis points, which 

is the asset-weighted average of fees for equity mutual funds held in IRAS (Investment Company 

Institute 2015b), the participants would lose in aggregate about $50 million due to higher fees in 

the first year, with annual losses continuing for the life of the account. That would be a loss of 

more than $1,000 per participant per year. Because that amount would compound over time due 

to the loss of investment income due to the smaller asset base, it can be used as the basis of a 

present value calculation, yielding a rough estimated present value loss of $20,000 for a person 

making the average rollover. That estimate is an understatement because it does not include fees 

for financial advice. However, it is also a rough approximation, depending on the age at which 

the person retires, how long the person lives, when the person starts drawing down their assets 

and how rapidly, and the rate of return on their assets.

When Would a Rollover Make Sense?

While generally, advice to rollover from the TSP is bad advice because of the substantially 

higher fees the individual will pay in IRAs and to advisers, in a few circumstances, the higher 

fees may be outweighed by the benefits of a rollover. We discuss the primary reasons given by 

financial advisers for rolling over the TSP. 

First, for people preferring investment options not in the TSP, or a high tolerance for risk, a 

rollover may be desirable. These options would include high-risk investments, actively managed 

mutual funds, real estate, and international bonds. However, individuals having the financial 

sophistication and risk tolerance to want these investments probably have sufficient assets 

outside of the TSP to use to make those investments. They could make these investments through 
8

their IRA, assuming they had one, and would not need to rollover to do so. Many TSP 

participants have exposure to the real estate market through owning their home.

Second, as indicated by the Federal Retirement Thrift Investment Board survey, some people 

find the TSP withdrawal options too inflexible. The TSP works well for people who want to 

receive regular monthly payments, but it does not work well for people who want to make an 

occasional withdrawal. Because most TSP members also receive a defined benefit plan monthly 

benefit, some may prefer to use the TSP for irregular withdrawals for special needs, but it cannot 

be used that way. Retirees can only take one partial withdrawal. People wanting to have extra 

money for special purposes could do a partial rollover to an IRA. After that, they must withdraw 

the full amount remaining, either as an annuity, a lump sum payment, or a series of payments, 

which can be tied to life expectancy. They can use a combination of those options that are 

available for full withdrawal. For the partial withdrawal, workers cannot choose which fund the 

withdrawal comes from, with the withdrawal being made on a pro rata basis from all funds in 

which they are invested. Allowing more than one partial withdrawal, and allowing workers to 

specify the fund from which it is taken, would be a step toward greater flexibility. The 

inflexibility in withdrawal options appears to be one reason why workers rollover their TSP 

accounts. However, because of its low fees, participants should first spend down their nonpension savings and their higher fee pension savings before making withdrawals from the TSP.

Third, people with small TSP account balances may roll over to an IRA rather than to maintain a 

separate small account. However, a superior strategy would be to maintain a small TSP account 

and later roll over higher-fee pension assets into that account. This type of rollover can be done 

by former and current federal employees who maintain a TSP account.

Our conclusion is that rarely is a complete rollover from the TSP good advice. Generally, the 

cost of a rollover in terms of higher fees outweighs the advantages of a rollover in the 

circumstances where there are advantages. 

SUPPLY OF ADVICE

This section discusses issues relating to advice concerning rollovers.

Conflicts of Interest, Advice and the Compensation Model

Conflicts of interest arise from the ways advisers are compensated. Conflicted advice arises 

whenever the adviser earns higher fees from advising a strategy that is not in the best interest of 

the client. Generally, advisers earn higher fees by doing what is in the best interest of their 

companies or themselves. However, the analysis of conflicts of interest relating to investment 

advice, as has been done by the Council of Economic Advisers (2015), does not directly apply to 

conflicts of interest in the case of pension rollovers. In the case of investment advice, advisers 

charging by the hour or based on assets under management do not have an incentive to provide 

bad advice, In the case of rollovers, however, advisers charging by the hour or based on assets 

under management will generally make more money if their clients decide to roll over their 

assets. When an adviser has a client who is considering a rollover, the adviser generally will 

receive higher fees over time from that client by advising a rollover because that advice will lead 

