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 July 21, 2015 

 

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Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Attn: Conflict of Interest Rule 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue NW 

Washington, DC 20210 

RE: RIN 1210-AB32 – Conflict of Interest Rule 

Dear Sir or Madam: 

On behalf of a group of firm clients, I am writing today to provide comments on the 

Department of Labor’s (“DOL”) proposed new definition of a fiduciary, the proposed new 

prohibited transaction exemptions, and the proposed modifications of existing exemptions 

(together referred to as the “proposal”). Overall, while we share the belief that firms should act in 

their clients’ best interest, the implementation of the DOL’s regime renders the proposal 

unworkable. 

 This letter is divided into eight main sections. The first section describes concerns with 

the proposal and the adverse effects that the proposal would have. Second, in response to DOL’s 

request for specific alternatives, the letter provides a regulatory approach that would address 

DOL’s objectives, but without the adverse effects of the proposal. The third section discusses 

why DOL does not have the statutory authority to issue very significant portions of the proposal. 

Fourth, the letter examines the shortcomings of DOL’s economic analysis. Fifth, the Appendix to 

this letter provides regulatory language for one aspect of our recommended regulatory approach. 

Sixth and seventh, attached to this letter are in-depth studies by Quantria Strategies, LLC of (1) 

the shortcomings of DOL’s economic analysis and (2) the adverse effects of the proposal on 

retirement savings and retirement readiness. Finally, also attached is a response from Quantria 

regarding a discussion in DOL’s regulatory analysis of a prior study performed by Quantria, as 

explained further below. 

 We are also attaching for the record key studies cited in this letter: “Oliver Wyman 

report: Assessment of the impact of the Department of Labor’s proposed “fiduciary” definition 

rule on IRA consumers” (April 12, 2011); “Access to Call Centers and Broker Dealers and their 

Effects on Retirement Savings”, Quantria Strategies, LLC (April 9, 2014); “The Impact of the 

Upcoming Re-Proposed Department of Labor Fiduciary Regulation on Small Business 

Retirement Plan Coverage and Benefits”, Greenwald & Associates (May 14, 2014); and “The 

role of financial advisors in the US retirement market”, Oliver Wyman (July 10, 2015). 

SUMMARY

Summary of Section 1 of the letter: concerns with the proposal. 

• Industry supports best interest standard. Contrary to indications from the 

Administration and statements in the press, most of the financial services industry is 
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completely fine with a best interest standard developed and implemented by the 

appropriate regulatory authorities. Indeed, the industry has been fine with this since the 

original DOL proposal was issued in the fall of 2010. The problem with the DOL 

proposal is not the premise that firms should act clients’ best interest; the problem is the 

“prohibited transaction rules” that would cut off low and middle-income individuals and 

small businesses from access to personal investment assistance. Unfortunately, the 

proposal does not address this fundamental problem, as explained in this letter. 

o The Administration’s own analogy to doctors working in their patients’ best 

interest illustrates the flaws in the proposal, since no doctor could work under a 

regime like the rules proposed by the DOL. 

o The Administration’s references to hidden fees are not consistent with the fact 

that DOL prohibited hidden fees with respect to plans in 2012. 

• Small businesses will lose critically needed help in setting up retirement plans. Any 

meaningful assistance for small businesses in selecting or monitoring investment options 

would give rise to fiduciary status and thus prohibited transactions. Since the best interest 

contract exemption (the “BICE”) does not apply to participant-directed small business 

plans, and the overwhelming majority of small business plans are participant-directed, 

there is effectively no prohibited transaction relief for advice to small businesses. The 

result would be cutting small businesses off from meaningful assistance in setting up and 

maintaining a plan. 

• Small IRA accounts will lose almost all access to professional investment advice.

Small IRA accounts generally do not have access to advisory assistance from registered 

investment advisers. The primary access to personal investment assistance for small IRA 

accounts is through the brokerage model, but the brokerage model gives rise to prohibited 

transactions unless the BICE can be used. Briefly, I am not aware of any financial 

institution that is planning to use the BICE or could possibly use the BICE; it is unusable. 

Even if it were usable, it would take years to program, so no one could possibly use it by 

the applicability date. This means that under the proposal small IRA accounts would lose 

almost all access to personal investment assistance. It is well documented that this 

occurred in the United Kingdom under a very similar rule. 

• Under the current timetable, the following message will be delivered to many 

millions of individual IRA investors with small accounts in the fall of 2016: neither 

their current adviser nor any other similar adviser can service their accounts because of 

new government rules.

• The DOL proposal would eliminate any meaningful assistance for employees 

terminating employment regarding their distribution and rollover options.

According to a comprehensive study by former government economists, this would result 

in $20 billion to $32 billion more in annual leakage from retirement plans. 

• The DOL proposal significantly reduces the scope of permissible investment 

education. Even the 2010 DOL proposal did not do this. 

• The DOL proposal would treat individualized promotion of a company’s own 

products and services to small businesses and individuals as fiduciary advice, and 

thus generally prohibited. Even the 2010 proposal did not go nearly this far. 

• The DOL proposal inadvertently applies to the simple marketing of health, life, and 

disability insurance to small businesses, making such marketing arguably 
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impermissible. This inadvertent error is more evidence that the adverse ramifications of 

the proposal have not been fully considered.

• The 2015 proposal is far less workable than the 2010 proposal, as it has many new 

onerous aspects. 

• All of this can be solved by regulations establishing a best interest standard, with 

workable rules that maintain access to investment assistance for low and middleincome individuals and small businesses. 

Summary of Section 2 of the letter: our recommended regulatory approach. 

The proposed rule should be withdrawn in deference to the primary role of the SEC and 

FINRA in establishing standards for broker/dealers and financial advisers. If, however, the DOL 

resolves to adopt a final rule, our recommended regulatory approach would include the following 

key elements: 

• A broadly applicable best interest standard, under which advice provided by financial 

professionals regarding investments, distributions, and rollovers would be required to be 

in the best interest of their ERISA plan and IRA customers. 

• A workable prohibited transaction exemption under which financial professionals would 

be permitted to provide investment, distribution, and rollover assistance as long as the 

assistance is in their customer’s best interest and the financial professional’s financial 

incentives are fully disclosed. 

• A seller’s exception based on the DOL’s 2010 proposal under which financial 

professionals who make it clear that they are selling products or services and not 

undertaking to advise an investor would not be considered fiduciaries. 

• Preservation of financial education. Unlike the 2010 DOL proposal, the 2015 DOL 

proposal would substantially restrict the types of investment education that can be 

provided without triggering potential fiduciary liability. Our approach preserves the 

current-law rules regarding investment education and, as under the DOL proposal, 

extends the education rules to education provided to plan sponsors and IRA owners, and 

to education regarding distributions and rollovers. 

Summary of Section 3 of the letter: large portions of the DOL proposal are not within 

DOL’s statutory authority. 

Here is the statutory language in ERISA section 3(21) that DOL is interpreting in the 

proposal: “a person is a fiduciary with respect to a plan to the extent . . . (ii) he 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 proposal goes 

far beyond this statutory language and is thus broadly invalid. For example: 

• Coverage of selling that is not advice. Under the proposal, individualized promotion of 

products or services to an individual or small business is fiduciary advice, even if the 

seller makes it clear that he or she is selling, not advising, and that is understood by the 

recipient of the promotion. There is no way to reconcile this treatment with a statute that 

requires the rendering of “investment advice for a fee” to be a fiduciary, and with a 
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statutory framework that recognizes that sales often involve incidental advice that does 

not give rise to fiduciary status. 

• Coverage of casual statements not viewed as advice by either party. Under the 

proposal, a mild statement that is reasonably viewed as a suggestion triggers fiduciary 

status, even if neither party views the statement as investment advice. Such a rule cannot 

be reconciled with a statute that requires the rendering of “investment advice” to trigger 

fiduciary status. 

• Coverage of distribution advice. The DOL has no authority under the statute to treat 

advice regarding whether to take a distribution as “investment advice”. Assume, for 

example, that an adviser advises a participant to take a distribution of her plan account 

and roll into an IRA but the adviser expresses no opinion on whether the participant 

should roll over her plan holdings into the IRA or should liquidate the plan holdings and 

invest in different assets in the IRA. How could this possibly be treated as investment 

advice regarding plan assets? Moreover, as discussed below, the DOL’s current position 

is in direct conflict with their own interpretation of the exact same law, which was the 

correct interpretation. 

• Indirectly regulating IRAs. Assume that DOL were to issue a regulation that directly 

imposes a series of regulatory requirements on IRAs, such as (1) disclosure rules, (2) a 

requirement that contracts be entered into with IRA owners, and (3) restrictions on the 

types of compensation that can be paid to IRA advisers. Legal analysts would agree that 

DOL has no such authority over IRAs and that the regulatory requirements would be 

invalid. Yet that is exactly what DOL has done here indirectly. 

Summary of Section 4 of the letter: shortcomings of DOL’s economic analysis. 

One theme is consistent throughout the DOL’s Regulatory Impact Analysis (“DRIA”), 

which is that it reads almost exactly like a brief prepared by an advocate who is retained to 

defend the DOL proposal in all events. Accordingly, in many cases discussed in detail in Section 

4 of this letter, the DRIA (1) attempts to refute contrary positions with incorrect statements, and 

(2) omits points that undermine the proposal. In addition, there are many instances, such as the 

education restriction, where the DRIA does not even explore the possible adverse effects of the 

proposal or possible more flexible ways to achieve DOL’s stated objectives. 

Here is one of many examples. A 2011 DOL analysis states that the prohibited 

transaction rules are “at least in part” responsible for over $100 billion of losses per year. Yet 

the 2015 DOL proposal does not address this point in very significantly broadening the 

application of those prohibited transaction rules. 

Section 5 is in the Appendix and Sections 6-8 are attached 

SECTION 1: CONCERNS REGARDING THE PROPOSAL 

INDUSTRY SUPPORT FOR A BEST INTEREST STANDARD 

 Under the DOL rules, an adviser’s treatment as a fiduciary has two main significances. 

First, a fiduciary is required to provide advice that is in the best interest of the fiduciary’s 
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customer, and second, a fiduciary becomes subject to an extensive set of prohibited transaction 

rules. 

There has been a lot of confusion in public discussions and media reports that state 

that the industry opposes a best interest standard. That is not the case. Members of the 

financial services industry are completely fine with being required by the appropriate 

regulatory authorities to act in the best interest of their customers. Advisers know that if they 

do not act in their clients’ best interest, they will not have those clients for long. 

The public policy dialogue regarding the fiduciary issue over the last 4 1⁄2 years has 

never been about the best interest standard. The real debate has been over DOL’s authority 

and its “prohibited transaction rules,” which under the DOL proposal would cut off access to 

investment and distribution assistance for low and middle-income individuals and small 

businesses. Under those rules, an adviser cannot provide any advice that could affect the 

adviser’s compensation, in the absence of a prohibited transaction exemption (provided by 

DOL). Assume, for example, that an IRA owner calls a broker/dealer for advice regarding 

whether to buy a particular stock. The adviser responds by saying that the stock is regarded as a 

good value and could help the IRA owner’s portfolio. The IRA owner buys the stock, which 

earns the broker/dealer a commission. Absent an exemption, if the broker/dealer is a fiduciary (as 

she would be under the DOL proposal), the simple favorable statement about the stock purchase 

is a prohibited transaction under the DOL proposal, regardless of whether the statement is in the 

best interest of the IRA owner. That is because the broker/dealer earns a commission on the 

purchase; thus, the broker/dealer’s favorable statement led to the broker/dealer earning a 

commission. 

The Administration’s own doctor analogy illustrates the flaws in the proposal. The 

Administration has said that financial advisors should be held to the same best interest standard 

that patients expect from doctors. The industry is completely fine being subject to a best interest 

standard like doctors. But to picture the unworkability of the prohibited transaction rules, just 

imagine if those rules applied to doctors: 

• A patient goes to a doctor with ankle pain. The doctor recommends an X-ray – which is 

done at the doctor’s office -- to determine if the ankle is broken. Under the DOL rules, 

the doctor would have committed a prohibited transaction because the advice to get an Xray leads to the doctor earning more money attributable to providing X-ray services for a 

fee. Under the prohibited transaction rules, the doctor would be required to send the 

patient to another doctor for an X-ray. 

• A patient goes to a doctor with back pain. The doctor prescribes rest and antiinflammatories, and recommends the patient come back in three weeks for a follow-up 

visit. The doctor would have committed a prohibited transaction by recommending a 

follow-up visit, which will earn the doctor more money. The doctor would be required 

to send the patient to another doctor for the follow-up visit. 

HIDDEN FEES ARE ALREADY BANNED 
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 In 2012, the DOL issued rules making hidden fees illegal with respect to retirement 

plans; these rules were the product of work by both Democratic and Republican Administrations. 

Thus, we are not sure what the Administration is referring to when it makes consistent references 

to hidden fees in its discussions of the need for the 2015 DOL proposal. In addition, in the IRA 

market, Richard Ketchum, the CEO of FINRA (which oversees broker/dealers) noted in his May 

27 speech at the 2015 FINRA Annual Conference that FINRA’s robust disclosure rules “require 

that principal trades, commissions, fees and expenses must be disclosed to the customer and . . . 

require that revenue sharing arrangements with mutual funds generally must be disclosed if they 

form a basis for the selection of funds that the broker-dealer recommends.” Ketchum also stated 

in the same speech that “depictions of the present environment as providing ‘caveat emptor’ 

freedom to broker-dealers to place investors in any investment that benefits the firm financially 

with no disclosure of their financial incentives or the risks of the product, are simply not true.” 

In light of the above, it would be helpful to understand better what hidden fees are being 

referenced by the Administration. 

OVERALL STRUCTURE OF THE DOL PROPOSAL 

 The DOL proposal has three basic components: 

• Expansion of the basic definition of the term “fiduciary.” Under current law, a person 

is treated as a fiduciary if, for a fee, the person provides individualized advice regarding 

investments on a regular basis pursuant to a mutual understanding that the advice will be 

a primary basis for decision-making. In other words, there must be a mutual expectation 

of reliance on the advice. 

o Under the DOL proposal, a person is treated as a fiduciary if, for a fee, the person 

provides individualized or specifically directed recommendations regarding 

investments, rollovers, or distributions that could be considered in making 

decisions. Any recommendation that would be viewed as a “suggestion” that 

someone take an action – or not take an action – is sufficient. So any casual 

comment that could be considered would give rise to fiduciary status.

• Exceptions from the definition of a fiduciary. The proposal includes exceptions from 

fiduciary status, i.e., persons covered by the general definition above are not fiduciaries if 

they fall within certain exceptions, such as an exception for investment education 

(narrower than under current law or under the 2010 DOL proposal) and an exception for 

recommendations provided as a seller (not as an adviser) to large plans. 

• Exemptions from the prohibited transaction rules. For persons that are treated as 

fiduciaries, the proposal provides limited exemptions from the prohibited transaction 

rules. The main exemption is the BICE. For reasons discussed below, the conditions 

required to satisfy the BICE are so extensive and onerous as to make it unusable. 

Effectively there is no exemption. 

EFFECTS OF THE DOL PROPOSAL 

 The DOL proposal would have the following adverse effects. 
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In general. The framework set up by the DOL, in its current form, would, like the 

original 2010 proposal, cut off the option for low and middle-income individuals and small 

businesses to receive personalized investment assistance, even if that assistance is in the best 

interest of the recipient. This is the case because the BICE has so many unworkable 

requirements as to be unusable. 

Small businesses could not get help setting up a retirement plan. When a financial 

institution talks to a small business owner about possibly setting up a 401(k) plan, the small 

business owner naturally wants to know if the plan can be established simply and inexpensively, 

with the financial institution taking care of almost everything. Today, that works well. The 

financial institution can, for example, provide the plan document, agree to do all the plan 

administration, and agree to help with employee communications. 

One other key item is selecting the investment options for the plan to offer to employees. 

Typically, the financial institution has a large portfolio of possible investment options, such as, 

for example, 2,000, but the business likely may only want to offer, for example, 10 or 15 options 

to its employees. Accordingly, a critical step in setting up a plan is choosing the 10 or 15 out of 

the 2,000 that the plan will offer. Today, the financial institution can provide “education” to the 

business owner about which 10 to 15 to choose, without the financial institution becoming a 

fiduciary. For example, the financial institution could provide examples of investment options 

offered to employees by similar businesses, including sets of options that are conservative, 

moderate, and aggressive. The financial institution can explain the differences between the 

different sets of options and provide additional information that the owner needs to make an 

appropriate decision for the plan. (The financial institution will be clear that it cannot make the 

decision for the business owner and cannot act as a fiduciary, but can provide information and 

education.) 

Under the DOL proposal, the assistance described above regarding the selection of the 10 

or 15 investment options would be treated as investment advice and thus would make the 

financial institution a fiduciary. This would make the assistance a “prohibited transaction,” 

subject to severe penalties. Fiduciary advice is a prohibited transaction if the advice affects how 

much compensation the fiduciary earns. In almost all cases, the financial institution will make 

different amounts of money based on which investment options are chosen by the business 

owner. Some options may be proprietary funds and some may not be. Generally, the nonproprietary funds will pay the financial institution a fee, but the fee varies from fund to fund. 

Proprietary funds also vary in the management fee charged because certain investment strategies 

are more expensive to manage than others.1

 So in short, even if the financial institution 

recommends the best possible funds for the business owner to offer to his company’s employees, 

the advice is a prohibited transaction because the advice affects how much the financial 

institution earns. 

So if the financial institution cannot help the business owner select the 10 or 15 

investment options, the owner has two choices: 

 1

 These fees are not hidden. The fees earned both for proprietary and non-proprietary funds are fully 

disclosed before the business owner adopts the plan under DOL’s fee disclosure rules. 
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• Select the investment options himself, without any assistance, subject to fiduciary 

liability. If the owner is not an expert on investments, this would subject the owner to 

liability, since ERISA holds fiduciaries to an expert standard. A fiduciary must seek help 

and guidance if the fiduciary is not an expert. 

• Conduct a diligent search, subject to fiduciary liability, for a qualified independent third 

party to do the selection for an additional fee. 

Neither of the above choices is really viable in most cases, so there would be far fewer 

small business plans established. The adverse effects of the original proposal would continue to 

apply, since the 2015 proposal is, with respect to the small business issue, effectively identical to 

the original proposal. The adverse effects of the original proposal were powerfully demonstrated 

by the results of a 2014 survey of small businesses by Greenwald & Associates (which our firm 

co-sponsored, along with the U.S. Hispanic Chamber of Commerce). For example, the survey 

found that: 

• Almost 30% of small businesses with a plan indicated that it is at least somewhat likely 

that they would drop their plan if this regulation were to go into effect. 

• Close to 50% of small businesses without a plan stated that the regulation would reduce 

the likelihood of them offering a plan, with 36% saying it would reduce the likelihood 

greatly. 

Small accounts will lose all access to an investment professional. There are two main 

ways that an IRA owner can get access to an investment professional: the brokerage model and 

the advisory model. Under the brokerage model, the amount of the payments to the adviser – 

such as commissions and payments from a mutual fund (e.g., marketing, recordkeeping, and 

shareholder servicing fees) – varies based on the investment made. Thus, under the proposal, any 

advice provided under the brokerage model to IRAs or retirement plans would violate the 

prohibited transaction rules unless an exemption applies. Because the BICE is unusable, the 

current brokerage model is effectively illegal with respect to IRAs and retirement plans under the 

DOL proposal. The only brokerage model that would be viable for IRAs and retirement plans 

would be a pure order-taker model with no advice provided. 

As a practical matter, this would mean that the only source of personal investment 

assistance for an IRA owner would be through an investment advisory account. However, 

investment advisory services generally are not available to small accounts. Under an advisory 

account, typically, the registered investment adviser takes full responsibility for managing the 

investments on an around the clock basis in exchange for a fee based on the amount of assets, 

such as a 1% of assets fee. Small accounts generally are not eligible for advisory services in part 

because the economics do not work. An adviser typically cannot accept around the clock liability 

for a $4,000 IRA for an annual fee of $40. 

Moreover, under the securities laws, an advisory service may not be suitable for a small 

account (or even a large account) if the IRA owner simply buys and holds securities. In fact, the 

SEC has made “reverse churning” and investment adviser account suitability – i.e., the 
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placement of buy and hold investors in an advisory account -- a priority for 2015 and has 

recently announced exams on this issue. Thus, the proposal is pushing investors toward 

advisory services while the SEC is putting up red flags with respect to advisory services in 

some contexts; this underscores the lack of effective coordination between the two agencies.

So under the proposal small IRA accounts generally would be cut off from personal 

investment assistance. This could have devastating effects, since it is advisers who encourage 

individuals to save, explain how IRAs work, explain how to open and maintain an IRA, explain 

investment diversification, and encourage individuals to stay in the market during down times 

and avoid the urge to sell low. In 2011, Oliver Wyman performed an extensive study of 40% of 

the IRA market, measuring the effect of the 2010 DOL proposal, which would have had the 

exact same effect as the 2015 DOL proposal. Oliver Wyman found that: 

• Over 7 million IRAs could lose access to an investment professional (just within the 

study sample, which, as noted, was approximately 40% of the IRA market) because the 

brokerage model, which serves 98% of IRAs under $25,000, would become unworkable 

with respect to IRAs.

• As many as 360,000 fewer IRAs could be opened every year. 

Lessons from the United Kingdom. The defenders of the DOL proposal maintain that 

the industry would never walk away from servicing small accounts because there is too much 

money to be made. The view of such defenders is that somehow the industry will figure this out. 

That is a frightening basis on which to risk the retirement security of low and middle-income 

individuals: “if the brokerage model becomes illegal, industry will figure out some other way to 

service small accounts – we don’t know what it is, but they will figure it out.” 

That is effectively what the regulators in the U.K. said before new rules took effect as of 

January 1, 2013 that had an effect almost identical to the effect the DOL’s prohibited transaction 

rules would have under the proposal – making payments from mutual funds to advisers illegal. 

Instead, advisers ceased servicing small accounts in droves, as shown below by a description of 

the January 1, 2013 results of the U.K.’s new rules. Some of these practices were implemented 

before the U.K. rule went into effect but clearly in anticipation of the rule, as recognized by a 

study commissioned by the U.K. regulator itself. 

• U.K.’s “big four” banks (an important source of investment advice in the U.K.) 

o HSBC: provided investment advice only for customers with at least $80,0002

 in 

total assets or $160,000 of annual income. 

o Lloyds: provided face-to-face investment advice only for customers with at least 

$160,000 in assets. 

o Royal Bank of Scotland: charged $800 to set up a financial plan, and made 

changes to gear investment advice services to high net-worth clients. 

o Barclays: provides investment advice only for customers with at least $800,000 

in assets. 

 2

 The dollar references are approximate, based on 2013 pound to dollar conversion rates. 
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These banks previously had entire business arms or strategies providing 

investment advice to investors with less assets, but just prior to the U.K.’s 

implementation of its new rule, HSBC, Lloyds, and Barclays completely pulled out 

of offering investment advice to such investors, and, as noted, Royal Bank of 

Scotland overhauled its offerings to target high net-worth clients. For example, 

Barclays closed Barclays Financial Planning, leaving only Barclays Wealth to 

offer financial advice to individuals with at least $800,000 in assets. 

o Examples of other actions taken.

 Aviva: ceased offering face-to-face investment advice. 

 AXA: ceased offering face-to-face investment advice. 

 Adviser firm AWD Chase de Vere: stopped accepting clients with 

$80,000 or less in assets. 

 Adviser firm Towry: stopped accepting clients with less than $160,000 

in assets. 

• Millions of small investors will be told in the fall of 2016 that they will no longer be 

permitted to talk to their adviser. The Oliver Wyman study lines up exactly with the 

experience in the United Kingdom and leaves us with a clear picture of the future under 

the DOL proposal. Based on DOL’s time line, the applicability date for the new rules will 

very likely be some time around January 1, 2017 or slightly earlier. That means that in 

the fall of 2016 financial institutions will need to deliver the message to millions of small 

investors that they will no longer be permitted to consult with their adviser for assistance. 

Meaningful assistance regarding rollover and distribution options would be 

prohibited. Under the DOL proposal, financial institutions would be prohibited from providing 

any specific assistance to individuals seeking help with the rollover and distribution process. 

This is the case in large part because any financial institution providing IRA services would have 

a conflict of interest with respect to advice regarding the rollover decision, thus creating a 

prohibited transaction. Most read the BICE in the proposal as not covering this type of 

assistance, thus rendering the assistance categorically prohibited. Others read the BICE as 

technically applicable to this assistance, but effectively unavailable because of the exemption’s 

unworkable conditions. Either interpretation denies assistance to many in need of help in 

navigating the retirement savings options that exist after termination of employment. Among 

many unfortunate consequences, this would cause a drastic curtailment of call center, brokerage, 

and other assistance to those terminating employment, leading to greatly increased leakage of 

assets from the retirement system. 

In fact, this prohibition of rollover assistance would apply without regard to whether the 

adviser is offering IRA services under a brokerage model or an advisory model. There has been a 

perception that advisers offering advisory services for a flat fee can advise participants to roll 

over to their IRA. This is incorrect. If an adviser promotes his or her own advisory services, that 

is fiduciary advice under the proposal. And it is a prohibited transaction because the adviser 

makes more money if the participant uses the adviser’s services than someone else’s. The flat fee 

element only applies to the advice provided to existing customers regarding investments; it does 

not apply to the choice of which adviser to use. 
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A study conducted by Quantria Strategies LLC found that the prohibitions described 

above could increase annual cash-outs of retirement savings for employees terminating 

employment by $20 billion to $32 billion. These withdrawals could reduce the accumulated 

retirement savings of affected employees by 20% to 40%. 

It is important to note two additional points. First, there is already a robust regulatory 

scheme applicable to rollovers, applied by both the SEC and FINRA. In late 2013, for example, 

FINRA issued Notice 13-45, which addressed (1) IRA rollovers and (2) marketing IRAs and 

associated services. Here are some key points from the Notice: 

• Reviewing firm practices in this area will be an “examination priority” for FINRA in 

2014. 

• The Notice discusses a number of compliance issues, including: 

o Firms must supervise IRA-related services to ensure that conflicts of interest do 

not adversely affect the services rendered. 

o The Notice is aimed at mitigating such conflicts by requiring representatives of 

member firms to provide information in a fair and balanced manner. For 

example, the Notice describes the four distribution options available to 

participants (e.g., maintain assets in the plan, roll over to an IRA, roll over to a 

successor plan if possible, or receive a cash distribution) and lists seven factors 

that may be of importance to a rollover decision. Conformity with these practices 

is included in the scope of FINRA regulatory examinations. 

o Broker/dealers must have a reasonable basis to believe that recommendations are 

suitable. 

o Broker/dealers must have written supervisory procedures designed to ensure 

compliance with applicable securities laws and FINRA rules. 

o Firms must ensure that registered representatives who advise on rollovers are 

adequately trained in that regard. 

o Communications must be fair and balanced. 

Again, for 2015, as noted in FINRA’s 2015 Regulatory and Examination Priorities Letter, 

the rollover issue will be an area of focus for FINRA: 

Part of FINRA's focus will be IRAs, one of the principal vehicles Americans use to save 

for their retirement. According to the Investment Company Institute, over one-quarter of 

Americans' retirement savings are held in IRAs and this percentage is growing. Rollovers 

from employer plans—such as 401(k) plans—play an important role in funding these 

IRAs.8 FINRA has stated that, whether in retail communications or an oral marketing 

campaign, it would be false and misleading to imply that a retiree's only choice, or only 

sound choice, is to roll over plan assets to an IRA sponsored by the broker-dealer.9 Any 

communications that discuss IRA fees must be fair and balanced,10 and the broker-dealer 

may not claim that its IRAs are "free" or carry "no fee" when the investor will incur costs 

related to the account, account investments or both. 

 Moreover, in the same 2015 letter, FINRA interpreted its rules to require that 

customers’ interest be put first. 
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Second, because the industry is committed to putting customers’ interests first, if advice 

is provided with respect to distributions or rollovers, we completely support the view that the 

advice should be in the recipient’s best interest. 

Elimination of the ability of financial professionals to continue to provide 

meaningful investment education. The DOL proposal would significantly restrict the type of 

investment education that can be provided without triggering fiduciary status and the prohibited 

transaction rules. Under current law, education includes (1) guidance on the extent to which an 

individual should invest in different asset classes (such as large and small cap equity funds, and 

long and short-term bond funds) based on her age and other factors, and (2) examples of 

investments that fit within such asset classes. This definition of education has worked very well 

for nearly 20 years, ensuring that a basic level of needed assistance can be available to retirement 

investors often with no cost. Moreover, this definition was explicitly preserved under DOL’s 

2010 proposal. Under the 2015 proposal, however, providing examples of investments that fit 

within asset classes would be fiduciary advice, not education. Thus, education would be limited 

to conversations about investment theory that will be of little use to most retirement savers. As a 

result, we will have less informed plan participants who will be less able to put investment 

education to practical use and will be much less able to make informed decisions about investing 

their IRA and 401(k) account assets. 

Prohibition on promoting your own products, services, or yourself. With respect to 

individuals and small businesses, the proposal provides no seller’s exception from the fiduciary 

definition, unlike the 2010 DOL proposal. So individualized marketing to individuals and small 

businesses would be treated as fiduciary advice. DOL’s rationale for this is the following: “Most 

retail investors and many small plan sponsors are not financial experts, are unaware of the 

magnitude and impact of conflicts of interest, and are unable effectively to assess the quality of 

the advice they receive.” This position is directly contrary to the structure of ERISA and to DOL 

enforcement positions, which place a fiduciary duty on small employers to make prudent 

fiduciary decisions. It is also contrary to the very premise of the disclosure-based regime enacted 

by Congress to regulate broker/dealers. And it is also cutting off marketing to individuals. The 

DOL’s view seems to be that individuals are unable to process marketing. But if individuals are 

unable to process marketing, how are they expected to make decisions? 

• Effect of absence of seller’s exception. Let’s translate the lack of a seller’s exception 

into real terms with a few examples. One could argue that these results were not 

intended, but after a four and a half year debate about the need for a seller’s exception, 

and the nature of any such exception, concern levels are high. 

o Prohibition on promoting a company’s own products or services. A company 

should be permitted to market its own products and services if it is made 

completely clear that the company is not providing advice but is selling a product 

or a service. Unfortunately, under the proposal, such promotion is prohibited with 

respect to individuals and small plans. Almost any discussion of a company’s 

own products or services with any individual or small business plan is a fiduciary 

discussion. The result is that companies would be prohibited by the prohibited 

transaction rules from, for example, promoting their own services, such as 
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rollover services or managed account services, even in connection with a request 

for proposal (“RFP”). (Responses to RFPs can also include examples of advice 

that might be given by the responder, an issue addressed later in this letter.) 

o Interviews to be hired. Assume that a broker is interviewing with a prospective 

customer and asking that she be hired to help with the customer’s IRA. She talks 

about her firm and her hard work and her dedication to her customers. She does 

not make any investment recommendations. Under the proposal, the broker is 

acting as a fiduciary. In fact, the individual would actually be committing a 

prohibited transaction by recommending that she be chosen. Obviously, that is an 

absurd result, but the fact that this result is inherent in the structure of the 

proposal says a lot about how overly broad the proposal is. 

o How do we know the difference between the results that are not intended 

and the results that may be intended? It is not enough to say that the above 

examples were not intended and cannot be the law. There is no hint in the 

proposal regarding what promotion by a financial services provider is permissible 

and what promotion is prohibited, leaving all of us to make guesses. 

Unfortunately, this lack of clarity is built into the structure of the proposal. 

ADDITIONAL ANALYSIS AND CONCERNS 

The BICE is unusable. Initially, there was hope that the BICE would address many of 

the concerns that had been raised with respect to the original 2010 proposal. For many reasons, 

however, as noted above, the BICE is unusable. For example: 

• The BICE does not even apply to advice provided to small businesses. With rare 

exceptions, small business 401(k) plans permit employees to direct the investment of 

their own account. The BICE does not apply to advice provided with respect to any such 

plan. 

• The BICE only applies if a contract is entered into before discussions begin. So if an 

individual wants to interview different advisers, the individual would have to enter into 

contracts with all those advisers before talking to them, which simply would not happen. 

• The BICE only applies to individual advisers who sign a contract. So if an individual 

adviser is on vacation or leaves her employer, a new contract would be needed. 

• The BICE does not apply at all to advice regarding services (such as 

recommendations of advisers and advisory solutions, including managed account or 

“wrap programs” which combine investment management with brokerage services) and 

even if it did apply, it would be unworkable with respect to such services. 

• The BICE requires disclosure of an unimaginable amount of detailed information. 

The adviser’s company must maintain a webpage with detailed information – updated at 

least quarterly -- about all direct and indirect compensation payable to the adviser, his 

company, and all company affiliates with respect to every single asset purchased, sold, 

or held by a retirement customer during the last 365 days (excluding only certain assets 

not commonly purchased). In addition, the webpage must include the same information 

about all assets that a retirement customer could possibly purchase (subject to the 
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same exclusion). It is hard to imagine that almost anyone would be able to process this 

staggering amount of data, which would be extremely costly to provide.

• Inconsistent with existing DOL rules. Every year, the adviser must provide 

information to the customer about that year’s transactions, including the total dollar 

amount of all indirect compensation received by the adviser and his company during the 

year attributable to the customer. Systems do not exist that could produce this data and 

would take years to build, at great cost. Also, this data is very different from existing 

DOL requirements about disclosing indirect compensation. 

• Litigation. The BICE effectively outsources enforcement of the prohibited transaction 

rules to the plaintiffs’ bar, including new class actions under state law. This is an 

enormous change with frightening possibilities for the potential liabilities that could 

occur by reason of providing retirement services. 

• Predictions of future investment performance required. Before a recommended 

purchase of an asset is made, the adviser must provide a chart to the customer with the 

“Total Cost” of the asset over 1, 5, and 10 year periods, as a dollar amount, which 

requires the adviser to make assumptions about future investment performance, a task 

that is fraught with uncertainty and the potential for controversy and litigation. In 

addition, the fact that this information is required before a transaction will dramatically 

slow the execution of trades, causing investors to systematically lose trading 

opportunities. And there are serious questions about the fundamental workability of 

making these projections based on the value of an asset that is changing as the projection 

is being prepared. 

• Concerns expressed by the main regulator of broker/dealers. Rick Ketchum, the 

CEO of FINRA (which regulates broker/dealers) has spoken out strongly against the 

BICE:

o Ketchum, May 27 speech: “I would like to . . . explain why . . . I believe moving 

to a properly designed best interests standard is a must going forward. Why, 

notwithstanding their good faith intentions, I believe the current Labor proposal 

is not the appropriate way to meet that goal . . .”

o Ketchum, May 27 speech: “I fear that the uncertainties stemming from 

contractual analysis and the shortage of useful guidance will lead many firms to 

close their IRA business entirely or substantially constrain the clients that they 

will serve. Put another way, the subjective language of the PTE [i.e., the BICE], 

coupled with a shortage of realistic guidance, may lead to few providers of these 

critical investor services.”

o In an apparent reference to the BICE, Ketchum is reported in a May 1 Politico 

article to have stated that the “safe harbor” is “very narrow” and doesn’t 

“describe any broker-dealer model that I’m aware of.”

There is no way to comply with the applicability date. The proposal provides eight 

months for businesses to analyze and understand lengthy final regulations and exemptions that 

we have not yet seen, make business decisions that affect the entire retirement business, 

restructure that business, revise compensation packages and structures for advisers, renegotiate 

fee arrangements, design and implement company policies and procedures, create and modify 

systems to produce an unprecedented amount of new data, draft contracts for IRA owners across 
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the country, and enter into contracts with tens of millions of existing customers. That would take 

a minimum of three years, if it is feasible at all; eight months is simply not realistic. 

• Feasibility of entering into contracts with all existing customers. A financial 

institution has no way to compel existing customers who are not actively using their 

services to enter into any contract. So not only is the applicability date unrealistic, the 

entire contract requirement is problematic as a transition matter. 

• Transition rule inadequate. The proposed transition rule protects assets purchased by 

the applicability date. But it does not protect (1) assets purchased after the applicability 

date pursuant to advice given before the applicability date, or (2) advice provided after 

the applicability date that was paid for before the applicability date, which it clearly 

should. 

Insurer promotion of its own health, life, and disability products. The proposal would 

convert the promotion by an insurer (or its agent) of the insurer’s own group health,3 life, and 

disability insurance products to small businesses (or their fiduciary, such as a broker) or 

employees (of employers of any size) into fiduciary acts even in circumstances where no plan 

assets are held in trust. In other words, an insurer would be treated as a fiduciary with respect to 

certain welfare benefit plans simply by reason of promoting its own products. 

If the promotion of these insurance products to small businesses (or their 

broker/fiduciary) or employees does become a fiduciary act, (1) the insurer would be vulnerable 

to a lawsuit simply for selling its own product without sufficiently considering the advantages of 

competitors’ products, and (2) it is unclear whether a prohibited transaction exemption would be 

available to permit the continued sale by an insurer of its own insurance products to small 

businesses. 

This result might seem counterintuitive, especially because DOL did not, in the preamble 

to the proposal, address this issue or provide any analysis of the economic effects of this aspect 

of the proposal. Nonetheless, DOL’s proposal applies to the sale of common employment-based 

insurance. There are several steps in the analysis of this issue. 

• The ERISA definition of “fiduciary” applies by its terms to both retirement plans 

and welfare benefit plans. Under ERISA, the term “fiduciary” applies by its terms to all 

types of plans, including both retirement plans and welfare plans. Moreover, the DOL 

proposal explicitly defines a “plan” covered by the fiduciary proposal as including both 

retirement plans and welfare benefit plans. See § 2510.3-21(f)(2)(i). 

• The DOL proposal applies to any “recommendation as to the advisability of 

acquiring . . . securities or other property.” Under the proposal and generally, it is 

clear that insurance contracts are “property.” For example, the DOL proposal uses the 

term “Asset” to refer to a specific subset of property both covered by the new definition 

 3

 All references herein to health insurance also include dental, vision, and other similar forms of health-related 

insurance coverage. 
Davis & Harman LLP 

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and eligible for an exemption. The term “Asset” is defined to include insurance contracts. 

See Section VIII(c) of the BICE. 

• The DOL proposal only applies to advice regarding the property of a plan or IRA; 

this requirement is satisfied too. Under longstanding DOL rules, if employees 

contribute toward the cost of benefits, such as health, life, or disability insurance, the 

employee contributions are considered property of a welfare benefit plan, even if the 

contributions are not held in trust. See 29 C.F.R. § 2510.3-102; DOL Advisory Opinion 

96-12A. Thus, in every case where employees contribute to the cost of a plan, advice 

regarding the insurance products is advice regarding the property of a plan. 

• The advice is rendered for a fee. Under the definition of fiduciary investment advice, 

the advice must be rendered for a fee or other compensation, direct or indirect. The DOL 

has long taken the position that this does not require a separate fee for the advice; on the 

contrary, it is sufficient under DOL’s interpretation for the adviser to receive 

compensation in connection with the recommended transaction, as clearly occurs when 

an insurer receives premiums for health, life, or disability insurance. 

• The DOL proposal specifically treats individualized marketing to small plans and 

individuals as fiduciary advice, not as marketing. Under the proposal, individualized 

marketing to large plans can be selling, not advising; individualized marketing to small 

plans and individuals cannot be selling, but rather is treated as investment advice. See § 

2510.3-21(b)(1). DOL explains this rule in the preamble to the proposal: “in this retail 

market [for small plans and individuals], a seller’s carve-out would run the risk of 

creating a loophole that would result in the rule failing to improve consumer protections. . 

. .” It is this dramatic change in position, from both current law and the 2010 DOL 

proposal, that causes this issue to arise. 

Let’s put the above points together in the context of a simple example. An insurer markets 

an array of health insurance products to employees of any size employer in a situation where 

employees are required to contribute toward the cost of the plan and can choose any of the 

products. The insurer, as expected, promotes the virtues of its products, as compared to its 

competitors’ products. Under the DOL proposal, this promotion is fiduciary advice because: 

• Individualized marketing to an employee is advice under the proposal. 

• The advice is for a fee, i.e., the premium that would be paid for the insurance. 

• The advice relates to the acquisition of property, i.e., the insurance contract. 

• The advice relates to the use of plan property, i.e., the employee contributions. 

• The advice is specifically directed to the employee for her consideration. 

• The advice relates to an ERISA plan, i.e., a health insurance plan. 

DOL informally indicates that the above result was not intended. But the above result 

very clearly flows from the actual language of the proposal and is further evidence that the full 

adverse ramifications of the proposal are not fully understood, even by the DOL. 

SECTION 2: RECOMMENDED CHANGES 

THERE IS A VERY STRAIGHTFORWARD SOLUTION 
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After 4 1⁄2 years and massive input, the DOL proposal got much worse between 2010 

and 2015. 

• The 2010 proposal preserved investment education; the 2015 proposal significantly 

restricts such education. 

• The 2010 proposal permitted financial institutions to do direct marketing of their products 

to individuals and small businesses; the 2015 proposal does not. 

• The 2010 proposal permitted financial institutions to provide meaningful distribution and 

rollover assistance; the 2015 proposal does not. 

• The 2010 proposal did not provide any prohibited transaction relief; the 2015 proposal 

provides only unusable relief. 

• There are very small improvements in the 2015 proposal, mostly addressing glaring 

glitches in the 2010 proposal, such as clarifying that ads on television are not fiduciary 

advice. 

Specific recommendations for changes. DOL should not move forward with this 

seriously flawed rule, and instead should defer to Congress’ decision to assign the SEC primary 

regulatory responsibility over broker/dealers and financial advisers. However, if a final rule is to 

be adopted, at a minimum, the following changes should be made. 

• Definition of fiduciary. Under our proposed approach, the DOL’s proposed definition of 

an investment advice fiduciary and the DOL’s proposed exceptions to the definition 

would be modified in the manner described below. The result of our proposed solution is 

that the definition of an investment advice fiduciary would be broadened so that financial 

professionals providing personalized advice about investments or distributions would be 

required by law to act in the best interest of their customers.4

o Investment or distribution advice would not give rise to fiduciary status unless 

there is a mutual understanding that the advice will be materially relied upon as a 

direction to engage in or refrain from taking a particular action. For example, 

casual discussions about investments or distributions that do not involve any 

expected material reliance would, of course, not give rise to fiduciary status. 

o As another example, advice provided in a response to an RFP is not expected to 

be relied on by either party; it is simply a way of illustrating the responder’s 

capability. Under the proposal, all such responders to RFPs would become 

fiduciaries with respect to non-customers, and generally would be committing a 

prohibited transaction. Under our approach, that inappropriate result would be 

addressed. 

• Exceptions. Under DOL’s proposal, there are specific exceptions from the definition of a 

fiduciary for the following: selling, swap transactions, employees of a plan sponsor 

providing advice to a fiduciary, providers of platforms of investment options, asset 

valuations, and investment education. Under our approach, these exceptions would be 

preserved in the regulations with the following modifications: 

 4

 As discussed below, we do not believe that DOL has any authority to treat distribution advice as fiduciary 

advice or to regulate IRAs. If those issues are resolved correctly, our recommended approach would be modified 

accordingly. 
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o Permitting providers to sell their own products and services as nonfiduciaries. Financial professionals who make it clear that they are selling 

products or services and not advising would not be considered fiduciaries under 

our approach. This commonsense exception was in the original 2010 DOL 

proposal with respect to products, but was explicitly limited to sales to large plan 

sponsors in the 2015 proposal. All categories of employees, agents, and registered 

representatives of selling entities could be sellers under our proposed rule, as well 

as business entities. 

 Also, the seller’s exception would not preclude the provision of incidental 

advice, provided that the appropriate disclosures are made regarding the 

fact that the entity or individual is acting as a seller. Selling activity can 

almost inevitably include some amount of incidental advice to use the 

product or service being sold; as long as it is made clear that this is part of 

the selling process, this should be treated as non-fiduciary selling. 

 This expansion of the seller’s exception is needed for many reasons. For 

example, it is critical that investment managers and advisers be permitted 

to promote services and products, such as managed account strategies and 

wrap programs. If this is effectively prohibited, very valuable services will 

become underutilized, harming the very people that DOL is trying to help. 

o Preserving education. DOL guidance in Interpretive Bulletin 96-1 established an 

important line between “investment education” provided to plan participants, 

which does not trigger fiduciary status, and “investment advice,” which gives rise 

to fiduciary duties and triggers the prohibited transaction rules. This extremely 

helpful guidance, which was preserved in the 2010 DOL proposal but not in the 

2015 proposal, has led to the wide availability of helpful information to plan 

participants. The original DOL proposal and our recommended approach, unlike 

the 2015 proposal, would continue to allow education to include the provision of 

examples of investment alternatives within asset classes. As under the proposal, 

our approach would also codify the existing education/advice distinction with 

respect to additional areas, i.e., education provided to plan sponsors and IRA 

owners, and education regarding distributions and rollovers (including 

distribution or rollover education that does not pertain to particular securities or 

other property or to the management of such securities or other property). 

 This type of education is extremely important to the millions of selfdirected investors who seek non-fiduciary assistance. The ability to 

identify specific investment alternatives is critical; without this education 

component, discussions and materials with respect to asset classes are very 

unlikely to be helpful to individuals. 