to the need for continuing advice on managing the person’s investments. 
9

An Assessment of Advice Concerning Rollovers from the TSP

Since the TSP does not provide individualized advice, participants may turn to the financial 

services industry for advice. Advice can be categorized in two dimensions—it can be selfinterested versus neutral advice, and it can be generalized versus individualized advice. With 

self-interested advice, the adviser has a conflict of interest in that his compensation may be 

higher if he provides advice that is not in the best interest of the client. With neutral advice, the 

adviser’s compensation does not depend on what he advises. With generalized advice, the advice 

is provided through advertising and through information on websites. With individualized 

advice, the advice is provided by a financial services professional to an individual. Different 

regulatory standards apply to generalized versus individualized advice, and arguably different 

regulatory reforms are needed concerning the current standards. 

A Survey Concerning Individualized Advice. In 2013, the Government Accountability Office 

(2013) conducted a survey of thirty call-in centers to assess what advice people were receiving 

concerning rollovers from 401(k) plans to IRAs. It found that frequently people were being 

encouraged to roll over to an IRA by financial advisers who had obtained little information 

concerning the situation of the person, including information on the fees being charged by the 

plan they were in. Because of its extremely low fees, advice concerning rollovers from the TSP

provides a stronger test of the quality of advice people are receiving than does the GAO survey.

Empirical Analysis

Studying advice received by TSP participants provides at least two advantages over studying 

advice to pension participants in 401(k) plans. First, we know the TSP participants are paying 

less than 3 basis points for their investments. Second, we know that any investment they are 

advised to roll over to will have higher fees, with the fees generally being substantially higher.

To obtain information on the advice that TSP participants receive from different types of 

financial advisers, we selected thirty advisers through a telephone survey and an email survey. 

With these surveys, we test two hypotheses. First, we test the hypothesis that participants in an 

extremely low fee plan are being advised to rollover to higher fee arrangements. Second, we test 

the hypothesis that having a fiduciary duty makes no difference in the quality of advice that 

advisers provide. To our knowledge, this is the first study to test that hypothesis, a weakness of 

previous studies according to the Investment Company Institute (2015a).

For most people, the best advice concerning rollovers would be to roll over IRAs and other 

pension accounts into the TSP. However, many advisers may not be aware that that is an option. 

The next best advice would be to leave the money with the TSP. The worst advice would be to 

roll over from the TSP to an IRA.

Telephone Survey. In the telephone survey, we contacted firms providing IRAs to see what 

advice one of the authors would receive concerning his own TSP account as a former federal 

government employee. We obtained contact information in two ways. We obtained telephone 

numbers from websites encouraging rollovers to IRAs. We also obtained telephone numbers for 

financial services firms from the Washington, DC telephone book. This survey is a convenience
10

sample survey, and is not meant to be statistically representative of any universe of advisers. In 

most cases, we believe that the person providing advice was a person subject to a “suitability” 

standard, rather than a registered investment advisor subject to a fiduciary standard requiring that 

services be in the best interests of the customer. 

We contacted seven mutual fund companies, seven banks and one insurance company seeking 

advice (a total of fifteen service providers) (Table 1).

iv It was clear that many of the advisers 

were aware that the TSP charges extremely low fees, but it was also clear that some of the 

advisers did not know that. The advice generally ignored fees as an issue. The advice we 

received generally focused on TSP participants having a small number of investment options, 

while IRA participants had a large number of options. Ten companies indicated that the client 

should rollover the TSP to an IRA. We can state unequivocally that this was bad advice because 

we know the details of the person receiving it. 

Four declined to provide advice, but instead to differing degrees tried to sell the idea that a 

rollover would be desirable. One adviser asked about the risk tolerance of the client and then 

advised that a client with moderate to high risk tolerance should roll over to obtain a greater 

range of funds, while a client with low risk tolerance should stay in the G Fund. One adviser 

said that we would receive $600 as an incentive to rollover plus 300 free stock exchange trades 

through their brokerage service. None of them advised rolling into the TSP.