 For example, this type of education is often provided through on-line tools 

and information. For many self-directed investors, who specifically do not 

want to pay a fee for investment advisory services, these tools are critical, 

and the provision of examples of specific investments through these tools 

makes the education meaningful for the investor. Without such tools and 

information, these self-directed investors will not have the information 

necessary to make sound investing decisions and will be forced into either 

making uninformed decisions or paying for services they do not want. 
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Moreover, FINRA has specifically addressed these tools in NASD Notice 

01-23, which provides guidance on when such tools can be viewed as a 

“recommendation” subject to applicable FINRA rules. 

 Specific regulatory language to codify the current-law rules regarding 

education of plan sponsors is included in Appendix A. 

o Platform exception. This exception, which applies only to plans under the DOL 

proposal, permits service providers to offer plans menus of available investment 

options without being treated as endorsing all such options as a fiduciary. The 

exception would be extended under our approach to apply to IRAs and all types of 

retirement plans (or portions thereof, such as self-directed brokerage accounts), 

including (1) defined benefit plans, and (2) defined contribution plans without 

regard to whether they permit the participants to direct the investment of plan 

assets. This exception would also apply to recommendations of platforms by a 

third party. 

o Asset valuations. Generally, the DOL proposal would make asset valuations a 

fiduciary act. However, the proposal creates exceptions for ESOP valuations and 

certain other valuations (such as for reporting and disclosure). But the proposal 

continues to subject to fiduciary requirements countless routine valuation 

functions, such as valuing common assets (e.g., annuity contracts) for purposes of 

making distributions to participants. There is no apparent purpose for this 

requirement, nor any public policy issue that has been identified. Imposing 

fiduciary obligations on routine valuations would cause costs to rise dramatically 

and would pose unprecedented questions for appraisers about how to comply with 

their fiduciary duty. Asset valuations should simply be objective and accurate. 

Thus, our recommended approach would continue the current-law treatment of 

asset valuations as non-fiduciary acts. 

• Best interest standard applies. Under ERISA, financial professionals treated as 

fiduciaries are required to act in the best interest of their retirement customers. Under our 

recommended approach, as a condition of the prohibited transaction exemption described 

below, investment advice provided to IRAs (and other non-ERISA arrangements covered 

by the DOL proposal) must meet a best interest standard. 

o Our recommended approach would also include certain clarifications, including 

(1) clarifying that the sale of proprietary products or a limited range of products 

can be consistent with a best interest standard and is not an indication of a 

violation of the adviser’s fiduciary duty, and (2) clarifying that the structure or 

nature of the compensation of the adviser (or the financial institution) – such as 

compensation variations based on the investment made -- is not an indication of a 

breach of fiduciary duty. These clarifications are consistent with the proposal. 

o In addition, any transaction or arrangement that complies with the conditions of a 

prohibited transaction exemption would not be an indication of a breach of 

fiduciary duty. 

• Ongoing fiduciary duty or duty limited to a specific transaction. Under our approach, 

any adviser may, through clear disclosure, define the scope of his or her fiduciary duty, 

including whether the adviser has an ongoing duty to advise or whether the fiduciary 

advice was rendered with respect to a discrete time and transaction. 
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• Preservation of investor access and choice. Under our approach, consumer access to all 

forms of investment assistance, services, and products (subject to securities and insurance 

laws) would be preserved. This would be achieved by providing an exemption from the 

prohibited transaction rules with respect to all advice to all advice recipients regarding 

both assets and services, unlike the BICE, which is artificially limited to assets and to 

certain advice recipients. The application of our proposed exemption would be 

conditioned on (1) the advice being in the customer’s best interest, (2) clear disclosure of 

material conflicts of interest, so that customers can understand the financial incentives of 

the adviser and the adviser’s employer, and (3) the absence of any misleading statements. 

o Such disclosures would be based on the very effective and workable structure 

established by DOL under ERISA section 408(b)(2). Embedded in the 408(b)(2) 

disclosure regime is a recognition that disclosures regarding services and assets 

are different, so that this would work very well for an exemption applicable to 

both. 

• Effective date. Under our approach, the proposal would become applicable three years 

after finalization. An entire industry cannot be restructured in eight months. In addition, 

we would provide appropriate transition rules regarding the proposal, including (1) a 

provision under which the proposal would not apply to any advice provided prior to the 

effective date, nor to any direct or indirect fees or other compensation received in 

connection with such advice, (2) a provision under which the proposal would not apply to 

any advice provided after the applicability date to the extent that such advice gives rise 

only to any compensation that would have been paid without regard to the advice, and (3) 

a provision under which the proposal would not apply to advice that was pre-paid for 

prior to the applicability date. 

SECTION 3: THE PROPOSAL GOES FAR BEYOND THE STATUTE AND IS THUS 

BROADLY INVALID 

 The prior discussions are premised on the notion that DOL has the statutory authority to 

issue the proposal as a regulation. In fact, that is not the case. 

Here is the statutory language in ERISA section 3(21) that DOL is interpreting in the 

proposal: “a person is a fiduciary with respect to a plan to the extent . . . (ii) he 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 proposal goes 

far beyond this statutory language and is thus broadly invalid. The following are some specific 

examples. 

THERE IS NO BASIS IN THE STATUTE FOR TREATING SALES ACTIVITY AS 

FIDUCIARY ADVICE 

 Under the proposal, individualized promotion of products or services to an individual or 

small business is fiduciary advice, even if the seller makes it clear that he or she is selling, not 

advising, and that is understood by the recipient of the promotion. In other words, (1) the seller 

makes it clear that he or she is selling and not providing investment advice, and (2) the recipient 

fully understands that the seller is selling, not providing investment advice. But the proposal still 
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treats the seller as a fiduciary. There is no way to reconcile this treatment with a statute that 

requires the rendering of “investment advice” to be a fiduciary. 

For example, under the proposal, a salesperson who makes the following sales pitch to an 

IRA owner is treated as a fiduciary: “I work for the XYZ mutual fund family and I just wanted to 

help you become more familiar with our offerings. We offer a wide variety of funds and services 

that we think you would be very happy with. For example, our target date funds have been the 

highest rated target date funds for the last three years, and provide an excellent way to pursue a 

secure retirement. We have been in business for X years and work very hard to earn our 

customers’ trust every day. I am not authorized to give you advice but I am happy to explain our 

products and services to you.” Under the statute, that is clearly not investment advice, but it is 

under the proposal. DOL has no power to go so far beyond the statute. 

Moreover, assume that an IRA owner is considering hiring an investment manager and 

asks to interview five possible managers. The interviews would be individualized promotion of 

investment services and thus trigger fiduciary status under the proposal. This clearly 

inappropriate result is required by the proposal but cannot be reconciled with the statute, which 

requires the rendering of investment advice. 

THERE IS NO BASIS IN THE STATUTE TO TREAT A PERSON AS A FIDUCIARY 

BASED ON CASUAL DISCUSSIONS THAT ARE NOT VIEWED AS ADVICE BY ANY 

PARTY 

 Under the proposal, the threshold for fiduciary treatment is extraordinarily low: a 

communication regarding plan or IRA investments or distributions is treated as fiduciary advice 

if the communication is individualized to or specifically directed to a person and: 

(1) It “would reasonably be viewed as a suggestion,” 

(2) It is provided “for consideration.” 

It is hard to reconcile this aspect of the proposal with the statute, which requires the 

furnishing of “investment advice for a fee” to trigger fiduciary status. Under the proposal, a mild 

statement that is reasonably viewed as a suggestion triggers fiduciary status, even if neither party 

views the statement as investment advice. Such a rule cannot be reconciled with a statute that 

requires the rendering of investment advice for a fee to trigger fiduciary status. 

For example, assume that a participant researches how best to invest his plan assets, 

makes decisions, and casually asks a colleague in the human resources department if his 

investments look like what others are doing. The human resources employee responds by saying 

that he or she has no investment expertise at all, but the choices do seem similar to what others 

are making. That mild statement that the choices are in the mainstream is provided for 

consideration and thus triggers fiduciary status under DOL’s proposal. This cannot be reconciled 

with a statute that requires “investment advice for a fee” to trigger fiduciary status. Nor can this 

be reconciled with an ERISA statutory structure under which fiduciary duties are the highest 

possible duties under the law: (1) the duty to act as a prudent expert in the sole interest of the 
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advice recipient, and (2) the duty to avoid even the faintest hint of a conflict of interest (barring 

an exemption). 

Under another example, assume that an IRA owner wants to invest some of her IRA 

assets in a large cap fund, and asks a financial professional who works for the IRA custodian for 

examples of large cap funds. The financial professional provides 25 examples. That is fiduciary 

advice under the proposal. For the same reasons noted above, there is no way to get to this result 

under the statute. 

DOL HAS NO AUHORITY UNDER THE STATUTE TO TREAT DISTRIBUTION 

ADVICE AS INVESTMENT ADVICE 

The DOL has no authority under the statute to treat advice regarding whether to take a 

distribution as “investment advice”. Assume, for example, that an adviser advises a participant to 

take a distribution of her plan account and roll into an IRA but expresses no opinion on whether 

the participant should roll over her plan holdings into the IRA or should liquidate the plan 

holdings and invest in different assets in the IRA. How could this possibly be treated as 

investment advice regarding plan assets? 

In fact, the DOL has squarely recognized this limitation on the scope of investment 

advice in DOL Advisory Opinion 2005-23A, which states: 

It is the view of the Department that merely advising a plan participant to take an 

otherwise permissible plan distribution, even when that advice is combined with a 

recommendation as to how the distribution should be invested, does not constitute 

“investment advice” within the meaning of the regulation (29 CFR § 2510-3.21(c)).(3)

The investment advice regulation defines when a person is a fiduciary by virtue of 

providing investment advice with respect to the assets of an employee benefit plan. The 

Department does not view a recommendation to take a distribution as advice or a 

recommendation concerning a particular investment (i.e., purchasing or selling securities 

or other property) as contemplated by regulation § 2510.3-21(c)(1)(i). Any investment 

recommendation regarding the proceeds of a distribution would be advice with respect to 

funds that are no longer assets of the plan.(4)

In our view, Advisory Opinion 2005-23A remains the correct interpretation of the statute. 

Nothing has changed, except the public policy view of the DOL, which apparently now believes 

that participants should generally not roll over assets to an IRA. 

The preamble to the proposal makes it very clear that DOL believes that “[p]articipants 

will often, but not always, be better off leaving their balance in the plan than rolling it into an 

IRA”. DRIA at 224. Also, on page 145 of the DRIA, DOL states that “[g]iven the structural 

advantages of retirement plans – large investible asset balances may provide access to better 

asset management and lower cost – plan participants often can expect lower net returns after 

rolling their account into an IRA.” 

Whether the law should favor plans or IRAs is clearly a policy point that is outside the 

interpretive authority of DOL. Nevertheless, DOL has reached its own policy conclusion and 
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ignored both the statute and its own interpretation of the law to issue a proposal that it has no 

authority to issue with respect to distribution advice. 

DOL HAS NO POWER TO REGULATE IRAs BUT HAS DONE EXACLTY THAT 

UNDER THE “BEST INTEREST CONTRACT EXEMPTION”

Assume that DOL were to issue a regulation that directly imposes a series of regulatory 

requirements on IRAs, such as (1) disclosure rules, (2) a requirement that contracts be entered 

into with IRA owners, and (3) restrictions on the types of compensation that can be paid to IRA 

advisers. Legal analysts would agree that DOL has no such authority over IRAs and that the 

regulatory requirements would be invalid. 

Yet that is exactly what DOL has done here indirectly. The first step is to issue a proposal 

under which all broker/dealers become fiduciaries as to IRAs and because of the structure of 

their compensation need a prohibited transaction exemption in order to provide services to IRAs. 

The next step is to impose a comprehensive regulatory regime on IRA advice as a condition of 

satisfying the exemption. Thus, any broker/dealer wishing to continue providing IRA services 

must comply with DOL’s comprehensive regulatory regime. DOL is clearly regulating IRAs in a 

way that it has no authority to do. 

SECTION 4: DOL’S ECONOMIC ANALYSIS, CONTRASTED WITH THE ACTUAL 

EFFECTS OF THE PROPOSAL 

One theme is consistent throughout the DRIA, which is that it reads like a brief prepared 

by an advocate who is retained to defend the DOL proposal. Accordingly, in many cases, like 

those discussed below, the DRIA does not include points that undermine the proposal, and 

sometimes makes statements that appear to be inconsistent with the facts. In addition, there are 

many instances, such as the education restriction, where the DRIA does not explore the possible 

adverse effects of the proposal or possible more flexible ways to achieve DOL’s stated 

objectives. 

DOL’s proposal would result in annual lost retirement savings of $68-80 

billion. Attached is a study prepared by Quantria Strategies, LLC, staffed by a former 

Deputy Chief of Staff and a former economist for Congress’ Joint Committee on 

Taxation. The study is entitled “Unintended Consequences: Potential of the Dol 

Regulations to Reduce Financial Advice and Retirement Readiness.” The study 

concludes that: 

Conservative estimates of the combined reduction in retirement assets 

attributable to the unintended consequences of the re-proposed regulations 

suggest that the regulations could result in losses of retirement savings of $68-

$80 billion each year. In addition, the re-proposed regulations will jeopardize 

retirement readiness for 11.9 million IRA and retirement participants. This 11.9 

million figure is made up of individuals who either are unlikely to be retirement 

ready (6.1 million) or are at risk of failing to be retirement ready (an additional 

5.8 million). 
Davis & Harman LLP 

 July 21, 2015 

 

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DOL’s analysis of the cost of “conflicted advice” is based on unfounded assumptions 

and erroneous analysis. Quantria Strategies prepared a second study (attached), which reviews 

the DOL economic analysis, entitled “Critical Review of DOL Regulatory Impact Analysis”. The 

study concludes that: 

1. DOL fails to incorporate any estimates of the positive benefits of financial advice, even 

though the DOL admits that there may be “observable or intangible” benefits to using a 

broker-dealer and despite the fact that DOL previously estimated that retirement plan 

participants made investment mistakes of approximately $114 billion in 2010 due in large 

part to the lack of financial advice. 

2. DOL claims that front-end load mutual funds “underperform” by 100-200 basis points 

per year, but the academic research DOL cites and additional data analysis show that 

these claims cannot be supported. 

3. DOL regulatory impact analysis cites numerous supporting studies that, upon 

closer scrutiny, often qualify their findings with caveats concerning the findings 

and suggestions for further research. 

4. DOL’s compliance cost estimates likely significantly underestimate the actual costs and 

fail to account for the fact that these costs will be borne by consumers. 

5. DOL assumes that financial advisers will accept reduced fees without any change in 

either the quantity or quality of their investment advice, but basic economic analysis 

suggests that this assumption cannot be supported. 

A 2011 DOL analysis states very clearly that the prohibited transaction rules are “at 

least in part” responsible for over $100 billion of losses per year; this occurs because those 

rules can preclude advice such as brokerage advice that runs afoul of those rules. Yet the 

2015 DOL proposal massively broadens the application of those prohibited transaction 

rules without mentioning the 2011 analysis. In 2011, DOL finalized another regulation on 

investment advice. See Regulation § 2550.408g-1. That regulation provided prohibited 

transaction exemptions for two types of arrangements: (1) arrangements under which the adviser 

and the adviser’s employer receive level fees (but affiliates may receive differential pay based on 

the recommendation), and (2) arrangements providing advice through the use of a computer 

model. DOL’s preamble to this final regulation contained a very interesting discussion, making 

the following points. 

• Even after the adoption of the 2011 rule, DOL estimates that annual retirement losses 

attributable to investment mistakes would be approximately $101 billion per year. See 76 

Fed. Reg. 206 (October 25, 2011) at 66153.

• “Such mistakes and consequent losses historically can be attributed at least in part to 

provisions in the Employee Retirement Income Security Act of 1974 that effectively 

preclude a variety of arrangements whereby financial professionals might otherwise 

provide retirement plan participants with expert investment advice”, referring 

“[s]pecifically [to the] ‘prohibited transaction’ provisions of section 406 of ERISA and 

section 4975 of the Internal Revenue Code”. Id. at 66151. 

The 2011 DOL analysis states very clearly that the prohibited transaction rules are “at 

least in part” responsible for over $100 billion of losses per year. Yet the 2015 DOL proposal 
Davis & Harman LLP 

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25 

massively broadens the application of those prohibited transaction rules without ever even 

mentioning the 2011 analysis. 

 DOL never analyzed whether an eight-month transition period is sufficient.

Shockingly, DOL makes it clear that it never analyzed the economic effects of the applicability 

date, which is eight months after publication of the final rule. In other words, DOL never 

analyzed whether the entire financial advice industry can be restructured to be conformed to the 

new rules in eight months. 

Here is DOL’s entire discussion of this issue in the DRIA (and there is no economic 

analysis of this issue in any other part of DOL’s proposal): 

 

• “The Department understands that affected advisers and others in the financial industry 

will need time to modify business practices. A longer compliance period would defer and 

may reduce compliance costs, but would forgo large, near term gains to investors, which 

in turn could have long-term negative effects on investors’ retirement savings trajectories. 

The Department invites comments as to whether the new proposal’s compliance dates are 

workable, or whether dates should be adjusted with respect to some or all of the 

proposal’s provisions and entities and transactions it affects.” In other words, the eight 

month transition period is not supported by any prior analysis. 

• On the contrary, it appears from DOL’s public statements that the applicability date 

was chosen for political reasons, not based on any economic analysis. For example, a 

BNA article quoted Secretary Perez as saying on June 23: “Completing this rule is one of 

the single most important things we can accomplish in the remaining 577 days. I've got a 

note on my desk: 577 days until the weekend, Jan. 20, 2017.” 

DOL’s analysis of the IT costs of complying with the BICE demonstrates a lack of 

work on the issue. Here is what DOL stated in the preamble to the BICE: 

• “The Department estimates that updating computer systems to create the required 

disclosures, insert the contract provisions into existing contracts, maintain the required 

records, and publish information on the Web site will require 100 hours of IT staff time 

for financial institutions during the first year that the financial institution uses the PTE.54 

This IT work results in approximately 280,000 hours of burden during the first year and 

approximately 22,000 hours of burden during subsequent years at an equivalent cost of 

$22.3 million and $1.8 million respectively.” 80 Fed. Reg. 75 (April 20, 2015) at 21982. 

o The only other analysis provided by the DOL was an overall cost estimate of the 

proposal based on private sector submissions made to the SEC with respect to the 

cost of a possible SEC uniform fiduciary standard, which did not contain anything 

remotely similar to the BICE. Instead of far increasing those estimates to take 

into account the enormous new burdens of the BICE, DOL concluded that those 

private sector submissions were too high, and dramatically reduced them without 

any apparent consideration of the cost of the many new burdens presented by the 

BICE. 

• I asked major financial institutions about the number of hours and amount of money that 

they spent on implementing a far less burdensome set of DOL disclosure requirements: 
Davis & Harman LLP 

 July 21, 2015 

 

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the participant disclosure rules under Regulation § 2550.404a-5 and the service provider 

disclosure rules under § 2550.408b-2. Here are the answers I received: 

o One company spent over 100,000 IT hours implementing the two existing 

requirements at a cost of approximately $8.4 million. 

o Another company spent over 90,000 hours at a cost of over $6.5 million. 

• Based on the information received, it appears that DOL’s 100 hour estimate was likely 

off by several hundred thousand hours, which could translate into tens of millions of 

dollars per company. 

• There are many reasons that the BICE exemption requirements are far more burdensome 

than the disclosure requirements noted above. I will mention one of them. The BICE 

requires the disclosure of indirect costs in dollar terms to participants. No system exists 

today that could do that. Anecdotal evidence indicates that it would take years to create 

such a system, if it could be done at all, and at great cost. It is indisputable that such a 

disclosure is far more burdensome than anything required under the two regulations (§§ 

404a-5 and 408b-2) cited above. 

DOL attributed no cost to any disruption caused by the need to enter into tens of 

millions of contracts with IRA owners in an eight-month period. On page 176 of the DRIA, 

the DOL noted that in its evaluation of the cost of BICE, that DOL’s cost estimates “do not 

include time or disruption costs for the situation where phone interactions between advisers and 

investors are interrupted (or switched entirely to e-mail, print or in-person) in order to first sign 

the contract.” The rationale was that the eight-month transition period will result in all of this 

work being done ahead of time, except in “rare” instances. 

DOL’s analysis of this point in one brief sentence overlooks a mountain of issues. For 

example, let’s examine the number of contracts involved. The attached 2011 Oliver Wyman 

study reflected data from 12 financial services firms, which held IRAs on behalf of a total of 19 

million IRA owners, i.e., an average of approximately 1.58 million IRA owners per firm. There 

are approximately 243 days in an eight-month transition period, including weekends and 

holidays. Thus, in order to enter into contracts with all IRA owners during this period, the firms 

would each have to enter into an average of over 6,500 contracts per day. In one brief sentence 

without any evidence or analysis, DOL states that this should not be a problem. On the contrary, 

this would be an enormous problem, and it is a virtual certainty that a huge number of IRA 

owners would not have contracts at the end of the eight-month period. 

DOL did not do any meaningful analysis of the workability of the BICE. On page 

176 of the DRIA, DOL states that that the 

Department expects that the proposed rule . . . to have little effect on access to investment 

advice. The proposed Best Interest Contract PTE extends substantial flexibility to advice 

providers to adopt the business models that allow them to best serve their clients, 

including the ability to continue receiving direct and indirect variable compensation, such 

as commissions and revenue-sharing payments. 
Davis & Harman LLP 

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In other words, DOL recognizes that the BICE is critical to avoiding an adverse effect on access 

to investment advice. But instead of examining the workability of the BICE, DOL simply asserts 

that it is sufficiently flexible. 

In fact, the consensus among all or substantially all financial institutions and financial 

trade associations, as reflected in comments, is that the BICE is unworkable and cannot 

practically be used. Even if it could be used, there is no way to implement it in less than 

approximately three years. The DRIA contains no analysis of these issues. 

DOL’s analysis of call centers reflects a lack of understanding of call centers. On 

page 175 of the DRIA, the DOL states that call center personnel may need training on the new 

definition of education but “call center [sic] would not be fiduciary advisers and therefore are not 

otherwise affected by this proposal.” This conclusory sentence, which is not supported by any 

analysis, is inconsistent with economic reality. 

Under the current fiduciary definition, call center employees will generally not be 

fiduciaries because there will not be any mutual understanding of any reliance. Call center 

employees provide basic information about investments, distributions, and rollovers, but do not 

give advice, as noted by DOL itself. Under the new proposal, if one call center employee 

answers almost any question, he or she becomes a fiduciary and almost certainly will have 

engaged in a prohibited transaction. Answers to any of the following questions, for example, 

would give rise to fiduciary status: 

• You mentioned large cap funds. What are large cap funds? Which of the funds in our 

plan are large cap funds? 

• What do most people like me invest in? 

• What do most people like me do with their account when they terminate employment? 

• How should I go about figuring out which funds to invest in? 

• Can you give me some information on how to contact IRA providers that have 

experience dealing with people like me? 

Answering any of those questions would give rise to fiduciary status and likely a 

prohibited transaction. In that context, many financial institutions are actively discussing 

instructing their call centers not to engage at all with respect to investment or distribution 

questions. DOL did not analyze this issue at all, once again demonstrating that its economic 

analysis is severely incomplete. 

DOL describes disclosure as either useless or counterproductive in its analysis of a 

regulation that requires more disclosure than any other DOL retirement regulation (at 

least in recent history), demonstrating a lack of relationship between the economic analysis 

and the actual proposal. 

• Here are quotes from the DOL’s analysis of the impact of disclosure: 

o “Nor are IRA owners likely to understand advisers’ conflicts. Many ignore 

disclosures. Some others may react to disclosures in ways that exacerbate the 

problem.” DRIA at 194. 
Davis & Harman LLP 

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o “[S]everal [representatives of brokerage firms] acknowledged that ‘investors 

rarely read these disclosures . . . [F]or many investors, the fact they were given 

disclosures was seen as meaningless.’ Burke etal. [sic] (2014) summarizes 

additional literature suggesting that retirement investors often fail to devote 

meaningful attention to relevant disclosures.” DRIA at 194. 

o “Lowenstein, Cain, and Sah (2011) describe how disclosure of adviser conflict 

can “backfire . . . They might interpret disclosure as a sign of honesty”. DRIA at 

194. 

o “Given that investors are hard pressed to understand advisers’ conflicts or their 

implications, this suggests that disclosure of conflicts will be ineffective.” 

• The above DOL analysis is not consistent with the fact that the proposal requires far 

more disclosure than any other retirement regulation or statute, at least in recent history. 

It is also in sharp conflict with the judgment made by Congress, embodied in the 

securities laws, that disclosure is an effective, central element of a regime for regulating 

financial investment. 

Even the DRIA’s own analysis reflects the damage done by the very similar rule 

adopted in the United Kingdom. Our discussion in Section 1 of this letter provides facts 

showing that a very similar rule adopted in the U.K triggered a massive exodus of advisers from 

the small account market. The DRIA attempts to respond to these facts with statistics that are 

simply off point, such as discussions of the number of advisers who have met the qualifications 

prescribed by the U.K. rule, a fact unrelated to the issues at hand. And the DRIA cites aggregate 

statistics unrelated to the effects on small accounts. For example, the DRIA cites a Towers 

Watson study commissioned by the U.K. regulator itself, which “concludes that there is not an 

advice gap because there are sufficient advisers to meet the demand.” This citation omits a key 

fact from the Towers Watson study, which states: 

“A different picture is likely to emerge in considering individual consumer markets, as 

opposed to the total market. . . .it has not been possible to analyse supply by segment. . . 

However, anecdotal evidence . . . suggests that advice capacity serving less affluent 

segments is likely to have reduced.” 

The omission of this crucial aspect of the Towers Watson study is a prime example of the point 

made at the outset of this Section of the letter: the DRIA appears to be more like a brief than a 

balanced presentation of the facts. 

But still the facts come through, even in the DRIA. In fact, in trying to defend the U.K. 

rule, the DRIA actually highlights the severe problems with the U.K. rule with the following 

statement: 

“The FCA [the U.K. regulator] reported that although a number of banks have exited 

from the investment advice market for small accounts, it is not accurate to point to the 

RDR as the main cause. For example, the letter states that Barclays exited the advice 

market even before the RDR was passed, due to “a decline in commercial viability for 

such services over recent years.” Although some of the banks have pulled out of the 
Davis & Harman LLP 

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investment advice market, FCA-commissioned research found that most retail 

investment advisers continue to serve clients with savings and investments between 

£20,000 and £75,000 and that a third of advisers continue to serve clients with less than 

£20,000. The FCA noted that the emergence of new ways to access advice using on-line 

technology has the potential to offer those with small amounts to invest an efficient and 

cost-effective means to receive advice.72 The report issued by Europe Economics in 

December of 2014 discusses that there are some indications that a number of banks are 

looking to re-enter the market, perhaps with more technology-supported applications.73” 

[emphasis added] 

This quote is a wealth of good information: 

• First, it is amazing that the U.K. regulator’s best answer in defending its own regulation 

is that (1) although the regulation contributed to the exodus of advisers from small 

accounts, there were other factors at play as well, and (2) one bank allegedly exited the 

market for other reasons. 

• But the most telling point is the bolded sentence, which reveals that roughly two thirds 

of advisers refuse to provide services to individuals with less than $31,200 (the 

equivalent of 20,000 pounds). Why doesn’t DOL find this extremely troubling? Why 

didn’t DOL follow up on this point and find out how many advisers serve individuals 

with less than $10,000? That is a critical issue and it was left completely unaddressed 

in the DRIA.

The clear problem with access to advice for small accounts is even acknowledged by the 

U,. K. regulator, but DOL put this point in footnote 72 on page 45 of the DRIA and does not 

further discuss it: 

In a July 2014 report, the FCA stated that it has been discussing with its stakeholders 

options for low-cost, simpler ways of recommending retail investment products, 

particularly for customers with relatively modest amounts to invest and relatively 

straightforward investment needs. The FCA acknowledged that it is clear that there has 

been some reluctance on the part of firms to develop these models and that it is seeking to 

understand more about the barriers firms believe they face. 

Instead of discussing this concerning problem, here is DOL’s textual summary of the 

above statement by the FCA: “The FCA noted that the emergence of new ways to access advice 

using on-line technology has the potential to offer those with small amounts to invest an efficient 

and cost-effective means to receive advice.” Again, this is yet another striking example of the 

DOL’s dismissal of facts that could argue against the proposal. 

Finally, DOL tries unsuccessfully to distinguish its proposal from the U.K. proposal. The 

U.K. proposal directly bans payments from mutual funds to advisers. DOL is correct that it does 

not directly ban such payments. But under the DOL proposal, such payments are only permitted 

under the unusable BICE, which is the equivalent of a ban. 
Davis & Harman LLP 

 July 21, 2015 

 

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DOL’s response to the 2011 Oliver Wyman study contained factually incorrect 

statements, thus further undermining the DRIA. The April 12, 2011 Oliver Wyman study of 

the IRA market found that under the original 2010 DOL proposal: 

• Over 7 million IRAs could lose access to an investment professional (just within the 

study sample, which, as noted, was approximately 40% of the IRA market) because the 

brokerage model, which serves 98% of IRAs under $25,000, would become unworkable 

with respect to IRAs.

• As many as 360,000 fewer IRAs could be opened every year. 

DOL’s response to the study stated that: 

“One comment in particular, which included the Oliver Wyman report, predicted major 

disruptions in the IRA market, including reduced savings by lower income households, 

appeared to have misunderstood important elements of that proposal. For example, it 

wrongly assumed that fiduciary advisers to IRA investors could not accept commissions, 

when in fact much of such compensation would have been permitted under PTE 86-128. 

It also wrongly assumed that such fiduciary IRA advisers would be liable for breaches of 

ERISA’s fiduciary duties of prudence and loyalty, when in fact such liability existed only 

for plan advisers, not IRA advisers.” 

DOL’s response is simply incorrect, as demonstrated below: 

• Oliver Wyman’s explanation of the problem with the 2010 proposal does not address 

commissions, but rather focuses exclusively on indirect payments from mutual funds, 

making DOL’s statement above inexplicable. And PTE 86-128 does not apply to 

indirect payments from mutual funds. Here is Oliver Wyman’s explanation: 

o “As fiduciaries under the Department of Labor’s proposed rule, firms and their 

associated representatives may not receive different levels of compensation based 

on the investment choices of retail investors in protected IRA accounts. However, 

the current brokerage model that has developed to serve IRA accounts is 

incompatible with this requirement, often involving both direct and indirect fees, 

such as shareholder servicing fees, sales and distribution fees, revenue-sharing 

and other fees. These fees frequently vary by product based on factors such as 

complexity, adviser time requirements (e.g. to explain the risks and benefits and 

determine client suitability), and services performed such as shareholder 

servicing.” 

• DOL states that Oliver Wyman assumed that IRA advisers would be liable for 

breaches of ERISA’s fiduciary duties of prudence and loyalty. This is simply untrue. 

For example, a computer search of the Oliver Wyman report reveals that the terms 

“prudence” and “loyalty” are never used. Nothing in the Oliver Wyman report comes 

close to suggesting what DOL says. 

• Because the BICE is unusable, all of the problems highlighted in the Oliver Wyman 

study will occur, a point that was not addressed by the DRIA. 
Davis & Harman LLP 

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DOL fails to mention statements in a study DOL commissioned that does not 

support the proposal. DOL’s discussion in the DRIA was very critical of the Oliver Wyman 

study, but that discussion fails to mention that a study commissioned by DOL was unable to 

conclude that Oliver Wyman was wrong. See Garber, Burke, Hung, and Talley, “Potential 

Economic Effects on Individual Retirement Account Markets and Investors of DOL’s Proposed 

Rule Concerning the Definition of a ‘Fiduciary’”, Rand Labor and Population, February 2015, 

Prepared for the Department of Labor. On page 19 of this study, the authors evaluate the key 

Oliver Wyman findings and conclude that:

We cannot assess these claims for two major reasons. First, we have no basis for 

gauging the extent of the adjustments that broker-dealers would have to make—which 

may include cost reductions, revenue increases, or both—to operate profitably if the 

Proposed Rule were adopted. Second, even if we did know how much broker-dealers 

would have to reduce costs, increase revenues, or both to operate profitably under the 

rule, we would have no basis for predicting whether the cost reductions would involve 

lesser availability of particular advisory services that currently are bundled in 

“commission-based” advisory relationships, such as those claimed in the four bullet 

points. 

 Similarly, DOL does not mention that the Rand study is “unable to conclude whether 

any particular kind of investor would be made better or worse off by adoption of the rule.” 

The fact that DOL does not mention these points in its DRIA lends further support to 

the view that the DRIA more resembles an advocate’s brief than a balanced assessment of the 

effects of the proposal. 

DOL’s response to a May 2014 small business survey conducted by Greenwald & 

Associates cannot withstand scrutiny. In May of 2014, Greenwald & Associates released a 

study of small business owners focusing on the effects of the prohibited transaction rules on 

small businesses if the DOL expands the definition of fiduciary. If the definition of a fiduciary is 

expanded as under the DOL proposal, current assistance provided to small businesses in setting 

up a retirement plan would give rise to fiduciary status, and thus trigger prohibited transaction 

rules that would preclude the assistance even if it is in the best interest of the small business. 

Because of the effect of the prohibited transaction rules, the survey found, for example, that: 

• Almost 30% of small businesses with a plan indicated that it is at least somewhat likely 

that they would drop their plan if this regulation were to go into effect. 

• Close to 50% of small businesses without a plan stated that the regulation would reduce 

the likelihood of them offering a plan, with 36% saying it would reduce the likelihood 

greatly. 

DOL first criticized this survey by contrasting it with an AARP survey that “found that 

plan sponsors overwhelmingly support subjecting DC plan providers who advise participants to 

the fiduciary standard of loyalty.” This DOL criticism of the Greenwald survey is simply off 

point since the Greenwald survey did not have anything to do with the fiduciary duty of loyalty. 

The Greenwald survey merely examined small businesses’ reactions to the effects of the 
Davis & Harman LLP 

 July 21, 2015 

 

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prohibited transaction rules, which under the DOL proposal, would preclude assistance that is in 

the participants’ best interest. 

DOL’s second criticism of the Greenwald survey is inconsistent with DOL’s own 

proposal. DOL says that its proposal simply requires adherence to a fiduciary standard and a duty 

of loyalty, and the DOL proposal does not contain applicable prohibitions in this area. This 

discussion is very odd in light of the prohibited transaction rules, which under the DOL proposal 

do exactly what the Greenwald study says. 

Then the DRIA seems to shift focus and address the prohibited transaction rules, but 

DOL suggests that the prohibited transaction problems can be solved in two ways. First, the 

service provider could restructure its entire business model and give up all or substantially all of 

its revenue from the investments offered under the plan. This would avoid the prohibited 

transaction problem, but needless to say, is not commercially viable. And what is most striking is 

that there is not a single piece of analysis and not a single citation indicating that the DOL 

explored whether such a restructured business model could be viable. 

Second, the DRIA makes the following statement. “Alternatively, the adviser or provider 

could take advantage of an existing or proposed PTE that permits variable and third-party 

compensation.” What is noteworthy here is that the DRIA could easily have provided examples 

of PTEs that could solve the problem if there were such PTEs. But no such examples are 

provided. In our view, no such PTEs exist, given that the BICE is both unusable and 

inapplicable to participant-directed small business plans. 

The DRIA’s response to an April 2014 Quantria Strategies study lacks any 

substance. In April of 2014, Quantria Strategies issued a study showing that the prohibitions 

contained in the DOL proposal could increase annual cash-outs of retirement savings for 

employees terminating employment by $20 billion to $32 billion. These withdrawals could 

reduce the accumulated retirement savings of affected employees by 20% to 40%. 

Instead of discussing the merits of the study, the DRIA’s study starts off by simply 

quoting unsubstantiated criticisms of the study by proponents of the DOL proposal. For example, 

one blog says, without any analysis, that the study “assumes a false premise.” 

Next the DRIA poses several questions about the evidence underlying the study. 

Nowhere is it disclosed that our firm, which co-sponsored the study, sent written invitations to 

the DOL to send us any questions they have about the study, but no questions were ever sent. If 

the answers to the questions in the DRIA are important, it is hard to understand why DOL did 

not pursue those answers. 

The DRIA goes on to make the following incorrect statement: “by explicitly extending 

guidance on the bounds of non-fiduciary education to cover education about distributions and 

rollovers, the new proposal is likely to make call center guidance more available and robust, not 

less.” Actually, under DOL Advisory Opinion 2005-23A, advice regarding distributions and 
Davis & Harman LLP 

 July 21, 2015 

 

33 

rollovers from a call center would not make the call center a fiduciary under current law. But the 

proposal clearly can convert call centers into fiduciaries, as discussed above. So there is no basis 

for stating that the education guidance in the proposal would expand permissible education and 

thus free up call centers to provide more information. 

Finally, DOL commissioned a third party to conduct a special study to review the 

Quantria study. We applaud the DOL for taking this step; that is exactly how an economic 

analysis should be conducted. However, the special study was seriously flawed. Please see 

Quantria’s document discussing those flaws, which is attached. 

In justifying its new rule applying the fiduciary rules to distribution and rollover 

advice, the DRIA relies heavily on a 2013 GAO report, but surprisingly omits one key 

element of that report that undermines the DOL proposal. The GAO report contains a 

striking inconsistency, which is not mentioned in the DRIA. GAO states in its report that: 

for fear of incurring additional liability, plan sponsors and service providers may 

unnecessarily limit the education they provide to plan participants about their 

distribution options when separating from employment. 

 This is a clear, logical, and accurate point. If the provision of distribution information 

triggers potential fiduciary liability, there will obviously be less information provided. The 

inconsistency in the report is that GAO then recommends that DOL finalize its fiduciary 

regulation, which would expand fiduciary liability and thus reduce access to critical 

information investors need to make a good decision.

 Page 48 of the report may shed some light on the inconsistency. Apparently, the initial 

draft of the GAO report was different on the fiduciary issue, but DOL appears to have expressed 

concerns. This is highlighted by the fact that GAO, in its discussion of DOL’s comments on the 

GAO study, stated: 

while we had previously pointed out that providers reluctant to become fiduciaries may 

limit the availability of investment advice as well as education to participants, we revised 

the section to better convey that upcoming clarification about the definition of a 

fiduciary, and about what constitutes investment advice and education, will help plan 

sponsors and providers understand what they can give to participants in different 

circumstances and should mitigate their concerns about assisting plan participants. The 

initial draft of the report was different with respect to the fiduciary issue. 

This may explain the inconsistency. DOL apparently objected to the suggestion that 

fiduciary liability can chill the provision of distribution and rollover assistance, so GAO 

adopted the following illogical position. “If providers are concerned that they may have 

fiduciary liability, they will not provide information. But if DOL confirms that they do have 

fiduciary liability, they will provide information.” This does not make sense. And GAO’s 

report does not reflect the terms of the rules actually proposed by DOL. 
Davis & Harman LLP 

 July 21, 2015 

 

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The DRIA should have examined the inconsistency in the GAO report and explored the 

chilling effect of fiduciary status on the provision of information. But the DRIA did not explore 

this issue. 

The DOL never measures the “intangible” effects of financial advice, but rather 

simply assumes that such benefits are not significant enough to affect the proposal. On the 

contrary, a very recent study shows striking benefits from financial advice. In “The role of 

financial advisors in the US retirement market” (July 10, 2015), Oliver Wyman finds that: 

• Small businesses that work with a financial adviser are 50% more likely to set up a 

retirement plan (and micro business with 1-9 employees are almost twice as likely). 

• Advised individuals, segmented by age and income, have a minimum of 25% more assets 

than non-advised individuals. 

• In the case of individuals aged 65 and older with $100,000 or less in annual income, 

advised individuals have an average of 113% more assets than non-advised investors. 

• Advised investors have more diversified portfolios -- own twice as many asset classes, 

have more balanced portfolio asset allocations and use more packaged products for equity 

exposure compared with non-advised investors. 

• Advised investors stay more invested in the market – advised individuals hold less cash 

in their investment accounts (36%-57% less than non-advised individuals for similar age 

and wealth cohorts). 

• Advised investors re-balance more frequently, and are 42% more likely to re-balance 

their portfolios at least every two years. 

It is a failure of the DRIA not to have attempted to measure these effects, as Oliver 

Wyman did. 

The DRIA devotes no time to determining the possible adverse effects of the 

proposal’s restrictions on investment education. On pages 143-144 and 154 of the DRIA, 

DOL discusses the proposal’s radical cutback in investment education permitted, i.e., not 

allowing educators to provide examples of investments within asset classes, but provides no 

economic analysis. 

• There is no analysis of the effect on participants who may be told that they should be 

invested, for example, 40% in large cap funds. If such participants do not know what a 

large cap fund is and ask for examples, no such examples can be given. The DRIA does 

not consider the effect of this lack of information on participants. 

• Moreover, the DRIA fails to even consider the advisability of alternatives to a complete 

ban on examples. One of the cardinal rules of regulation-writing is that regulators should 

look for less restrictive ways to achieve the same goals. Why is there no discussion of 

ways to ensure that the examples provided do not improperly steer participants if that is 

DOL’s objective? This type of issue was never even mentioned. 
Davis & Harman LLP 

 July 21, 2015 

 

35 

The DOL does not do any analysis of the harmful effects of the inconsistency 

between the rules applicable to different retail accounts. Under the proposal, the prohibited 

transaction rules and best interest standard (under the BICE) would apply to advice regarding 

IRAs, while, under securities rules, a suitability standard would apply to advice regarding nonretirement accounts. This lack of consistency can have very adverse results. The DRIA does not 

even mention these possible adverse results, much less analyze them. 

• Advice focused on non-retirement accounts. As discussed above, the brokerage model 

will generally be illegal with respect to IRAs because the BICE is unusable, an issue 

never examined by the DOL. So broker/dealers will generally be precluded from 

helping individuals with their IRAs. But no such prohibition exists with respect to nonretirement accounts. So broker/dealers who have traditionally encouraged clients to save 

through an IRA will be effectively forced to focus their energies on non-retirement 

accounts because they are prohibited from working on IRA investments. Thus, it is only 

logical that far fewer IRAs will be opened every year, as found by the 2011 Oliver 

Wyman study, and far fewer IRA contributions will be made. Yet the DRIA does not 

even mention this issue. 

• Investor confusion. Another problem of great concern to broker/dealers is the fact that 

they could be held to have provided prohibited advice without knowing it. For example, 

assume that a customer comes to a broker/dealer for help with a $25,000 non-retirement 

account. The broker/dealer provides some ideas for investing the account, but prudently 

requires the customer sign an agreement that the customer will not consider this 

assistance in making decisions about how to invest his IRA assets. In order to protect 

themselves against lawsuits and prohibited transactions, broker/dealers will almost 

inevitably require such agreements. 

o Any customer would be extremely confused by this situation. The broker/dealer 

had just explained basic investing principles, and provided numerous ideas about 

how best to invest the non-retirement account. But the customer is not permitted 

to take these ideas into account in investing the IRA assets. Does that mean that 

the ideas are not prudent for the IRA assets? Or does it mean that there are some 

legal issues with making similar investments in an IRA? Or are there additional 

factors that need to be taken into account in investing IRA assets? Or are the 

same investments appropriate for the IRA but the broker/dealer is legally 

prohibited from saying that? Or does the non-retirement advice somehow fall 

short of a higher standard applicable to IRAs, calling into question the nonretirement advice? The customer will have no idea which is right, and the 

broker/dealer would be prohibited by the DOL rules from providing any 

assistance on these questions. Again, this almost inevitable result is not 

addressed at all in the DRIA. The DRIA simply assumes without any basis that 

everyone can and will use the BICE and that issues like this will not exist. 

Information potentially critical to the public’s evaluation of the proposal has been 

unavailable to the commenting public. In a letter to House Education and the Workforce 

Chairman John Kline (R-MN) and Subcommittee Chairman Phil Roe (R-TN), Secretary Tom 

Perez stated that: 
Davis & Harman LLP 

 July 21, 2015 

 

36 

the Department has consulted extensively with SEC staff on the draft proposal. . . . The 

SEC staff provided technical assistance on the Department’s proposal, including the 

regulatory impact analysis. The Department has made numerous changes in response to 

observations and issues raised by SEC staff . . . . 

Thus, it appears that there were robust discussions between the DOL and the SEC. In 

light of the fact that the SEC is the primary regulator of the financial services industry, and the 

proposal relates primarily to the financial services industry, these discussions are of great interest 

to the commenting public. Yet there is nothing in the DRIA regarding the SEC’s views. 

Moreover, even more concerning is the fact that DOL has not complied with multiple 

requests from Members of Congress for documentation regarding the communications between 

the SEC and the DOL. See the letters to Secretary Perez dated March 4 and March 24, 2015 from 

Committee Chairman Kline and Subcommittee Chairman Roe. See also the letters to SEC Chair 

Mary Jo White, dated April 21, May 20, and July 13, 2105, from Senate Homeland Security and 

Government Affairs Chairman Ron Johnson (R-WI). The last letter from Chairman Johnson 

states that: 

The Labor Department “asked the SEC to defer to the Department’s ongoing dialogue 

with the Committee about the provision of the Department’s deliberative materials, and 

while that dialogue is continuing to defer producing those materials” – indicating that the 

Labor Department had instructed the Commission not to comply with the Committee’s 

request. . . . To be clear, there has been no “ongoing dialogue” with the Committee and 

the Department about the production of documents. 