From some of the advisers, we received false information that made a rollover seem to be 

desirable. One adviser said that we could reduce fees by rolling over. The insurance company 

indicated that we could obtain lower priced annuities outside of the Thrift Savings Plan. One 

company said we had no control of our investments in the Thrift Savings Plan. Two advisers 

praised actively managed funds, which are not an option with the Thrift Savings Plan.

Table 1. Telephone survey results for advisers with a suitability standard

Outcome Number of Firms

Advised not to roll over 1

Declined to advise but suggested a rollover 

would be a good idea

 4

Recommended a rollover 10

Total 15

Source: Author’s calculations

Advisers who worked for companies that took a more aggressive stance on their websites 

concerning IRA rollovers also tended to take a more aggressive stance in advising those rollovers 

in our phone conversations. We do not know how the people we contacted on the telephone were 

compensated, but it was clear that they viewed it as their job to encourage us to rollover from the 

TSP. While most of the companies we contacted advised rollovers, some companies that had 

more balanced presentations on their websites declined to provide advice, but instead focused on 

what they considered to be the advantages of rolling over. One adviser indicated that for 

rollovers, the company would make available mutual funds it managed that were currently closed 

to new investors as an incentive to rollover. One adviser suggested investing in a small cap fund 
11

when he learned that our portfolio did not include that. The lowest fee small cap fund that mutual 

fund company offers has an expense ratio of 91 basis points, compared to 2.9 basis points for the 

TSP small cap fund (the S Fund). Thus, fees would be more than 30 times higher. One adviser 

stated that we would have thousands of investment options if we rolled over.

v

Information received in the mail from one mutual fund company we contacted indicated that an 

advantage of their IRA was that their investment advisers are noncommissioned, implying 

presumably that their advice would not be affected by a conflict of interest. An adviser from that 

company subsequently advised rolling over the TSP account to an IRA at their company.

All the fifteen advisers we contacted worked for companies that sold financial products. In total, 

two-thirds of the companies advised rollovers, one advised against rollovers for participants who 

were highly risk averse, and four companies declined to provide advice but indicated that their 

companies offered a good alternative. They generally ignored the issue of fees and made little 

effort to find out information about their client.

Email Survey. To test the hypothesis that having a fiduciary standard makes no difference in the 

quality of advice clients receive, we obtained a list of such advisers from the website for the 

National Association of Personal Financial Advisors (NAPFA 2015). That website provides

email addresses, and we contacted the advisers in this survey by email. vi All members of 

NAPFA have a NAPFA fiduciary duty concerning the advice they provide their clients, but we 

believe that all of the ones we contacted were also subject to the SEC fiduciary standard. In 

addition, members of NAPFA can only receive compensation as fees from their clients. They 

cannot receive compensation from investment management companies whose products they 

purchase for their clients. The fees can be on an hourly basis, as a percentage of assets under 

management (AUM) or as a combination of those two approaches. Thus, this survey allows us to 

test for the effect of having a fiduciary duty concerning the advice provided. Our null hypothesis 

is that having a fiduciary standard has no effect on advice. 

In the email survey, because we were dealing with financial advisers in one-person or small 

firms, for ethical reasons we wanted to make it clear that we were not actual clients but that we 

were doing a survey. The email survey may have two biases. First, by providing their answers in 

writing, the advisers may have felt more cautious about providing “bad” advice, or even any 

definite advice. Second, because we indicated it was a survey, the may have been less aggressive

in seeking rollovers because they knew they were not dealing with actual potential clients, so that 

no money was at stake. Both effects may bias the results away from recommending rollovers.

Because we did not specify a fixed set of response options, the responses we received were 

varied, as indicated in Table 2. Among these advisers, the issue of fees was more commonly 

discussed. Four advisers recognized the extremely low fees charged by the TSP and 

recommended against rolling over. One of these advisers recommended rolling other pension 

accounts into the TSP. The majority of advisers argued that in some circumstances a rollover 

might be advisable. Because it is our conclusion that in most circumstances it would not be 

advisable, the effect of having a fiduciary standard is weaker than we expected. It appears that 

having a conflict of interest still affects the quality of advice. For those advisers, we do not know 

whether they would recommend a rollover to most of their clients, but that is a possibility, given 
12

the responses. Nonetheless, when comparing these responses with those in the earlier survey, the 

null hypothesis is rejected—the two sets of responses are statistically different at the 2.5 percent 

level according to a chi square test.