This is of great concern. The views of the SEC, which has great expertise regarding the 

regulation of financial services, are very relevant to the notice and comment period regarding the 

proposal. Yet these views are unavailable to those commenting on the proposal. The 

unavailability of potentially important information is a serious flaw in the process here, depriving 

the commenting public of needed information. 

None of the above issues received the attention they deserved at OMB. OMB’s 50-

day review of the proposal was startlingly brief: 

• The review period was almost a month shorter than the next shortest review period for 

any significant retirement regulatory proposal in the last 10 years. 

• It was less than half the average review period of other significant retirement regulatory 

proposals in the last 10 years (which was 109 days). 

• Equally startling is that the review period after OMB received significant public input 

was actually just a few days. For example, on April 7, 2015 the Investment Company 

Institute (“ICI”) submitted a very thoughtful eight-page review of the White House’s 

economic analysis of the fiduciary issue, exactly the type of information that OMB is 
Davis & Harman LLP 

 July 21, 2015 

 

37 

mandated to review. ICI met with OMB on April 9, 2015 to discuss the submission. 

Only five days later, OMB approved the proposal.

• There is no reasonable explanation for the extremely short review period at OMB, other 

than a rush to move forward with the regulation in light of the expressed desire to have 

this rule completed before the next Administration takes over in January of 2017. In light 

of all the steps needed to get the rule in place before January of 2017, there simply was 

not time for a meaningful review by OMB. 

 Thank you for your consideration of the views expressed in this letter. 

 Sincerely, 

 

 Kent A. Mason 
Davis & Harman LLP 

 July 21, 2015 

 

38 

APPENDIX 

Distinguishing education from advice regarding investment menu assistance: 

recommended regulatory language 

 Clause (v) of Proposed Regulation § 2510.3-21(b)(6) would be re-designated as clause 

(vi) and the following new clause (v) would be inserted immediately before such re-designated 

clause: 

“(v) Education Regarding Plan Investment Options. 

 

(A) For purposes of paragraph (b), the services described in this clause (v) 

are considered to be education and do not constitute advice or recommendations 

for purposes of paragraph (a). 

 (B) The following services are described in this clause (v): provision of 

investment education information and materials to a sponsor of a defined 

contribution plan in connection with the selection or monitoring of investment 

options to be offered to plan participants. For this purpose, investment education 

information and materials shall include: information about general investment 

concepts and asset classes, the provision of illustrative investment menu models, 

information on the criteria often used to select a plan investment menu, and 

information about investment options that satisfy a plan fiduciary’s stated criteria. 

 (C) The rules of subclause (B) are illustrated by the following examples, 

all of which are based on the same fact pattern. Small company S discusses with 

financial institution F the possibility of F providing services with respect to an 

individual account plan under which participants and beneficiaries can direct the 

investment of assets in their individual accounts. F maintains a group of 3,000 

investment options as its “service provider menu” from which plan sponsors may 

select some or all such options to offer to their participants under their plan. S 

desires to offer, as its “plan menu”, 15 investment options to its participants, and 

seeks education from F regarding how to select the appropriate 15 from the 3,000 

options. In all cases, F informs S that (1) F is not functioning as a fiduciary in 

providing the education, (2) the selection of the plan menu is S’ responsibility, 

and (3) different investment options can provide different levels of financial 

benefit to F (and F offers to provide additional information in that regard with 

respect to any option being considered by S). 

 (1) Example (1). F discusses with S the factors 

commonly used by plan sponsors to select plan menus, including fund ratings, 

past performance (measured against options in the same asset class), risks, fees, 

and manager tenure. F also discusses with S the different asset classes that are 

generally offered to participants under a participant-directed individual account 

plan. S informs F that S wishes to provide its employees with the lowest risk, 

lowest fee options that are consistent with a suitable plan investment menu. S 

informs F that fund ratings and past performance are less important, but manager 
Davis & Harman LLP 

 July 21, 2015 

 

39 

tenure is of moderate importance. F then provides S with a list of two or three 

options in each asset class that best meet S’ criteria. 

 Based on the rules of subclause (B), the information provided by F is 

education, not advice. Screening funds based on S’ criteria simply provides S with 

information on which options would achieve S’ objectives. 

 (2) Example (2). F provides S with several model 

plan menus that businesses of a similar size with similar risk tolerances have 

selected. F explains the differences between the model plan menus and why a 

plan sponsor might choose each one. The information provided by F constitutes 

education on what similar plan sponsors have selected and why. F is not making 

recommendations to S, but rather is providing S with the tools to make its own 

decisions. As such, the information is education, not advice. 

 (3) Example (3). In responding to a “request for 

proposal” (“RFP”) from S, F provides S with a model plan menu in order to 

facilitate the provision to S of information on the cost of the plan. F clearly 

communicates to S that F is not recommending the model plan menu, but is only 

providing it for pricing purposes. 

 The information provided by F is education, not advice. The information 

is conveyed solely to illustrate the cost of the plan, and this is made clear. 

 (4) Example (4). In helping S select its plan menu, 

F provides S with economic market analyses and forecasts, such as discussions of 

the effect of debt issues on the capital markets and reports on the economies of 

emerging market countries. F also provides S with an analysis of the U.S. 

political environment and its potential impact on industries and markets. This 

information is education, not advice: it is not individualized to S’ needs, and it 

does not relate specifically to any fund. It is simply background information that 

could be used in many different ways to support many different investment 

decisions. 

 (5) Example (5). F provides S with objective data 

that other plan sponsors commonly use in selecting a plan menu, including data 

regarding fund ratings, past performance (measured against options in the same 

asset class), risk measurements, fees, and management tenure. 

 This information simply provides S with tools that are commonly used to 

make determinations regarding the selection of investment options. The selection 

of the plan menu is made by S based on the objective information provided. The 

information provided by F is education, not advice. 

 (6) Example (6). The same facts as Example (5) 

except that F also uses the objective data to provide S with two or three options in 

each asset class typically offered by similar businesses. The screening of funds is 

not done in a way that is individualized to S’ needs. 

 The information provided by F is education, not advice. Screening funds 

based on objective data simply provides S with objective information. Another 

way of looking at this is that F could have simply offered the shorter list to all 

plan sponsors as its service provider menu, which would have been within the 

platform exception. That would not have made F a fiduciary. F should be treated 
Davis & Harman LLP 

 July 21, 2015 

 

40 

as doing the same thing here; the only difference is that F is doing it in two steps 

rather than one. 

 (7) Example (7). F hires an independent third party 

with expertise in selecting investment options. Using accepted investment 

evaluation criteria developed independently from F, the third party narrows the 

service provider menu to a much shorter list from which S can choose a plan 

menu. For example, the third party could narrow the list to 75 options that meet 

objective criteria developed by the third party. The third party’s criteria are not 

individualized to S’ needs; on the contrary, the same shorter list is provided or 

available to all prospective plan sponsors of a similar size. 

 The service provided by F is education, not advice. The service is not 

individualized to S’ needs and does not reflect a recommendation regarding 

specific options that S should select. The service simply provides S with 

information regarding how an independent expert would narrow the choices 

presented to S. Another way of looking at this is that F itself could have simply 

offered 75 investment options to all plan sponsors as its service provider menu, 

which would fit within the platform exception. That would not have made F a 

fiduciary. The fact that the same service is provided by the third party should not 

make the service fiduciary in nature. 

 (8) Example (8). S maintains an existing plan and 

wants to make the transition to using F as its service provider as seamless as 

possible for its participants. Accordingly, S asks that F create a plan menu 

through “mapping”, i.e., selection of investment options that most closely 

resemble the existing options offered to plan participants. F creates a plan menu 

that, based on objective criteria such as Morningstar “fund fact sheets,” is similar 

to the existing plan menu. Where two or more investment options are comparably 

similar to an existing option, F may provide S with both options. 

 The information provided by F is education, not advice. Screening funds 

based on S’ criteria simply provides S with information on which options would 

achieve S’ objectives. 

 (9) Example (9). After a year, S asks F to prepare a 

report on the plan’s menu, including past performance (measured against options 

in the same asset class), fees, manager tenure, risks, and ratings. F prepares such 

a report in the manner requested, based on objective criteria or reports of 

independent third parties. 

 The information provided by F is education, not advice. F is simply 

providing information requested by S, based on objective criteria or reports of 

independent third parties. 

 (10) Example (10). The same facts as in Example 

2, except that S asks F to recommend one of the model plan menus and makes it 

clear to F that S will follow F’s recommendation. F recommends one of the 

model plan menus. Unless F’s recommendation fits within the limitation 

described in paragraph (b)(1) [seller’s exception], F’s recommendation is advice: 

(1) the recommendation was individualized to S, and (2) the recommendation was 

specific regarding the investments for the plan menu. 
{C/M:785/0002/00229177.DOCX; 1}

Critical Review of DOL

Regulatory Impact Analysis

Prepared for Davis & Harman

by

Quantria Strategies, LLC

July 2015
-iCritical Review of DOL 

Regulatory Impact Analysis

I. Executive Summary ...............................................................................................1

II. Failure to Account for Positive Benefits of Financial Advice...............4

A. DOL Estimates of Errors Attributable to Lack of Financial Advice .......................5

B. Research on Benefits of Financial Advice...............................................................6

C. Quantifying the Benefits of Financial Advice .........................................................7

III. DOL Claims of Front-End Load Fund Underperformance 

Inconsistent With Market Data .........................................................................9

A. ICI Estimates of Front-Load Mutual Fund Performance.........................................9

B. DOL Cited Research..............................................................................................10

C. Long-Term Trends in Mutual Fund Fees...............................................................12

D. Reliance on Foreign Experience ............................................................................15

IV. DOL Ignores Qualifying Statements Made in Research Relied on to 

Support DOL Arguments ..................................................................................15

A. Existence of Conflicts............................................................................................15

B. Costly Pursuit of Customers ..................................................................................16

C. Obstacles to Assessing Advice Quality .................................................................16

D. Lack of Reputation Effects....................................................................................17

E. Obstacles to Understanding Conflicts....................................................................18

V. DOL’s Compliance Cost Estimates Understate Actual Costs of ReProposed Regulations..........................................................................................19

VI. DOL Fails to Account For Reduced Access to Financial Advice.........20

VII. Conclusions.............................................................................................................22

Tables and Graphs

Table 1 – Average Mutual Fund Expense Ratios ....................................................................13

Graph 1 – Concentration of Assets in Lower-Cost Mutual Funds, 2013.................................14

Davis & Harman, LLP commissioned this report on behalf of a coalition of financial services 

organizations that provide retirement services to millions of Americans.
-1-

Critical Review of DOL Regulatory Impact Analysis

I. Executive Summary

In the DOL Regulatory Impact Analysis for the re-proposed regulations relating to fiduciary 

investment advice, the DOL estimates that the re-proposed regulations will result in IRA 

performance gains of 100 to 200 basis points per year over the next 20 years, that “conflicted 

advice” costs investors $210 to $430 billion over 10 years and $500 billion to $1 trillion over 

20 years, and that compliance costs for the industry with respect to the re-proposed regulations 

will total between $2.4 and $5.7 billion over 10 years.

The DOL acknowledges the imprecision and uncertainty surrounding their estimates. The DOL 

defines these uncertainties as: (1) the imprecision in the estimates of the IRA performance gains, 

the effects of “conflicted advice,” and the compliance costs; (2) the potential for the prohibited 

transaction exemptions to expand exemptions for current-law fiduciaries; and (3) the potential 

for unanticipated and/or unintended negative consequences of the regulations.

In addition, DOL notes that “some of the performance gap may reflect deliberate and fair 

payment by IRA investors for observable or intangible services. If so, that portion should not be 

interpreted as a performance gap associated with conflicts of interest.”1

However, over the 243 pages of the regulatory analysis, DOL repeatedly and incorrectly implies 

that (1) all financial advice provided by broker-dealers is conflicted advice, (2) all IRA investors, 

retirement participants, and small business owners are harmed, when consulting – in any way –

with broker-dealers, (3) there are no measurable benefits to using a broker-dealer, and (4) brokerdealers will easily comply with the re-proposed regulations without any significant costs.

A close review of the DOL regulatory impact analysis uncovers many overstatements and flawed 

assumptions. DOL cites numerous studies that they argue support the re-proposed regulation, 

yet closer scrutiny shows that many of the studies either are not relevant or caveat the findings 

on which DOL relies. When subjected to close scrutiny, the DOL analysis fails to support the reproposed regulation on many levels, including the following:

1. DOL fails to incorporate any estimates of the positive benefits of financial advice, even 

though the DOL admits that there may be “observable or intangible” benefits to using a 

broker-dealer and despite the fact that DOL previously estimated that retirement plan 

participants made investment mistakes of approximately $114 billion in 2010 due in 

large part to the lack of financial advice. Including estimates of the positive effects of 

financial advice would (1) reduce the estimates of the losses attributable to so-called 

“conflicted advice” under current law, and (2) increase the costs to IRA owners and 

retirement plan participants under the re-proposed regulation.

 1

 United States Department of Labor, Fiduciary Investment Advice, Regulatory Impact Analysis, section 8.1.1., 

IRA Performance Gap, p. 212.
-2-

In its own regulatory analysis for the re-proposed regulation, DOL states that some of the 

studies “find robust evidence that advice affects savings styles and levels. . .at least 

some of the advised investors’ excess fees. . .can be interpreted as fair payment for 

financial services that yield consumer benefits other than improved investment 

performance.”2

2. DOL claims that front-end load mutual funds “underperform” by 100-200 basis points 

per year, but the academic research DOL cites and additional data analysis show that 

these claims cannot be supported.

The Investment Company Institute (ICI) examined market data from 2007 to 2013 and 

found that the sales-weighted average returns for shares sold with front-end loads 

actually did better than an industry average by 27 basis points, directly countering 

DOL estimates of 100-200 basis points of underperformance. ICI also found that the 

DOL ignored the costs of fee-based accounts, overstating the cost difference between 

front-end load accounts and fee-based accounts.

According to ICI, “the DOL does not actually measure – and cannot measure, based on 

these studies – whether an investor using a fee-based ERISA fiduciary adviser will 

experience a different outcome than an investor using another financial adviser that is 

not an ERISA fiduciary.”

3. The DOL regulatory impact analysis cites numerous supporting studies that, upon 

closer scrutiny, often qualify their findings with caveats concerning the findings and 

suggestions for further research.

Often, the evidence cited by DOL represents a “potential,” rather than an “actual,” 

conflict of interest. DOL assumes that the mere existence of certain characteristics –

for example, the receipt of commissions – leads to improper behavior and that most, if 

not all, RIAs acted improperly with respect to their clients.

The DOL analysis argues that individuals with low financial literacy can be manipulated 

by financial advisers. But lack of financial literacy offers a reason why investors need 

access to financial advice. Investors who lack financial literacy tend to start saving 

later, save less than they should, and don’t retain their savings for retirement purposes. 

For example, one study cited by DOL (Hung et al (2010)) found that having employers 

offer financial advice to employees can result in improved financial outcomes.

DOL states that additional disclosure will not be effective because IRA investors cannot 

understand potential conflicts of interest. Yet the re-proposed regulations require 

disclosures that provide so much information that the average individual could not 

possibly assess all the information.

 2

 United States Department of Labor, Fiduciary Investment Advice, Regulatory Impact Analysis, section 3.2.3,5 

Eroded IRA Returns, p. 94.
-3-

4. DOL’s compliance cost estimates likely significantly underestimate the actual costs and 

fail to account for the fact that these costs will be borne by consumers. 

For example, DOL significantly underestimated the costs of updating computer systems 

to comply with the best interest contract exemption. DOL estimated 280,000 hours of 

burden during the first year and approximately 22,000 hours of burden in subsequent 

years at a cost of $22.3 million and $1.8 million respectively. However, two companies 

reported significantly higher costs to comply with disclosure rules under another 

regulation that required significantly less information than required under the best interest 

contract exemption. One company reported more than 100,000 IT hours at a cost of 

approximately $8.4 million and another company reported spending more than 90,000 

hours at a cost of over $6.5 million. These examples suggest that the IT costs (a small 

component of DOL’s overall costs of compliance) could be significantly 

underestimated, raising questions about the assumptions underlying the other 

components of DOL’s costs of compliance. Note that the combined effect of these two 

companies ($14.9 million) totals 67 percent of the DOL’s total estimate of IT costs 

($22.3 million) for the first year under the regulatory analysis.

5. DOL assumes that financial advisers will accept reduced fees without any change in 

either the quantity or quality of their investment advice, but basic economic analysis 

suggests that this assumption cannot be supported.

Basic economic principles suggest that, if an adviser’s costs increase as a result of the 

re-proposed regulation, these costs will be borne by the adviser’s customers either 

through decreased services or increased costs to the customer. The decreased services 

would involve either the exit of certain advisers from the market or a reduction in the 

intensity of advice provided by remaining advisers.

DOL notes the potential for reduced access to financial advice and states “the 

Department takes seriously the risk that banning adviser conflicts could reduce access 

to advice for some IRA investors, and that not only their investing but also their saving 

might suffer as a result. Even if the potential for this result is limited, its severity is 

sufficiently great that the Department agrees caution is required.”3

DOL dismisses virtually all of the information and data provided by the industry on the potential 

impact of the regulations even though this information could help inform the DOL estimates. 

Although the industry has consistently indicated its support for a fiduciary standard implemented 

by the appropriate regulatory authorities and has offered to work closely with DOL to develop 

workable rules, the DOL regulatory analysis reads more like a legal brief in litigation than a 

reasoned analysis supporting the re-proposed regulations.

DOL provided an extremely short period for review and comment with respect to the reproposed regulations and an extraordinarily short period after finalization before the regulations 

become effective. These time periods suggest that DOL may implement the regulations without 

taking into account input from the industry that must comply with the rules.

 3

 DOL Regulatory Analysis, section 3.2.2., Qualitative Discussion, p. 109.
-4-

Taken together, the flaws with the DOL regulatory analysis raise significant questions about the 

justification for the re-proposed regulations. As detailed below, each of these points raises 

questions about whether DOL’s regulatory analysis supports the broad conclusions that are 

drawn.

II. Failure to Account for Positive Benefits of Financial Advice

DOL fails to incorporate any estimates of the positive benefits of financial 

advice, even though the DOL admits that there may be “observable or 

intangible” benefits to using a broker-dealer and despite the fact that DOL 

previously estimated that retirement plan participants made investment mistakes 

of approximately $114 billion in 2010 due in large part to the lack of financial 

advice. Including estimates of the positive effects of financial advice would (1) 

reduce the estimates of the losses attributable to so-called “conflicted advice” 

under current law, and (2) increase the costs to IRA owners and retirement 

plan participants under the re-proposed regulations.

The DOL regulatory analysis acknowledges that there may be positive benefits to individuals 

who have access to financial assistance, but fails to measure these benefits. DOL states “some of 

the performance gap may reflect deliberate and fair payment by IRA investors for observable or 

intangible services. If so, that portion should not be interpreted as a performance gap associated 

with conflicts in advice.”4

 By ignoring the positive benefits of financial advice under current 

practices, DOL overstates estimates of the losses theoretically occurring with what DOL calls 

“conflicted advice.” In addition, DOL fails to account for the losses of these positive benefits 

that occur to the extent that the re-proposed regulations result in less access to financial advice.

The potential benefits of financial advice include, at the participant level, (1) the decision to 

begin saving for retirement, (2) increasing the amount saved for retirement, (3) making sensible 

portfolio choices, and (4) retaining retirement benefits in a qualified retirement savings 

arrangement (qualified plan or IRA) on a potential distribution event, such as job change. 

In addition, financial assistance increases the number of retirement plans established by small 

employers and the number of IRAs established by individuals and small businesses. Some 

research refers to these as the “intangible” benefits of receiving financial assistance. However, 

the reality is that these benefits are quite “tangible.” While it may be difficult to measure how 

financial assistance affects any specific individual’s decisions, research shows that individuals 

who have access to financial assistance have larger account balances, all things (including 

income and age) being equal. Yet, DOL does not acknowledge or attempt to measure the 

positive effects of financial assistance that supports these larger account balances.

 4

 DOL Regulatory Impact Analysis, section 8.1.1, IRA Performance Gap, p. 212.
-5-

A. DOL Estimates of Errors Attributable to Lack of Financial Advice

DOL ignored its own estimates of the benefits of financial advice in the regulatory analysis. In a 

2011 regulatory impact analysis to a final regulation relating to a new prohibited transaction 

exemption for the fiduciary standard rules, DOL stated the following:

“The results of this final regulation will depend on its impacts on the availability, 

cost, use, and quality of participant investment advice. The Department 

anticipates that, as a result of these actions, quality, affordable expert investment 

advice will proliferate, producing significant net gains for participant-directed 

defined contribution (DC) plan participants and beneficiaries and beneficiaries of 

individual retirement accounts (IRAs). The improved investment results will 

reflect reductions in investment errors such as poor trading strategies and 

inadequate diversification.”5

DOL further states “there is evidence that many participants of these retirement accounts often 

make costly investment errors due to flawed information or reasoning . . . Financial losses 

(including foregone earnings) from such mistakes likely amounted to more than $114 billion in 

2010. These losses compound and grow larger as workers progress toward and into retirement.”6

 

In fact, as justification for the rule, DOL states that individuals who do not receive financial 

advice with respect to their retirement savings are twice as likely to make a mistake as those 

who do receive financial advice.

7

 DOL notes that these mistakes and losses can be attributed to 

the loss of access to financial advice under ERISA and the prohibited transaction provisions. 

Specifically in reference to the prohibited transaction provisions, DOL states:

“Such mistakes and consequent losses historically can be attributed at least in part 

to provisions in the Employee Retirement Income Security Act of 1974 that 

effectively preclude a variety of arrangements whereby financial professionals 

might otherwise provide retirement plan participants with expert investment 

advice.”8

By finalizing the prohibited transaction exemption regulation that allowed more IRA owners and 

retirement plan participants to receive financial advice, DOL estimated the benefits of this advice 

as follows:

“The Department believes that this final regulation will provide important benefits 

to society by extending quality, expert investment advice to more participants, 

leading them to make fewer investment mistakes. . .participants, after having 

received such advice, may pay lower fees and expenses, engage in less excessive 

or poorly timed trading, more adequately diversify their portfolios, and thereby 

 5

 U.S. Department of Labor, Employee Benefits Security Administration, 29 CFR Part 2550, Investment Advice –

Participants and Beneficiaries, D. Regulatory Impact Analysis, Federal Register, Vol. 76 No. 206, Tuesday, October 

25, 2011, p. 66151.

6

 Ibid. at p. 66151. 7

 Ibid. at p. 66153. 8

 Ibid. at p. 66151.
-6-

assume less uncompensated risk, achieve a more optimal level of compensated 

risk, and/or pay less excess taxes.”9

B. Research on Benefits of Financial Advice

Ample evidence of the benefits of access to financial advice exists with respect to IRA owners 

and retirement plan participants, yet DOL ignored or dismissed this evidence in its regulatory 

analysis. In fact, the DOL regulatory analysis for the re-proposed regulations acknowledges 

these benefits, stating with respect to some of the studies used in the DOL analysis:

“However, they also find robust evidence that advice affects savings styles and 

levels, and suggest that the higher fees paid by advised clients might reflect 

payment for broader financial advice. Both the industry-generated investor 

survey results and Foerster et al.’s finding of savings impacts suggest that at least 

some of advised investors’ excess fees. . .can be interpreted as fair payment for 

financial services that yield consumer benefits other than improved investment 

performance.”10

DOL goes on to state “that is not to say that benefits such as savings goals, estate planning, and 

time saving can be completely ruled out as factors contributing to returns differences.”11 Even 

after acknowledging the potential benefits of financial advice, DOL failed to measure them, even 

though they had previously estimated these benefits in the 2011 regulatory analysis.

Other studies provide additional support for the notion that there are measurable benefits of 

financial advice that should be taken into account when assessing the costs of the re-proposed 

regulation. A recent report commissioned by the DOL specifically addresses the benefit of 

financial advice with respect to unsophisticated (e.g., financially illiterate) investors. Garber et 

al. (2015) discuss the potential economic effects on individual retirement markets and investors 

of the 2010 DOL proposed regulation. 12 This analysis applies to the re-proposed regulations as 

well. Garber et al. state that, without the proposed regulation, “unsophisticated investors benefit 

from time savings” by using a financial adviser and “also benefit from help in choosing 

investment products (relative to those making these choices without professional help) and 

from coaching to open IRAs, contribute appropriate amounts, and so on.”13

Garber et al. further state that a key question concerning the proposed regulation relates to how 

the rule would affect the well-being or welfare of investors. They note that adopting the rule 

would likely help some investors and hurt others; they conclude by stating “we cannot predict 

 9

 Ibid. at p. 66152. 10 U.S. Department of Labor, Fiduciary Investment Advice, Regulatory Analysis, Section 3.2.3.5, Eroded IRA 

Returns, p. 94, April 14, 2015.

11 Ibid. at p. 94. 12 Garber, Steven, Jeremy Burke, Angela Hung, and Eric Talley. Potential Economic Effects on Individual 

Retirement Account Markets and Investors of DOL’s Proposed Rule Concerning the Definition of a ‘Fiduciary.’ 

Rand Corporation, Rand Labor and Population, RR-1009-DOL, February 2015, prepared for the Department of 

Labor.

13 Ibid. at 23.
-7-

whether the benefits to IRA investors would outweigh their costs for any particular type of IRA 

investor or in the aggregate.”14

A 2014 Financial Engines/AOL Hewitt study attempts to quantify the benefits of the use of 

“help” in defined contribution plans.15 The Financial Engines/AON Hewitt study provides 

important information with respect to participants who do not receive any form of help finding 

that 60.5 percent of non-help participants had inappropriate levels of risk (either too high or too 

low) and lower returns (332 basis points lower, net of fees). The study also found that near 

retirees needed the most help with this group having the widest variability in risk levels.

C. Quantifying the Benefits of Financial Advice

The fact that the 2011 DOL analysis quantified the benefits of financial advice suggests that the 

benefits of financial advice can and should also be taken into account with respect to the reproposed regulations. Indeed, their own analysis of the 2011 regulations provides support for 

recognizing the benefits of financial advice in the regulatory impact analysis for the re-proposed 

regulation. 

Incorporated in the 2011 estimates were assumptions concerning the availability and use of 

advice by defined contribution (DC) plan participants and IRA owners. DOL assumed that 63 

percent of DC plans offered some form of advice (online or live) and that 16 percent of DC plan 

participants utilized advice (25 percent of DC plan participants utilized advice when it was 

offered).

16 DOL also assumed that 67 percent of IRA owners utilized financial advice. These 

estimates appear consistent with DOL’s estimates for the re-proposed regulation that ignore the 

benefits of financial advice.

17 

A recent study by the Center for a Secure Retirement quantified the benefits of access to 

financial advice. The study found that, among similarly situated individuals (middle-income 

Baby Boomers, defined as those with annual household income between $25,000 and $100,000), 

individuals who work with a financial professional were more likely (25 percent) to have 

investable assets over $500,000 than those who do not work with a financial professional (less 

than 10 percent).18 In other words, an individual who worked with a financial professional was 

2.5 times more likely to have investable assets over $500,000.

The Secure Retirement study found that the length of time an individual has worked with a 

financial professional also contributed to higher asset levels. Among those who worked with a 

financial professional for less than two years, 43 percent reported assets less than $100,000, 38 

percent reported assets between $100,000 and $500,000, and 19 percent reported assets 

 14 Ibid. at 26. 15 Financial Engines, AON Hewitt, Help in Defined Contribution Plans: 2006 through 2012, May 2014. 16 2011 Regulation, supra. 17 Using these statistics and other research on the value of financial advice, DOL was able to estimate the losses to 

retirement savings when DC plan participants and IRA owners do not have access to financial advice.

18 Center for a Secure Retirement, The Middle-Income Boomer Retirement Gap: Savings, Education, and Advice, 

November 2014.
-8-

exceeding $500,000. On the other hand, for individuals who had worked with a financial 

professional for at least 10 years, 24 percent reported assets less than $100,000, 47 percent 

reported assets between $100,000 and $500,000, and 28 percent reported assets exceeding 

$500,000.

A DOL-sponsored pilot survey (that examined how DC plan participants make retirement 

decisions) supports empirical research indicating that retirement savings plan balances are 33 

percent higher if a participant receives financial advice.

19 These results occurred consistently 

across all demographic groups, implying significant positive benefits attributable to access to 

financial advice.

Anecdotal evidence provided by financial services companies also supports the idea that there 

are measurable positive benefits to financial advice that should be measured. One company 

indicated that oral communications with employees terminating employment have a significant 

effect on cash-out rates; employees with account balances between $35,000 and $50,000 are 

approximately 3.2 times less likely to cash out their retirement savings if they receive a call 

rather than only receiving written communications.

As noted above, the 2011 DOL regulatory analysis concluded participants who select their own 

investments often choose inappropriate levels of risk (either too low or too high). In addition to 

encouraging individuals to begin saving for retirement and to save appropriate amounts, financial 

advisers help individuals select appropriate levels of risk for their retirement savings investments

(consistent with the individual’s comfort level). DOL’s focus on rates of returns is misleading, 

because it fails to account for individual preferences for lower risk levels (and often lower rates 

of return associated with lower risk investments, e.g. government securities). In addition, the 

DOL focus neglects to account for the ancillary benefits of using a financial adviser, including 

risk management.

 19 Rand American Life Panel, Well-Being Survey 189. The survey asked the following question: “How do you 

make decisions about savings and investment related to retirement?” The possible responses were: “1) Ask 

relatives/friends, 2) Talk to financial planners/brokers, 3) Talk to lawyers, 4) Read magazines/newspapers/books, 5) 

Get advice from television, and 6) Other.” Of the respondents who had not already retired, approximately 24 

percent indicated that they had talked to financial planners/brokers. These contacts likely include both consultation 

with a paid financial planner and contacts through a call center or broker-dealer associated with their employer’s 

retirement savings plan.
-9-

III. DOL Claims of Front-End Load Fund Underperformance

Inconsistent With Market Data

DOL claims that front-end load mutual funds “underperform” by 100-200 basis 

points per year resulting in costs to IRA mutual fund investors of $430 billion 

over 10 years and nearly $1 trillion over 20 years, but the academic research 

DOL cites and additional data analysis show that these claims cannot be 

supported.

A. ICI Estimates of Front-Load Mutual Fund Performance

Recent research by the Investment Company Institute suggests that DOL’s estimates of 

underperformance by front-end load mutual funds used to justify the approach taken in the reproposed regulation cannot be supported.20 The ICI states 

“The DOL has arrived at these numbers (DOL’s estimates of 

underperformance) by misinterpreting and incorrectly applying the findings of 

academic research that it cites as the foundation of its conclusions. In fact, 

these assertions do not stand up when tested against actual experience and 

data.”21

ICI examined front-load mutual fund shares sold from 2007 to 2013 and measured fund returns 

net of expenses in the year after the sale. ICI found that the sales-weighted average returns for 

shares sold with front-end loads actually did better than an industry average calculated from 

Morningstar performance data by 27 basis points, directly countering DOL estimates of 100-200 

basis points of underperformance. ICI notes that DOL failed to test its estimates against “real 

and widely available” market data and states “the fact that investors concentrated their 

purchases of fund shares sold with a front-end load in those funds that outperformed the 

average return for their category undermines the DOL’s analysis and eliminates almost all of 

the rationale the DOL uses to justify its proposal.”22

Further, the ICI analysis notes that none of the studies cited by DOL to support its conclusion of 

rampant so-called “conflicted advice” actually examine the outcomes of investing with a 

financial adviser who is a fiduciary compared to a financial adviser who is not a fiduciary. Thus, 

according to ICI, “the DOL does not actually measure – and cannot measure, based on these 

studies – whether an investor using a fee-based ERISA fiduciary adviser will experience a 

different outcome than an investor using another financial adviser that is not an ERISA 

fiduciary.”23

 20 See Statement of the Investment Company Institute, Brian Reid, Chief Economist, Hearing on “Restricting Access 

to Financial Advice: Evaluating the Costs and Consequences for Working Families and Retirees,” before the 

Subcommittee on Health, Employment, Labor, and Pensions, Committee on Education and the Workforce, United 

States House of Representatives, June 17, 2015.

21 Ibid. at p. 2. 22 Ibid. at. p. 4. 23 Ibid. at p. 5.
-10-

ICI also notes that the DOL analysis treats front-end loads as a cost, but ignores the costs of feebased accounts, thereby overstating the cost differences between these types of accounts. 

Specifically, ICI states

“The DOL’s analysis is flawed in another fundamental way: it ignores the cost of 

advice and services outside of broker-sold accounts, resulting in an inappropriate 

overstatement of the benefits of the proposal. The DOL focuses solely on the 

costs of advice and assistance paid through a fund—through an up-front sales 

charge, for example. But the DOL fails to consider how these costs compare to 

the costs that investors incur when they pay a financial advisor directly for advice 

(for example using an asset-based fee that an investor pays directly to a financial 

advisor) rather than paying through a load. Ignoring the market realities of the 

cost of advice and assistance, the DOL exaggerates the benefits from lower loads 

resulting from their proposal and ignores possible costs that investors could incur 

if they move to fee-based accounts.

How significant is this omission? The DOL argues that IRA investors currently 

pay between 26 and 28 basis points per year in front-end loads, in addition to fund 

expenses. A recent study by Cerulli Associates finds that fee-based accounts –

the most likely alternative to brokerage accounts – cost investors 111 basis points 

per year on average, in addition to fund expenses.”24

B. DOL Cited Research

DOL cites research that they say supports the view that investors are pushed into “questionable 

investments” based on the potential fees that brokers and others might earn on the investments. 

They argue that the research uniformly finds that investors put more money into funds that 

attract higher payments to brokers and state that this supports the view that brokers and financial 

advisers “apparently serve their own interest by guiding investors into funds with higher 

loads.”25

DOL relies significantly on the findings in Bergstresser et al. (2009) as support for the 

conclusion that broker-dealers provide “conflicted” advice to IRA and retirement plan 

participants. The research examined risk-related returns between “direct sold” and “broker-sold” 

mutual funds over the 1996 to 2004 period, finding that broker-sold mutual funds delivered 

lower risk-adjusted returns, except with respect to foreign equity funds.26 Thus, the research 

examines mutual funds in general and does not specifically examine the effects of broker 

assistance on IRA or retirement savings plan participants. DOL extrapolates the results of the 

research to IRA and retirement savings plan investments, but does not consider whether the 

evidence supports such extrapolation. 

 24 Ibid. at p. 4. 25 DOL Regulatory Analysis, 3.2.3.4.2, p. 87. 26 Bergstresser et al. describe direct-sold funds are marketed by the fund directly to the consumer, while broker-sold 

funds are sold by an intermediary.
-11-

Bergstresser et al. examine the demographics of mutual fund investors and find these individuals 

to be disproportionately drawn from upper ranks of national wealth, income, and educational 

attainment. DOL does not explore whether the demographics of mutual fund investors in the 

Bergstresser research would compare to the demographics of individuals participating in IRAs or 

a qualified retirement savings plan, but rather presumes that the Bergstresser research applies to 

IRAs and qualified retirement plan participants without considering or adjusting for the different 

demographic characteristics of these participants compared to mutual fund buyers.

The DOL analysis neglected to mention that Bergstresser et al. indicate that their results do not 

account for the potential intangible (and tangible) benefits of brokers, including that “brokers 

may help their clients save more than they would otherwise save, they may help clients more 

efficiently use their scarce time, and they may increase overall investor comfort with their 

investment decisions.”27

Other papers cited by DOL to support the estimates of the magnitude of underperformance 

caused by “conflicted advice” also relate to purchases in the retail mutual fund market and not 

specifically to IRAs (e.g., Del Guercio and Reuter (2014)).

28 Del Guercio and Reuter found that 

actively-managed funds sold directly to investors outperformed index funds and broker sold 

index funds outperform broker sold actively-managed funds, but did not examine whether these 

returns would differ if investors used a fiduciary adviser.

Further, the February 2015 Council of Economic Advisors (CEA) analysis of this issue noted 

limitations in the Bergstresser and Del Guercio papers. CEA notes 

“One limitation of this type of comparison is that it may incorporate differences 

other than the presence of conflicted advice between the types of investors 

purchasing funds through these two sources. For instance, investors purchasing 

funds through intermediaries may be more risk-averse and less experienced with 

investing than those buying direct-sold shares from a mutual fund sponsor. 

Failing to account for such differences may potentially overstate or understate 

losses due to conflicts of interest.”29

Only one paper, Chalmers and Reuter (2014), examines an employer retirement plan. Chalmers 

and Reuter founds that broker clients in the Oregon State University’s defined contribution 

retirement plan underperformed self-directed investors by 1.54 percentage points.30 However, 

Chalmers and Reuter note that the investment menus in the options being examined were 

significantly different. As a result, it is not clear whether the results reported in the study relate 

specifically to the effects of broker-dealer advice. Further, the study did not examine whether 

 27 Bergstresser et al. 2009, at 4131. 28 DOL Regulatory Analysis, section 3.2.4., Magnitude of Harm, p. 95-96.

29 Executive Office of the President of the United States of America, The Effects of Conflicted Investment Advice on 

Retirement Savings, February 2015, at p. 11. 30 Chalmers, John and Jonathan Reuter, What is the Impact of Financial Advisors on Retirement Portfolio Choices 

and Outcomes?, University of Oregon and Boston College, 2014.
-12-

the results would have been different if individuals in the plan had access to financial advice 

provided by a fiduciary.

One notable additional point worth mentioning concerning the Chalmers and Reuter paper relates 

to the characteristics of the plan. The contribution amount to the Oregon State University plan 

was a fixed percentage of salary paid by the employer on behalf of all participating employees. 

Thus, as noted in the paper, “there is no scope for brokers to increase savings rates within 

ORP.”31 As a result, the structure of the plan prevented Chalmers and Reuter from examining

the potential positive effects that financial advice might have had on savings behavior. Thus, the 

results in the paper fail to examine all of the effects that might accrue from access to financial 

advice.

C. Long-Term Trends in Mutual Fund Fees

Research and analysis of ICI data contradict DOL’s arguments concerning the harm caused by 

brokerage relationships. First, declines in the expense ratios of mutual funds, including activelymanaged funds, suggest that competition in the marketplace may be driving down the fees that 

investors pay. Second, this competition would not occur if investors did not demand lower fees. 

Finally, low cost index funds may have costs that are not reflected in the fund’s expense ratio, 

i.e., direct payments to an adviser under a fee-based arrangement, so a comparison of fees 

between actively-managed funds and index funds may not capture the full extent of index fund 

costs.

Long-term trends show significant declines in mutual fund expense ratios, which include 

portfolio management costs, fund administration and compliance costs, shareholder service 

expenses, recordkeeping, certain kinds of distribution charges (e.g., 12b-1 fees), and other 

operating costs.32

Table 1 shows the average expense ratios for mutual funds from 2000-2013.

 31 Chalmers and Reuter, p. 8. 32 See, Investment Company Institute, 2015 Investment Company Fact Book, A Review of Trends and Activities in 

the U.S. Investment Company Industry, 55th Edition, 2015.
-13-

Table 1.—Average Mutual Fund Expense Ratios

[Asset-Weighted Average, Basis Points, 2000-2014]

Year Equity Hybrid Bond Money Market

2014 70 78 57 13

2013 74 80 61 17

2012 77 79 61 18

2011 79 80 62 21

2010 83 82 63 24

2009 87 84 64 33

2008 83 77 61 35

2007 86 77 64 38

2006 88 78 67 40

2005 91 81 68 42

2004 95 85 72 42

2003 100 90 75 42

2002 100 89 74 44

2001 99 89 75 46

2000 99 89 76 49

Source: Investment Company Institute, 2015 Investment Company Fact Book, 55th Edition, 2013.

For equity funds, over the 14 year 2000-2014 period, the average expense ratio declined from 99 

basis points to 70 basis points, a decline of 29 percent, while the average for hybrid funds 

declined by 12 percent, for bond funds declined by 25 percent, and for money market funds 

declined by 73 percent. The ICI attributes the decline in average expense ratios for equity and 

long-term funds to a shift of investors toward no-load share classes, which is due in large part to 

changes in the way that investors compensate brokers and other financial professionals.33

Over the last 30 years, there has been a shift away from front-end load fees (a one-time, up-front 

payment for current and future services) to asset-based fees (fees assessed as a percentage of the 

assets that a financial manages for an investor). ICI notes that, from 2005 to 2014, front-end and 

back-end load share classes have seen $717 billion in outflows, while the greatest inflow of 

funds occurred in no-load share classes.

At the same time, the average expense ratios for actively-managed funds, which would likely 

have higher fees because of the more intensive analysis required by financial advisers and 

brokers, have also declined. 

ICI finds that the average expense ratios for both actively-managed funds and for index funds, 

which tend to have lower expense ratios, have declined by approximately the same amounts with 

a 20 basis point decline for actively-managed funds and a 16 basis point decline for index funds 

over the 2000 to 2014 period. Part of this decline can be attributed to an increase in the 

percentage of assets invested in lower-cost funds, a trend that applies both to actively-managed 

and index funds.

 33 Ibid.
-14-

According to ICI data, in 2000, 33 percent of the assets in actively-managed funds were invested 

in the funds with expense ratios in the lowest decile; by 2013, this percentage had increased to 49 

percent of the assets in actively-managed funds.34 In 2014, among actively-managed equity 

funds, index equity funds, and target date funds, assets tend to be concentrated in lower-cost 

funds (see Graph 1).

Further, as the ICI hearing testimony discussed previously points out, the correct comparison is 

between (1) fee-based accounts that may invest in index funds at a cost of 11 basis points plus 

the adviser’s fees of 111 basis points for total of 122 basis points, and (2) 86 basis points for 

brokerage accounts, showing that, on average, investors save 36 basis points under the brokerdealer model.35

 34 Trends in the Expenses and Fees of Mutual Funds, 2013. Investment Company Institute, ICI Research 

Perspective, Vol. 20, No. 2, May 2014.

35 Statement of the Investment Company Institute, supra.

26

30

15

36

74

70

85

64

0

10

20

30

40

50

60

70

80

90

All Equity Funds Actively Managed Equity

Funds

Index Equity Funds Target Date Funds

Graph 1.--Concentration of Assets in Lower-Cost Mutual Funds, 2013

(Percentage of Total Assets)

Source: Investment Company Institute, Trends in the Expenses and 

Fees of Mutual Funds, 2013

Funds with expense ratios in the upper three quartiles Funds with expense ratios in the lowest quartile
-15-

D. Reliance on Foreign Experience

DOL cites papers that purport to measure the effects of “conflicted advice,” but the papers cite 

data relating to foreign investment markets, not U.S. investment markets. Specifically, Foerster 

et al. (2014) and Hackethal et al. (2012) relate to investors in Canada and Germany, respectively. 

There is no evidence that either Canada or Germany presents the same statutory, regulatory, or 

investor behavioral framework as the United States. Therefore, conclusions about the effects of 

the re-proposed regulations cannot be inferred from these studies.

IV. DOL Ignores Qualifying Statements Made in Research Relied on 

to Support DOL Arguments

The DOL regulatory impact analysis cites numerous studies in support of their 

positions. But closer scrutiny reveals that these studies often qualify their 

findings with caveats concerning the findings and suggestions for further 

research.

A. Existence of Conflicts

DOL identifies what it calls “conflicts of interest” in the case of broker-dealer interactions with 

IRA customers. However, often the evidence cited by DOL represents a “potential,” rather than

an “actual,” conflict of interest. For example, DOL cites a RAND study for the Securities and 

Exchange Commission (SEC), as evidence that registered investment advisors (RIAs) are “often 

highly conflicted.”36 However, the statistics cited by DOL do not represent evidence that RIAs 

consistently acted in a way that was against their clients’ best interests. Rather, DOL assumes 

that the mere existence of certain characteristics – for example, the receipt of commissions –

leads to improper behavior and that most, if not all, RIAs acted improperly with respect to their 

clients. Further, the Rand study states “the current body of literature generally cannot account 

for selection issues and the intangible benefits financial advisers provide.”37

Similarly, DOL cites research relating to concerns with contingent commissions of insurance 

agents, but then notes that “it is unclear whether or to what degree contingent commissions might 

affect IRA investors.”38

DOL cites the empirical model created by Stoughton, Wu, and Zechner (2011) as support for the 

position that investors who use a financial adviser who receives a fee rebate or kickback are not 

only worse off than they were without the conflict of interest, but they are “worse off than they 

would have been if the investment adviser did not exist at all.”39 However, once again, the 

 36 DOL regulatory analysis, section 3.2.3.1, p. 73. 37 Burke, Jeremy, Angela A. Hung, Jack W. Clift, Steven Garber, and Joanne K. Yoong. Impacts of Conflicts of 

Interest in the Financial Services Industry. Rand Corporation, Rand Labor & Population, Working Paper WR-1076, 

August 2014, p. 2. The work in the report was supported by a grant funded by the Department of Labor. 38 Ibid. p. 74.

39 Ibid. p. 75.
-16-

research contains important caveats that DOL does not mention. In their conclusions, these 

authors state the following:

“Advisory services provide an opportunity for smaller investors to participate in 

an actively managed portfolio, consisting for instance of alternative investments 

which would not be economical without the use of an adviser. . .the presence of 

advisers improves the total welfare of the portfolio manager and investors even 

when they are subject to potential conflicts of interest (emphasis added).”40

The authors go on to state that, while it is tempting to conclude from their research that rebates 

should be banned, this conclusion should not be drawn.