One reason why some advisers may recommend a rollover from the TSP is that they have 

misperceptions concerning the TSP. For example, one adviser told us that the TSP does not have 

investments in corporate bonds, which it does, and that a comparable Vanguard fund had lower 

fees, which it does not.

Table 2. Email survey results of fee-only advisers with a fiduciary standard

Outcome Number of Firms

Advised not to roll over because of low fees 4

Advised not to roll over during accumulation phase, but 

would recommend rollover during the distribution phase

 2

Would recommend partial rollover in some circumstances for 

greater diversification

 3

Would recommend rollover in some circumstances, 

depending on the individual situation

 4

Recommended a rollover for greater diversification 2

Total 15

Source: authors’ calculations

This survey suggests that having a fiduciary duty does affect the advice advisers provide.

However, the survey suggests that advisers with a fiduciary duty often use the argument that a 

rollover would provide the opportunity for greater diversification, which is true, without the 

adviser considering the extra cost in fees that a rollover would entail. This finding suggests that 

in addition to a fiduciary standard, education of advisers may be needed as to what a fiduciary 

standard implies, particularly with respect to the cost of alternative investment approaches.

Greater enforcement may also be needed.

Further Reasons Why an Adviser May Advise a Rollover

We have already identified two general categories of reasons why an adviser might advise a 

rollover from the TSP. First, under limited circumstances, a rollover may be good advice. 

Second, the adviser may be acting based on a conflict of interest. In addition to those sets of 

reasons, based on our surveys, we now add two other categories. 

First, we encountered advisers who are not familiar with the TSP or have incorrect information 

about it which makes it seem to be less favorable than it is.

Second, advisers may have valid reasons for recommending a rollover, but they fail to balance 

those reasons against the cost of the rollover in terms of higher fees. Thus, their analysis is 

flawed by not taking into account costs. In effect, they are telling a half-truth because they are 

not divulging all the relevant information, and in particular they are ignoring fees. They are not 

alone in this last respect. NASDAQ (2010) lists five common errors in making rollovers to IRAs, 
13

but it does not include considering differences in fees. Similarly, the SEC (2015) provides 

information on the availability of rollovers, but it does not mention that the person should 

consider the level of fees in the new plan versus the old plan. FINRA (2013) provides the 

following advice: “An IRA often enables an investor to select from a broader range of 

investment options than a plan. The importance of this factor will depend in part on how satisfied 

the investor is with the options available in the plan under consideration. For example, an 

investor who is satisfied by the low-cost institutional funds available in some plans may not 

regard an IRA’s broader array of investments as an important factor.” This advice does not 

indicate that the extra diversification should be weighed against the extra cost. 

Counter Arguments

This section responds to two counter arguments—first, that the TSP offers too few options and 

second, that higher fees can be paying for other services, such as peace of mind and having a 

person to interact with.

Does the TSP Offer Too Few Options? One of the main criticisms of the TSP by advisers 

advocating rollovers from it is that it offers too few funds. A survey of TSP active participants 

found that 36 percent would roll over once they left federal employment to access more or better 

investment options (Long 2014). Thus, addressing this issue is key in evaluating the advice that 

TSP participants receive. Hewitt (2013) addresses the question of whether a non-U.S. bond fund 

and other categories of investments not currently included in the TSP funds should be added. For 

some categories, such as value and growth stocks, and real estate, it concludes that the TSP funds 

already provide access to investments in those areas. For the non-U.S. bond fund, it concludes 

that a small improvement in the efficient frontier (risk-return tradeoff) would be obtained for 

participants, particularly those with low-risk portfolios. 

The TSP stock funds do not cover emerging markets, Canada, and international small 

capitalization stocks, and its other investment options do not international bonds. Copeland 

(2013) finds that in aggregate, IRA participants invest 13.8 percent of their assets in the category 

“other,” which refers to investments not in stocks, bonds, or target date funds. This finding 

suggests that IRA participants do hold a wider range of investments, since the TSP does not have 

any investments in that category. The TSP does not offer actively managed funds. 

Adding new funds would improve the opportunity for diversification, but because the TSP 

already offers wide diversification in international and domestic stocks and domestic bonds, the 

benefits of increased diversification are likely to be relatively small. Investment advisers 

encouraging rollovers for this reason apparently do not weigh the relatively small benefits 

against the costs in increased fees. Advisers with a conflict of interest need a justification for 

advising a rollover, but it appears that when they find one, they do not fully explore its merits.

They provide self-interested analysis that justifies their self-interested advice.

In addition to traditional arguments relating to the advantage of having more choice versus the 

added costs, behavioral economics also provides analysis. The paradox of choice refers to the 

negative effects of having too many choices. For some pension participants, having too many 

options may make investment decisions more difficult, which would cause the limited options in 
14

the TSP to be an advantage. Several studies have documented problems people have generally in 

making decisions when facing a large number of options (Iyengar and Lepper 2000, Carosa 

2011). Despite the concept from traditional economics that more options are always better, 

recent research has documented that for psychological reasons of mental overload, above a 

minimum level, fewer choices are better for many people when the remaining choices allow a 

sufficient range of choice. A further study found that too many investment options in 401(k) 

plans lowered participation rates (Iyengar, Huberman and Jiang 2004). The idea that having 

unlimited choice is a good feature is thus not supported by behavioral research.

Another aspect of too much choice, in the context of IRAs, is that there may be a tradeoff 

between quantity of choice and quality of choice, with a larger number of choices including more 

options that are of poor quality, having high fees, poor rates of return and being poorly 

diversified because of their limited scope (Goldreich and Halaburda 2011). 

In the TSP, where the choices have been preselected by financial experts, the average quality of 

choice is better than for IRA participants who face a much larger range of choice, with limited or 

no elimination of poorly performing investment options. Because the TSP has a preselected 

choice of investments, it may be easier for participants to make good investment choices in that 

setting than with an IRA, particularly for participants who are not financially sophisticated.

Are Higher Fees Justified by Other Services? The response to this argument is basically the 

same as for the preceding argument. The fees may be paying for other services besides asset

management. The question is, does the marginal value of the other services justify the 

substantially higher cost incurred by rolling over?

CONCLUSIONS

We argue that a logical place to look for bad advice concerning pension rollovers is participants 

in a really low-fee plan. The same words spoken to participants in a high-fee plan advocating a 

rollover may be good advice, while they would be bad advice to someone in a really low-fee 

plan. While a lower-cost investment option is not always the best choice, when the cost 

difference is large, the cost of not taking that option needs to be considered. 

Because of the low fees the Thrift Savings Plan charges and the quality of the investment options 

it provides, the advice provided by financial advisers concerning rollovers from the TSP permits 

a particularly strong test of the hypothesis that the standard used by many financial advisers 

concerning the advice they provide is low. The Thrift Savings Plan provides participants 

uniquely low fees, many times lower than fees generally available in IRAs. 

Because of its very low fees, for most people it would be bad advice to rollover from the TSP. 

For this reason, the advice does not even meet the suitability standard, much less the standard 

that it is in the best interest of the client. On average, workers taking this advice appear to be 

paying more than $20,000 extra in present value of fees compared to if they had stayed in the 

TSP. In some cases, the fees are more than 70 times larger. We thus provide evidence of 

insensitivity by some pension participants to large differences in fees. We argue that this is the 

outcome of financial illiteracy meeting conflicted advice. 
15

Advisers with a conflict of interest need a justification for advising a rollover, which for the TSP 

often is the possibility of greater diversification. However, it appears that when conflicted 

advisers find a justification, they do not weigh the added costs against the benefits. Our surveys 

suggest that a fiduciary standard does have some effect on advice, but it does not guarantee good 

advice. It appears that advisers with a conflict of interest concerning rollovers may engage in a 

partial analysis that justifies their position, focusing on the benefits of a rollover, while not fully 

considering the costs.