B. Costly Pursuit of Customers

DOL argues that IRA customers bear the costs of advertising, marketing, and other expenses 

intended to secure new customers and that this results in costs that are “unlikely to yield 

commensurate benefits for IRA customers.”41 However, the fact that customers bear the costs of 

marketing and other business expenses represents a fundamental principle of business 

economics. In fact, most of the section of the DOL regulatory analysis deals less with 

advertising and more with DOL’s objection to the fees received by advisers.

C. Obstacles to Assessing Advice Quality

The DOL states “almost certainly, the great majority of IRA investors cannot directly assess the 

quality of the investment advice they receive.”42 The DOL cites research relating to basic issues 

of financial literacy to support this statement and notes “older Americans ‘lack even a 

rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and 

investment fees.’”43 Yet, the problems with financial illiteracy also point to a more 

fundamental problem – without access to some sort of financial advice or assistance, 

individuals tend to make suboptimal decisions concerning their retirement savings. The DOL 

completely ignores this issue, as addressed in section B., above.

DOL cites research that they contend supports their view that individuals are unable to assess the 

quality of financial advice that they receive. However, the research also contains important 

caveats. For example, DOL cites the problems with financial adviser advice in a study by 

Mullainathan, Noeth, and Schoar (2012), but the researchers also qualify their results by noting 

that their research was a first step that did not take into account important issues that should be 

considered. In addition, the authors concluded “it is possible that fee-only advisers provide 

 40 Stoughton, Neal M., Youchang Wu, and Josef Zechner. Intermediated Investment Management. Journal of 

Finance 66, no. 3 (2011), p. 35.

41 DOL regulatory analysis, section 3.2.3.2, p. 75. 42 DOL regulatory analysis, section 3.2.3.3.1, p. 77. 43 DOL regulatory analysis, section 3.2.3.3.1, p. 77-78, citing Lusardi Annamaria, Olivia Mitchell, and Vilsa Curto, 

Financial Literacy and Financial Sophistication among Older Americans, NBER Working Paper 15469, 2009.
-17-

better advice but have to charge such high fees that average retail investors are better off in the 

status quo situation.”44

In addition, researchers have noted that the results of the academic research have been mixed. 

For example, a paper by Bluethgen, Meyer, and Hackethal (2008), which DOL cites as 

supporting their position, found that investors who received advice had higher quality, more 

diversified portfolios, and also paid higher fees on their investments. But the authors posited that 

these fees may have provided compensation to the adviser for the benefits of improved 

investment efficiency. Kramer (2012) found that advised accounts were better diversified than 

self-directed accounts.

Further, the DOL analysis discusses at length the problem of financial literacy among average 

investors. But lack of financial literacy also offers a reason why investors need access to 

financial advice and assistance. Because investors lack the knowledge to make sound 

decisions about saving for retirement, they tend to start saving later, save less than they 

should, and don’t keep their savings for retirement purposes.

Hung et al. (2010) found that individuals with low financial literacy are more likely to seek 

advice when it is offered to them. Further, the research suggests that having employers offer 

financial advice to employees and ensuring employees engage in active decision making can 

result in significant utilization of the financial advice and improved financial outcomes. The 

research concluded that moving from knowledge to actual behavior changes required both advice 

and educational materials designed to engage rather than inform individuals. Thus, this research 

suggests that active efforts to improve financial literacy and provide financial advice will 

improve retirement savings outcomes.

D. Lack of Reputation Effects

Along the same lines, DOL argues that individuals cannot assess the value of financial advisers 

(reputation effects) because they are unable to process the information necessary to judge 

whether financial advisers are giving them good or bad advice. DOL cites research suggesting 

that reputation effects will cause investors to reject advisers who provide bad advice, but then 

DOL rejects the research by saying that IRA investors don’t have the attention and understanding 

of adviser performance to make accurate assessments of their adviser.

Inderst and Ottaviani, cited in the DOL analysis, have conducted extensive research on financial 

advice. DOL cites this research, but concludes that few IRA investors would qualify as wary 

consumers in the Inderst and Ottaviani model.

DOL does not discuss the fact that Inderst and Ottaviani also point out some of the potential 

downsides of increased regulation of financial advice. Their 2011 paper states “policy 

intervention that mandates disclosure of commissions can protect naïve consumers and increase 

welfare. However, prohibiting or capping commissions could have the unintended 

 44 Mullainathan, Sendhil, Markus Noeth, and Antoinette Schoar, The Market for Financial Advice: An Audit Study,

National Bureau of Economic Research, NBER Working Paper Series 17929, March 2012. p. 19.
-18-

consequence of stifling the adviser’s incentive to acquire information. More vigorous 

competition benefits consumers and reduces exploitation. . .”45 Inderst and Ottaviani also 

concluded that the efficiency of particular arrangements could be impaired by factors outside the 

scope of their analysis. They remark “for instance, it is often claimed that customers’ up-front 

willingness to pay for advice is inefficiently low because they are reluctant to lock-in a certain 

loss. To wit, while customers pay a commission only after they decide to buy a particular 

product or decide to invest at all, the sure payment of an up-front fee could loom excessively 

large.”46

Similarly, in the paper cited by DOL, Inderst and Ottaviani note “professional financial advice. . 

. can play a key role in improving efficiency, as consumers often lack knowledge and 

capability to make informed decisions in their own best interest.”47 They go on to conclude 

that “given the various, potentially beneficial roles that commissions and other inducements play 

in some settings, commission caps, bans, and other strict measures should be imposed only 

when disclosure has been proven (or can reasonably be expected) to fail.”48 Finally, the authors 

state “we anticipate that measures to enhance transparency will harness market forces to raise the 

quality of advice, without interfering with contractual practices.”49

E. Obstacles to Understanding Conflicts

The DOL states that IRA investors will not understand the potential for bias from adviser 

conflicts. The DOL further represents that disclosures of conflicts of interest don’t provide 

enough information for IRA investors to make informed decisions. From this, the DOL 

concludes that because IRA investors cannot determine the quality of the advice that they receive 

and often do not understand or react to their advisers’ potential conflicts of interest, they are 

unlikely to react to these conflicts. Consequently, the DOL further concludes that additional 

disclosure will not be effective. At the same time, the re-proposed regulations include required 

disclosures that provide so much information that the average individual could not possibly 

process all the information.

The only reference cited by the DOL relates to potential conflicts of insurance intermediaries. 

The paper cited (Beh and Willis (2009)) represents a qualitative analysis of potential problems 

with insurance intermediaries, but does not entail any attempt to measure the possible 

quantitative losses attributable to these conflicts.

In fact, the Beh and Willis paper also notes the “benefits” of insurance intermediaries. They 

state “Intermediaries, both independent and exclusive, perform valuable services that are desired 

and beneficial to both prospective insureds and insurers.”50 The authors further state

 45 Inderst, Roman and Marco Ottaviani. How (not) to pay for advice: A framework for consumer financial 

protection. August 2011, p. 1. 46 Ibid. at p. 35. 47 Inderst, Roman and Marco Ottaviani. Financial Advice. March 2012, p. 23. 48 Ibid. at p. 24.

49 Ibid. at p. 26. 50 Beh, Hazel and Amanda M. Willis. Insurance Intermediaries. Connecticut Insurance Law Journal, Vol. 15:2, 

2009, p. 579.
-19-

“Prospective insureds also benefit from the expertise and labors of intermediaries. A buyer, 

whether sophisticated or not, would be hard pressed to intelligently compare characteristics of 

insurance products beyond the premium charged without the expertise of an intermediary. For 

example, nuances in policy language, insurer solvency, claims practices, and reputation of the 

insurer are matters for which even sophisticated insureds need the counsel of intermediaries.”

V. DOL’s Compliance Cost Estimates Understate Actual Costs of 

Re-Proposed Regulations

DOL’s compliance cost estimates likely underestimate the actual costs of 

compliance and fail to account for the fact that these costs will be borne by 

consumers.

DOL estimates the compliance costs to be between $2.4 billion and $5.7 billion, mostly 

attributable to the costs of new fiduciaries complying with relevant prohibited transaction 

exemption requirement.51 DOL later states that they estimate the costs to be “less than 

approximately $2.4 billion over 10 years”52 and “between $2.4 billion and $5.7 billion, or less if, 

as expected, more cost effective business models gain market share.”53 

DOL utilized data provided by the Securities Industry and Financial Markets Associations 

(SIFMA) to the Securities and Exchange Commission with respect to a different regulatory 

process to develop its cost estimates of the upper range ($5.7 billion). However, DOL then 

dismisses the SIFMA estimates and refers to SIFMA’s data as significant overestimates and uses 

data from the Investment Adviser Association (IAA) also submitted to the SEC to derive a 

significantly smaller estimate ($2.4 billion) of potential costs. However, closer scrutiny of the 

DOL estimates calls into question whether they have adequately captured the potential 

compliance costs of the re-proposed regulations.

For example, consider one component of the DOL estimates – the costs of updating computer 

systems to comply with the best interest contract exemption. DOL estimates these costs as 

follows: “The Department estimates that updating computer systems to create the required 

disclosures, insert the contract provisions into existing contracts, maintain the required records, 

and publish information on the Web site will require 100 hours of IT staff time for financial 

institutions during the first year that the financial institution uses the PTE. This IT work results 

in approximately 280,000 hours of burden during the first year and approximately 22,000 hours 

of burden during subsequent years at an equivalent cost of $22.3 million and $1.8 million 

respectively.”54

However, a simple survey of major financial institutions reported significantly higher costs to 

comply with disclosure rules that required significantly less information than required under the 

 51 DOL Regulatory Analysis, at p. 157. 52 Ibid. at p. 178. 53 Ibid. at p. 215. 54 U.S. Department of Labor, Employee Benefits Security Administration, 29 CFR Part 2550, Proposed Best 

Interest Contract Exemption, Federal Register Vol. 80, No. 75, Monday, April 20, 2015, at p. 21982.
-20-

best interest contract exemption. The companies indicated the number of IT hours required to 

comply with the participant disclosure rules under DOL regulation 2550.404a-5 and the service 

provider disclosure rules under DOL regulation 2550.408b-2. One company reported spending 

more than 100,000 IT hours implementing these two regulations at a cost of approximately $8.4 

million. Another company reported spending more than 90,000 hours at a cost of over $6.5 

million. These examples suggest that the IT costs (a small component of DOL’s overall costs of 

compliance) could be significantly underestimated, raising questions about the assumptions 

underlying the other components of DOL’s costs of compliance. Note that the combined effect 

of these two companies ($14.9 million) totals 67 percent of the DOL’s total estimate of IT costs 

($22.3 million) for the first year under the regulatory analysis.

DOL estimates that the total costs of complying with the best interest contract exemption in the 

first year would be $77.4 million, which includes producing and distributing the disclosures, 

complying with the recordkeeping conditions, staff time to create the original disclosure 

templates, and time to update IT systems. Assume that the company reporting IT costs of only

$6.5 million would have similar costs under the re-proposed regulation, even though it is likely 

that this company would have significantly greater costs. This implies that this single 

company’s IT costs in the first year would represent almost 8.5 percent of the total estimated 

industry costs of compliance with the best interest contract exemption. If the costs of both 

companies were considered, the combined IT costs for the two companies would represent 

nearly 20 percent of the total DOL estimated industry costs of complying with the exemption.

In addition, another element of the potential costs of compliance that DOL ignores are the 

potential additional compliance costs related to the very short eight month transition period 

provided to implement the re-proposed regulations after they are finalized. DOL fails to discuss 

the potential costs of this in its economic analysis, but states the following in its discussion of 

possibly adjusting the compliance date:

“The Department understands that affected advisers and others in the financial 

industry will need time to modify business practices. A longer compliance period 

would defer and may reduce compliance costs. . .The Department invites 

comments as to whether the new proposal’s compliance dates are workable, or 

whether dates should be adjusted with respect to some or all of the proposal’s 

provisions and entities and transactions it affects.”55

VI. DOL Fails to Account For Reduced Access to Financial Advice

DOL assumes that financial advisers will accept reduced fees without any 

change in either the quantity or quality of their investment advice, but basic 

economic analysis suggests that this assumption cannot be supported.

DOL assumes that the re-proposed regulation would have “little effect on access to investment 

advice.”56 DOL states that the best interest contract exemption will be used and that firms 

 55 DOL Regulatory Analysis, section 7.10, Adjust the Compliance Date, p. 207-208. 56 DOL Regulatory Analysis, section 5.6, Indirect Cost, p. 176. 
-21-

providing investment advice today will continue to provide advice after the regulation is enacted. 

However, basic economic principles suggest that, if an adviser’s costs increase as a result of the 

re-proposed regulation, these costs will be borne by the adviser’s customers either through 

decreased services or increased costs to the customer. The decreased services would involve 

either the exit of certain advisers from the market or a reduction in the intensity of advice 

provided by remaining advisers.

DOL ignores the substantial market disruptions that the re-proposed regulations could generate. 

First, as noted above, DOL’s estimates of the compliance costs of the re-proposed regulations 

appear to understate significantly the real costs that could occur if the regulation is finalized. 

Second, many commenters have noted the potential for real market disruptions if the re-proposed 

regulations are finalized.

The Financial Industry Regulatory Authority (FINRA) CEO recently criticized the re-proposed 

regulations on the grounds that the regulation could cause firms to curtail or even discourage 

sales of IRAs.57 Mr. Ketchum stated that the DOL proposal would create a bias against products 

with higher fees, even if they’re the best recommendation for a client, and that it could force 

firms to move to a fee-based rather than a brokerage model.

SIFMA offered a counter-proposal to the DOL re-proposed regulation, contending that the DOL 

rule would significantly increase broker liability risk and force clients to move from 

commission-based accounts to fee-based accounts, potentially pricing investors with modest 

assets out of the market.

Garber et al. acknowledge the potential for contraction in the market. They state

“we think it is likely that many broker-dealers and investment advisors would exit 

the IRA market if the Proposed Rule were adopted only if the proportion of 

current revenues that would have to be replaced or increases in costs were fairly 

substantial.

The number of professional advisors needed to serve the IRA market would be 

expected to decrease as a result of adopting the rule to the extent that brokerdealers exit the IRA market or take other steps to reduce their IRA-related 

advisory activities.”58

In the regulatory analysis, DOL notes the potential for reduced access to financial advice and 

states

“Nevertheless, the Department takes seriously the risk that banning adviser 

conflicts could reduce access to advice for some IRA investors, and that not 

only their investing but also their saving might suffer as a result. Even if the 

 57 Schoeff, Mark Jr., Finra’s Ketchum criticizes DOL fiduciary rule, Investment News, May 27, 2015. 58 Garber et al, at p. 18.
-22-

potential for this result is limited, its severity is sufficiently great that the 

Department agrees caution is required.”59

Further, DOL acknowledges the potential for reduced intensity of financial advice. In a section 

of the regulatory analysis relating to the decline in loads that has occurred over the last 20 years, 

DOL states that a reduction in financial adviser compensation would lead to a decrease in 

either the level of service provided per customer or the cost of providing those services.

60

However, despite significant comments from the industry about the potential adverse effects of 

the 2010 regulation, DOL assumes that the industry will develop models, such as robo-advisers, 

to take the place of face-to-face interactions that have proven successful in improving savings 

outcomes. In effect, the DOL analysis assumes that financial advisers will adapt in any way 

needed to ensure that they will maintain their same level of business.

Further, the DOL analysis attempts to counter claims about the effects of adoption of a similar 

rule in the United Kingdom. DOL states that the UK experience has only limited application to 

the re-proposed regulation. In addition, DOL cites a Towers Watson study as evidence that any 

actual exodus of financial advisers from the market was not the result of adoption of the UK rule.

However, evidence from the United Kingdom suggests that advisers will exit the market, 

particularly for small accounts. The DOL analysis cites a Towers Watson study to state that 

there is not an advice gap in the United Kingdom. In fact, the Towers Watson study notes

“A different picture is likely to emerge in considering individual consumer 

markets, as opposed to the total market . . . it has not been possible to analyse 

supply by segment . . . However, anecdotal evidence . . . suggest that advice 

capacity serving less affluent segments is likely to have reduced.”61

VII. Conclusions

A close review of the DOL regulatory impact analysis uncovers many overstatements and flawed 

assumptions. DOL cites numerous studies that they argue support the re-proposed regulation, 

yet closer scrutiny shows that many of the studies either are not relevant or caveat the findings 

on which DOL relies.

More troublesome is the fact that DOL dismisses virtually all of the information and data 

provided by the industry on the potential impact of the regulations even though this information 

could help inform the DOL estimates. Although the industry has consistently indicated its 

support for a fiduciary standard and has offered to work closely with DOL to develop workable 

rules, the DOL regulatory analysis reads more like a legal brief in litigation than a reasoned 

analysis supporting the re-proposed regulations.

 59 DOL Regulatory Analysis, section 3.2.2., Qualitative Discussion, p. 109. 60 DOL Regulatory Analysis, section 3.4.3.2.3., Decline in loads, p. 123. 61 Advice Gap Analysis: Report to FCA, Towers Watson, 5 December 2014, p. 8.
-23-

DOL provided an extremely short period for review and comment with respect to the reproposed regulations and an extraordinarily short period after finalization before the regulations 

become effective. These time periods suggest that DOL may implement the regulations without 

taking into account input from the industry that must comply with the rules.
{C/M:785/0002/00229218.DOCX; 1}

UNINTENDED CONSEQUENCES: 

Potential of the DOL Regulations to 

Reduce Financial Advice and Erode 

Retirement Readiness

Prepared for Davis & Harman

by

Quantria Strategies, LLC

July 2015
i

UNINTENDED CONSEQUENCES: POTENTIAL OF THE DOL 

REGULATIONS TO REDUCE FINANCIAL ADVICE AND ERODE

RETIREMENT READINESS

CONTENTS

I. Introduction and Executive Summary.......................................................................1

II. Unintended Effects of the DOL Regulations.............................................................2

A. DOL Regulations Likely to Reduce Access to Financial Assistance ................2

1. Re-proposed DOL Fiduciary Regulations ...................................................2

2. DOL Regulations Likely Would Reduce Access to Financial Markets For 

Small IRAs and Small Business Retirement Plans......................................6

3. DOL Regulations Reduce Availability of Educational Materials For 

Retirement Plan Participants........................................................................8

B. Unintended Effects on Retirement Readiness....................................................9

1. Measures of Retirement Readiness..............................................................9

2. The Impact of Financial Literacy on Retirement Readiness......................10

3. The Benefits of Financial Assistance.........................................................12

III. Effects of the Regulations on Overall Retirement Savings....................................15

A. Individuals with IRAs......................................................................................16

1. Effects on IRA Account Holders...............................................................19

B. Small Business Retirement Plans ....................................................................21

C. Retirement Plan Participants............................................................................25

1. Current Participants ...................................................................................25

2. Terminating Participants............................................................................27

D. Cumulative Loss in Retirement Savings and Reductions in Retirement

Readiness .........................................................................................................29

1. Cumulative Loss in Retirement Savings....................................................29

2. Reductions in Retirement Readiness .........................................................32

VI. Conclusions.................................................................................................................33

Appendix A: Detailed Methodology of Estimates..............................................................34

References...............................................................................................................................42
ii

LIST OF TABLES

Table 1 – Distribution of IRA Ownership, by Account Balance Size, 2013...........................18

Table 2 – Characteristics of Participants, Classified by Type of Financial Advice ................26

Table 3 – Fair Market Value of Traditional and Roth IRAs, 2012..........................................34

Table 4 – Fair Market Value of SEP and SIMPLE IRAs, 2012 ..............................................40

LIST OF GRAPHS

Graph 1 Taxpayers Making Contributions to Individual Retirement Arrangements and 

Total Contributions, by Type of Account, Tax Year 2012..............................17

Graph 2 Average Individual IRA Balances, by Age of Account Holder, 2012.............18

Graph 3 Rollover Contributions to IRAs, Distributed by Type of IRA Plan, 2012 ......19

Graph 4 Average Fair-Market Value of SEP and SIMPLE IRA Plans, Distributed by 

AGI, 2012 ........................................................................................................22

Graph 5 Decline in SEP and SIMPLE IRAs, 2008 through 2012 .................................22

Davis & Harman, LLP commissioned this report on behalf of a coalition of financial services 

organizations that provide retirement services to millions of Americans.
1

I. Introduction and Executive Summary

DOL issued re-proposed regulations relating to the definition of a fiduciary for retirement 

savings purposes on April 14, 2015. In its regulatory impact analysis accompanying the reproposed regulations, DOL estimated the effects of what it referred to as “conflicted advice” 

under current law, which DOL presumed to be any advice provided by a broker-dealer who 

accepted certain forms of compensation. DOL estimated that this “conflicted advice” costs 

investors $210 to $430 billion over 10 years and $500 billion to $1 trillion over 20 years. DOL’s 

analysis acknowledges that there may be positive effects to financial advice, but they do not 

attempt to measure these effects.

The re-proposed regulations would cast a broad swath. The general rule causes many activities 

of financial advisers to create potential fiduciary liability and the regulations do not provide

workable safe harbors in the prohibited transaction exemptions. The regulations can be expected 

to create a chilling effect on financial adviser behavior. This is particularly true when the 

potential liabilities for violating the broad fiduciary standards and the likely costs of complying 

with safe-harbors in the prohibited transaction exemptions would exceed the value of providing 

certain services to retirement plans, their participants, and individual retirement arrangement 

(IRA) owners. Consequently, the regulations likely would result in a reduction of services 

provided to these parties, particularly for those with smaller account balances.

The reduced services would be reflected in a variety of ways, including (1) a decreased ability of 

financial service providers to accept small account balance clients under a brokerage model, (2) 

an increase in the fees charged with respect to small account balance clients, and (3) an overall 

reduced level of services provided by financial service advisers. On balance, the regulations are 

expected to hurt, rather than help, retirement plan participants,1 small employers, and IRA 

owners with small account balances.

Conservative estimates of the combined reduction in retirement assets 

attributable to the unintended consequences of the re-proposed regulations 

suggest that the regulations could result in losses of retirement savings of $68-

$80 billion each year. In addition, the re-proposed regulations will jeopardize 

retirement readiness for 11.9 million IRA and retirement participants. This 

11.9 million figure is made up of individuals who either are unlikely to be 

retirement ready (6.1 million) or are at risk of failing to be retirement ready (an 

additional 5.8 million).

The following analysis provides details on the ways in which the re-proposed regulations would 

affect adversely IRA account owners, retirement plan participants, and small businesses.

 1

 The fact that the best interest contract exemption does not apply to rollovers and distributions means that all 

retirement plan participants could be affected. Even if the exemption were to be made technically applicable, it is 

our understanding that financial institutions will not be able to use the exemption, making it effectively inapplicable. 
2

II. UNINTENDED EFFECTS OF THE

DOL REGULATIONS

A. DOL Regulations Likely to Reduce Access to Financial 

Assistance

When the Department of Labor (DOL) issued proposed regulations in 2010 revising the 

definition of a fiduciary for retirement plan purposes, many commenters criticized both the 

substance and the scope of the regulations. After a year of comment and review, the DOL 

announced plans to withdraw the proposal and issue a new proposed regulation. DOL issued the 

re-proposed regulations on April 14, 2015.