In sum, we provide evidence on the following points. First, traditional economics (rationality) 

and behavioral economics (inertia) cannot explain TSP rollovers. We argue that a new decisionmaking model is needed. The model we present is financial illiteracy with conflicted advice, 

which is in the class of models relating to agency problems. Second, pension participant inertia 

has been overcome by advice, and for other reasons. Pension participant inertia appears to 

depend on the context, being less at the point of job change than while working for the employer. 

This concept relates to research on “fresh starts,” indicating that people are more likely to make 

changes following the New Year or a birthday (Benartzi et al. 2015).

Third, because of the financial illiteracy of many people and the conflicts of interest of advisers, 

the market for financial advice may result in bad outcomes for clients. Fourth, some people are 

insensitive to large differences in fees. While not everyone rolling over from the TSP does so 

because of financial advice, those rolling over for other reasons appear often to not be taking into 

account the cost of doing so in terms of higher fees. The insensitivity to fees may be due in part 

to lack of knowledge of the fees the person is paying and lack of knowledge relating to the effect 

of apparently small differences in fees. Fifth, some people are not aware when they are receiving 

bad advice. Bad advice has been followed by pension participants, presumably due to financial 

illiteracy. Sixth, bad advice can be very costly, with a present value cost of roughly $20,000 for a 

person making the average TSP rollover. 

Seventh, the analysis of conflicts of interest for pension rollovers differs from the standard 

analysis of conflicts of interest concerning investment advice. When advising concerning 

rollovers, advisers generally have a conflict of interest, even if they charge by the hour or by 

assets under management, because the rollover will lead to the need for further advice in the 

future. Eighth, in our survey of advice, we find that among advisers with a suitability standard, 

fees were rarely mentioned. Ninth, advisers with a conflict of interest need a justification for 

advising a rollover, but it appears that when they find one, they do not fully explore its merits. It 

appears that even advisers with a fiduciary duty often do not weigh the costs of higher fees 

against the benefits of a rollover, that being, for example, the benefits of marginally greater 

diversification. They are telling a half-truth because they do not fully divulge the relevant 

information. 

Tenth, existing regulatory standards, as they currently are enforced, are not adequate to protect 

pension participants from seriously bad advice. Eleventh, a fiduciary standard, in particular the 

SEC standard, for advisers does make a difference, but it does not completely solve the problem

that arises from the financial incentives inherent in their conflicts of interest. Just making an 

adviser a fiduciary is not sufficient to overcome self-interest and assure good advice for clients. 
16

They may use self-interested analysis to support self-interested advice, with the end result being 

harm to pension participants. 

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i We have received valuable comments from Brigitte Madrian, David Laibson and other 

participants in a session at the 2015 American Economic Association meetings; from Natalya 

Shnitser and Peter Weidenbeck and other participants at the Fourth Annual ERISA Scholars 

Conference, from Ike Brannon and other participants at the Savings & Retirement Forum, from 

Anna Maria l Lusardi and other participants in the Global Financial Literacy Excellence Center 

Seminar on Financial Literacy, and from Stewart Kaplan, Daniel Kasprzyk, Anna Rappaport and 

Steve Vernon.

ii Unless otherwise indicated, we are referring to the SEC fiduciary standard. Different 

organizations have different fiduciary standards, as discussed later in the paper. The SEC 

standards are not as stringent as standards found in ERISA and the IRC. In particular, the SEC 

generally permits self-dealing transactions that would largely be prohibited under ERISA and the 

IRC, as long as the Registered Investment Adviser (RIA) fully discloses the conflict to the client.

iii Some of the transfers may have been for the purpose of making a withdrawal, while avoiding 

the 20 percent withholding tax. We have no information on the importance of that strategy.

iv We presented the following scenario. “I am a retired Federal employee. I am trying to decide 

whether I should keep my Thrift Savings Plan account or I should roll it over to an IRA. What 

would you advise?”

v One adviser told us that he had recently advised his mother-in-law to roll over her TSP account 

to an IRA.

vi We sent the following email text: “I am an economist investigating advice that fee only 

financial advisers provide concerning TSP rollovers to IRAs. Would you generally advise a 

retired federal government employee to roll over their TSP account to an IRA? Thanks for your 

help.”