The re-proposed regulations would cast a broad swath. They have a general rule that causes 

many activities of financial advisers to create potential fiduciary liability and they do not provide

workable safe harbors in the prohibited transaction exemptions. The regulations can be expected 

to create a chilling effect on financial adviser behavior. This is particularly true when the

potential liabilities for violating the broad fiduciary standards and the likely costs of complying 

with safe-harbors in the prohibited transaction exemptions would exceed the value of providing 

certain services to retirement plans, their participants, and individual retirement arrangement 

(IRA) owners. Consequently, the regulations likely would result in a reduction of services 

provided to these parties, particularly for those with smaller account balances.

The reduced services would be reflected in a variety of ways, including (1) a decreased ability of 

financial service providers to accept small account balance clients under a brokerage model, (2) 

an increase in the fees charged with respect to small account balance clients, and (3) an overall

reduced level of services provided by financial service advisers. On balance, the regulations are 

expected to hurt, rather than help, retirement plan participants,2 small employers, and IRA 

owners with small account balances.

1. Re-proposed DOL Fiduciary Regulations

Overview of regulations – Like the 2010 proposed regulations, the re-proposed regulations 

provide a broad expansion of the definition of a fiduciary with respect to retirement plans and 

IRAs. Under the general rule of the re-proposed regulations, individuals will be considered 

fiduciaries if they either (1) represent that they are acting as an ERISA fiduciary or (2) make 

individualized recommendations regarding investments, rollovers, or distributions pursuant to an 

agreement, arrangement, or understanding that the advice being provided is individualized or 

specifically directed to the recipient for consideration.

Generally the following types of advice could trigger fiduciary liability: (1) investment 

recommendations, including a recommendation to take a distribution of benefits or as to the 

investment of securities or other property to be rolled over or otherwise distributed from a plan; 

 2

 The fact that the best interest contract exemption does not apply to rollovers and distributions means that all 

retirement plan participants could be affected. Even if the exemption were to be made technically applicable, it is 

our understanding that financial institutions will not be able to use the exemption, making it effectively inapplicable. 
3

(2) investment management recommendations, including recommendations as to the 

management of securities or other property to be rolled over or otherwise distributed from the 

plan; (3) appraisals, fairness opinions, or similar statements whether verbal or written concerning 

the value of securities or other property provided in connection with a specific transaction 

(except ESOP valuations); or (4) recommendations of persons to provide any advice described in 

1-3 above for a fee or other compensation.3

Even a casual comment that could be considered as relating to the above types of advice would 

give rise to fiduciary status. Thus, the proposed regulations make many interactions that 

currently occur between advisers and retirement plans, plan participants, and IRA owners subject 

to potential fiduciary liability and also, pursuant to the prohibited transaction rules, prohibit 

many forms of compensation that advisers currently receive. The consequences of violating the 

fiduciary standards for advice with respect to retirement plans and IRAs can be significant, as 

discussed briefly below.

Sanctions for violating regulations – Under ERISA, fiduciaries are subject to personal liability 

for any loss arising from a breach of fiduciary duty. Thus, ERISA recognizes a private right of 

action against a fiduciary for a breach of fiduciary liability. The ERISA personal liability rules 

apply to qualified retirement plans, but do not apply to IRAs. 

Fiduciaries are also subject to the prohibited transaction provisions of ERISA and the Internal 

Revenue Code (IRC). These prohibited transaction provisions apply to retirement plans and their 

participants, as well as IRAs. 

Once a person is a fiduciary, the person is prohibited under the prohibited transaction provisions 

from engaging in certain types of transactions, including transactions in which the compensation 

of the fiduciary can increase based on the fiduciary’s advice. Thus, under the re-proposed 

regulations, certain common forms of compensation arrangements, such as brokerage or 

insurance commissions in connection with investment transactions made by a plan, plan 

participant, or IRA, would be prohibited under the prohibited transaction provisions, absent a 

workable exemption.

The excise taxes on prohibited transactions imposed under the IRC represent a potentially 

substantial penalty for violations, which equals an annual 15 percent of the amount involved with 

respect to the prohibited transaction. However, if the prohibited transaction is not corrected 

within a specified period, the excise tax equals 100 percent of the amount involved.

 3 The following types of activities would be excluded from the definition of a fiduciary: sales pitches involving 

large plan clients; counterparties in certain swap transactions; platform providers who merely make available a 

roster of investment options that plan administrators can use to choose plan investment menus; consultants who only 

provide investment data or identify investments that meet objective criteria set by the plan; recommendations made 

to plan sponsor fiduciaries by their own employees; valuations provided for reporting and disclosure purposes rather 

than in connection with transactions; and financial “investment or retirement” education that does not include 

specific investment recommendations or even examples of specific types of investments.
4

As a practical matter, financial advisers cannot risk the sanctions imposed if they violate the 

fiduciary standards, especially the prohibited transaction rules. Thus, these advisers will have to 

modify their activities in ways that ensure that they are complying with the regulations.

Prohibited transaction exemptions – The re-proposed regulations do provide certain new 

prohibited transaction exemptions (PTEs), as well as revising some existing exemptions. The 

prohibited transaction exemptions allow individuals who meet certain requirements to avoid the 

potential prohibited transaction excise taxes. A problem arises because (1) the new prohibited 

transaction exemptions do not cover a number of important and common situations, and (2) the

new best interest contract exemption is apparently so burdensome in its conditions as to not be 

usable.

The proposed “best interest contract” prohibited transaction exemption would permit advisers 

who are fiduciaries to receive compensation for services provided to certain plans, plan 

participants, and IRA owners. The exemption applies to advice (1) provided to plan participants, 

IRA owners, and sponsors of plans that have less than 100 participants (and do not allow 

participants to control the investment of their own accounts, which is not a typical situation) and 

(2) that relates to the purchase, sale, or holding of certain assets. This exemption, if applicable, 

would permit fees such as commissions, 12b-1 fees, and revenue sharing for investment 

transactions for plan participants, beneficiaries, IRA owners, and a tiny portion of small plans 

with less than 100 participants.

The requirements that apply to the best interest contract exemption include the following:

 The adviser and his or her company must contractually agree to adhere to “Impartial 

Conduct Standards” in providing advice and must comply with those standards.

 The contract must state that the adviser is a fiduciary.

 The adviser’s company must warrant that it has policies and procedures designed to 

mitigate the dangers of conflicted advice (e.g., the adviser’s company cannot have 

bonuses, special awards, or other incentive payments that would encourage advisers to 

make recommendations that are not in the best interest of the customer.)

 The contract must disclose all conflicts of interest and make information about direct and 

indirect fees available.

 The contract cannot have a provision under which the customer “waives or qualifies its 

right to bring or participate in a class action or other representative action in court.”

 The adviser must provide a chart to the customer with the total cost of the asset over 1, 5, 

and 10 year periods, as a dollar amount, making reasonable assumptions about future 

investment performance. The chart must include acquisition costs (such as 

commissions), ongoing costs (such as revenue sharing), disposition costs and other costs 

that reduce the investment’s return. Total cost includes the expense ratio with respect to 

a mutual fund, for example.

 Every year, the adviser must provide information to the customer about that year’s 

transactions, including the total dollar amount of all indirect compensation received by 

the adviser and his company during the year attributable to the customer.

 The adviser’s company must maintain a webpage with detailed information, updated at 

least quarterly, about all direct and indirect compensation payable to the adviser, his 

company, and all company affiliates with respect to every single asset purchased, sold, or 
5

held by a retirement customer during the last 365 days (excluding only certain assets not 

commonly purchased). In addition, the webpage must include the same information 

about all assets that a retirement customer could possibly purchase (excluding certain 

assets not commonly purchased).

 The adviser may provide advice, but all investment decisions must be made by the 

customer. Thus, discretionary accounts in which the adviser has discretionary authority 

over the assets, pursuant to guidelines from the customer, are not covered by the 

exemption.

 The exemption only applies to certain assets that are commonly purchased by retirement 

customers.

 Firms would be required to maintain specified data on investments and returns for six 

years.

The best interest contract exemption would require companies to provide and maintain a massive 

amount of information and data for customers in order to qualify. Some of the information is not 

currently collected by the companies, leading to substantial startup costs for companies 

interested in using the exemption. In many cases, customers would be overwhelmed by the 

amount of information they would receive with respect to investments. 

Companies are likely to find that the costs of providing the required information to qualify for 

the prohibited transaction exemption would exceed the value of getting or retaining a small 

account. As a result, conditions imposed by the proposed exemption create an incentive for 

companies to significantly reduce assistance to individuals with smaller accounts. The 

exemption would require companies to provide far more data and disclosure to smaller accounts 

compared to current disclosures required to be provided to a larger retirement plan (e.g., a plan 

with 10,000 participants).

For example, under the re-proposed exemption, financial institutions would be

required to disclose, and update at least quarterly, all direct and indirect 

compensation received with respect to all assets of all retirement customers of 

the financial institution and all affiliates for the past 365 days as well as the 

same information with respect to all assets that a retirement customer could 

possibly purchase (other than certain assets not commonly purchased).

In a recent paper, the U.S. Chamber of Commerce argued that an overly broad general rule 

defining a fiduciary (with prohibited transaction exemptions) creates a regime that will be “(1) 

lengthy and protracted, (2) burdened with conditions, limitation, and requirements, and (3) 

generally ineffective in addressing the needs of the employee benefits community.”4

 The paper 

notes “despite best efforts by the DOL, we remain concerned that no matter how well-crafted the 

PTEs are, they will prove to be insufficiently narrow and inflexible to accommodate the many 

beneficial ways that financial professionals serve the needs of investors today and in the future”5

and states “by creating a series of PTEs to narrow an overly broad regulation the DOL 

 4

 U.S. Chamber of Commerce, Using PTEs to Define a Fiduciary Under ERISA. Threading the Needle with a Piece 

of Rope, Released February 20, 2015, p. 1. 5

 Ibid, at p. 1.
6

is...unintentionally creating barriers to finding better ways to improve the system and protect 

investors.”6

Most importantly, initial indications suggest that very few, if any, financial institutions could 

satisfy the best interest contract exemption, thereby practically eliminating this exemption. In 

most contexts, the prohibited transaction rules would bar financial professionals from providing 

services to customers under the brokerage model.

Simple examples of the likely effects of the re-proposed regulations help to demonstrate their 

unintended consequences. The result would be a decline in the amount of financial education, 

assistance, and advice available to IRA owners and retirement plans and their participants.

2. DOL Regulations Likely Would Reduce Access to Financial 

Markets For Small IRAs and Small Business Retirement Plans

The DOL regulations likely would reduce the availability of financial assistance for the owners 

of small account IRAs and small business retirement plans. A number of provisions create this 

result.

First, the seller’s exception in the regulation does not apply to individuals and small businesses, 

eliminating the marketing of products to these groups. 

In some cases, it is difficult to distinguish the difference between selling (e.g., 

“our investment products can help you achieve a secure retirement”) and 

advice (e.g., “we advise you to invest in these products”).

Almost any discussion of a company’s own products or services with any 

individual or small business is a fiduciary discussion. Thus, companies would 

be prohibited from discussing their own services, such as creating rollover 

accounts or managed account services.

Any interviews to be hired would create potential fiduciary liability for the 

financial adviser; e.g., merely by recommending to a potential customer that he 

or she be hired could result in fiduciary liability and a prohibited transaction.

The 2010 proposed regulations provided a seller’s exception to the fiduciary standards under 

which a seller who makes clear that he or she is selling and not advising is not a fiduciary. The 

elimination of this seller’s exception in the re-proposed regulation makes it much more difficult

and risky to provide information that may be considered advice. In addition, the best interest 

contract exemption does not apply to the vast majority of small business plans and generally will 

be unusable with respect to small accounts.

Small businesses need more assistance than large businesses in choosing investment options or 

managed account services to offer to their employees. But eliminating the seller’s exception and 

not having a workable prohibited transaction exemption means that almost no assistance can be 

 6

 Ibid, at p. 1.
7

provided to these small businesses. Doing so would create a risk of fiduciary status and the 

resulting potential liability for hefty prohibited transaction excise taxes. This occurs because

financial institutions typically earn different amounts on the different options that a small 

business can choose to offer its employees. As a result, financial advisers would not be able to 

provide services to these types of customers.

Ultimately, the lack of a seller’s exception to the fiduciary standards and of a workable 

prohibited transaction exemption for individuals and small businesses would discourage access 

and participation in the retirement plan market.7

Effect on Establishing IRAs – The re-proposed regulation would also impact the availability of 

IRAs in the marketplace. In 2011, Oliver Wyman studied the effect of the 2010 proposed 

regulation on IRA owners.8 Because the re-proposed regulation fails to provide a workable 

prohibited transaction exemption, the 2011 study remains relevant to the analysis of the effects 

of the re-proposed regulations.’

Under the regulation, IRA owners would have the following options: (1) if the account is large 

enough, move to an advisory relationship, which may increase fees, especially for buy and hold 

investors, (2) if the account is not large enough for an advisory relationship, leave the money in 

the account, but lose access to an adviser, (3) cash out the savings from the IRA and either 

spend the money or add the assets to an account that is not tax favored, or (4) roll the IRA assets 

over to another tax-favored retirement savings account, such as an employer plan, if available.

9

A study commissioned by the DOL relating to the 2010 proposed regulations provides 

information relevant to the re-proposed regulations. This study, released in February 2015, 

acknowledges that the regulations could have an adverse effect on some portion of IRA investors 

and that, as a result, some IRA owners would be worse off under the regulations.10 The study 

concludes that unsophisticated investors in particular, those who need the most assistance in 

saving for retirement, would have lower IRA contributions under the regulations because they 

either do not have access to a financial adviser or because the intensity of financial assistance 

they receive would decline. In addition, the study states “it is far from clear whether 

unsophisticated investors would earn higher returns on their own than they would if they receive 

conflicted advice.”11 The study suggested that the primary disadvantage for sophisticated 

investors would be the higher time spent by the investor on investment options due to decreased 

 7

 Small business employees tend to have lower access to retirement plans compared to their counterparts in larger 

businesses. Refer to the Bureau of Labor Statistics, National Compensation Survey (2014,). In addition, individuals 

eligible to make IRA contributions tend to have very low take-up rates. Refer to the IRS, SOI, Individual Income 

Tax Return data, 2013. 8

 Oliver Wyman, Assessment of the impact of the Department of Labor’s proposed “fiduciary” definition rule on 

IRA consumers, NYC-ZPR00111-002, April 12, 2011. 9

 This option will not always be available to an individual. 10 Garber, Steven, Jeremy Burke, Angela Hung, and Eric Talley. Potential Economic Effects on Individual 

Retirement Account Markets and Investors of DOL’s Proposed Rule Concerning the Definition of a ‘Fiduciary.’ 

Rand Labor and Population, PR-1009-DOL, February 2015, prepared for the Department of Labor. The authors do 

not attempt to measure the quantitative effects of the regulation, stating that available information makes it difficult 

to estimate how much any particular group of investors is likely to be helped or harmed by adoption of the 

regulation.

11 Ibid, at p. 27.
8

or no time spent by a financial adviser under the regulations. Thus, the regulations would harm 

unsophisticated investors more than sophisticated investors.

3. DOL Regulations Would Reduce Availability of Educational 

Materials for Retirement Plan Participants

Current Participants – Under current law, an employer or service provider can provide 

educational materials to employees without being considered a fiduciary. This rule allows 

educational materials to include (1) guidance on the extent to which an individual should invest 

in different asset classes (such as large and small cap equity funds, and long and short-term bond 

funds) based on the individual’s age and other characteristics and (2) examples of specific 

investments that fit within the asset classes. The re-proposed regulations continue to permit the 

educational materials described in (1) to be provided to retirement plan participants, but would 

not allow examples of specific investments as these would be considered fiduciary advice, not 

participant education.

When providing educational assistance to plan participants, the re-proposed 

regulations would not allow educators to provide examples of funds that fit 

within recommended asset classes, as these “examples” would be considered 

fiduciary advice.

As a result of the re-proposed regulations, plan participants would get less, rather than more 

information, leaving them to make decisions about their retirement plan investments without 

knowing how to use the educational assistance they are provided. Because many plan 

participants are ill-equipped to select investment options on their own, the re-proposed 

regulations would lead to suboptimal decision-making with respect to retirement savings.12 The 

regulatory analysis to a 2011 DOL regulation relating to prohibited transactions estimates that 

individuals make more than $100 billion per year in mistakes with respect to their retirement 

savings.13

Participants Terminating Employment – Under the re-proposed regulations, the best interest 

contract prohibited transaction exemption does not apply to advice relating to plan distributions 

or rollovers and does not apply to advice or marketing regarding which company to use to 

provide investment services, such as managed account or IRA services.

An employee who is terminating employment cannot receive information from a 

broker dealer or a call center offered by the plan’s financial services adviser 

concerning the employee’s options with respect to his or her retirement savings. 

Because the best interest contract prohibited transaction exemption does not 

apply to distributions and rollovers, these entities cannot use the exemption to 

protect themselves from the prohibited transaction rules. (Even if the best 

interest contract exemption were to be made applicable to distribution and 

rollover advice, it is our understanding that as a practical matter the exemption 

is unusable.) Thus, while a broker-dealer or call center could provide factual 

 12 This analysis is discussed in greater depth below. 13 Federal Register, Volume 76, No. 206, Rules and Regulations, Tuesday, October 25, 2011.
9

information to a terminating employee about his or her options to roll over 

assets or leave them in the employer’s plan, the broker-dealer or call center 

could not discuss with the employee any products or services relating to the 

broker-dealer or financial institution. Rather than promote the products of 

other companies, these broker-dealers and call centers would stop providing 

assistance to terminating employees.

If employees lose access to assistance at this critical choke point in their working career, some 

employees will be more likely to take cash outs of some or all of their accumulated retirement 

savings. Employees will be cut off from a logical form of assistance and will lose their normal 

source of information on distributions and rollovers. A 2014 study by Quantria Strategies, LLC 

estimated that the loss of call center and broker dealer assistance at job termination could lead to 

increased cash outs of $20-32 billion annually.14

B. Unintended Effects on Retirement Readiness

Retirement readiness provides a sense of how well-equipped an individual is to meet their 

financial needs during retirement. Traditionally, this measure focused on income replacement 

rates. Historical measures of retirement readiness posit that individuals could maintain their 

preretirement standard of living if their retirement income replaced 80 percent of their 

preretirement income. As retirement plans shifted from defined benefit to defined contribution 

plans, the focus of retirement readiness includes whether individuals will have sufficient assets to 

meet anticipated expenses. The re-proposed regulations likely would affect adversely the 

account balances and assets of employees, which reduces the retirement readiness for defined 

contribution account holders.

1. Measures of Retirement Readiness

The Employee Benefit Research Institute (EBRI) devised the Retirement Security Projection 

Model (RSPM) to simulate (by age and income) the percentage of the population not having 

adequate retirement income to cover average expenses and uninsured health care costs (including 

long-term care costs) at age 65 or older throughout retirement.15 EBRI’s Retirement Readiness 

Rating (RRR) for 2014 found that 56.7 percent of early Baby Boomers had sufficient retirement 

readiness, compared to 58.5 percent for late Baby Boomers, and 57.7 percent for Generation 

X’ers.16 An EBRI 2012 analysis examined more closely the retirement readiness of these groups 

and found that 18.0 percent of early Baby Boomers had less than 80 percent of what is needed to 

be considered adequate retirement readiness and 31.5 percent had 80-100 percent of what is 

 14 Quantria Strategies, LLC, Access to Call Centers and Broker Dealers and Their Effects on Retirement Savings, 

April 9, 2014.

15 VanDerhei, Jack. What Causes EBRI Retirement Readiness Ratings to Vary: Results from the 2014 Retirement 

Security Projection Model. Employee Benefit Research Institute, EBRI Issue Brief No. 396, February 2014. 16 Early Baby Boomers include individuals born between 1948 and 1954, the Late Boomers were born between 

1955 and 1964, and the Generation X’ers were born 1965-1974.
10

needed, compared to 17.2 percent and 31.1 percent of late Baby Boomers, and 19.4 percent and 

31.4 percent of the Generation X’ers.17 

Fidelity conducted year-long research to create a Retirement Preparedness Measure (RPM), 

which resulted in findings similar to the EBRI RRRs.18 Fidelity found that 55 percent of 

Americans are in a yellow or red zone, meaning that they are in danger of not fully covering 

essential expenses like housing, health care, and food in retirement.19 

AON Hewitt produced yet another measure of retirement income adequacy in a 2012 report.20 

The AON Hewitt report calculates that an individual needs to accumulate assets that are 15.9 

times final pay to cover retirement expenses through an average life expectancy (age 87 for 

males and age 88 for females). According to AON Hewitt, Social Security covers 4.9 times pay, 

leaving 11.0 times pay to be covered by other means. According to the report, employees who 

retire at age 65 after a full career will, on average, accumulate 8.8 times pay for retirement 

savings.

2. The Impact of Financial Literacy on Retirement Readiness

A substantial body of research has explored the causes of inadequate retirement savings in the 

United States. One problem commonly identified relates to financial literacy; i.e., individuals

lack basic understanding of key financial concepts. 

Across all age groups, individuals lack essential knowledge of basic financial concepts, including 

interest compounding, the effects of inflation, and diversification of risk. 21 Limiting access to 

financial advice further limits the availability of much needed financial education.

In multiple surveys and studies, the research shows that a significant percentage of U.S. workers 

(1) cannot answer correctly the most simple multiple choice questions on issues of basic 

financial literacy, (2) fail to plan adequately for retirement, (3) consistently underestimate the 

amount of retirement savings they will need, and (4) make decisions, such as cashing out their 

retirement savings prior to retirement age, that adversely impact their long-term retirement 

savings.22 

 17 VanDerhei, Jack. All or Nothing? An Expanded Perspective on Retirement Readiness. Employee Benefit 

Research Institute, EBRI Notes, Vol. 33, No. 11, November 2012.

18 The RPM estimates the percentage of total estimated retirement expenses that individuals are expected to cover 

based on a survey of 2,265 households and data from the Consumer Expenditure Survey and the Medical 

Expenditure Panel Survey.

19 See How ready is America to retire, accessed at https://www.fidelity.com/bin-public/060_www_fidelity_com/

documents/picture-of-americas-retirement-readiness.pdf. 2020 AON Hewitt, The Real Deal. 2012 Retirement Income Adequacy at Large Companies, 2012. 21 See, for example, Lusardi, Annamaria and Olivia S. Mitchell. Financial Literacy and Retirement Planning in the 

United States, February 1, 2011. Lusardi, Annamaria and Olivia S. Mitchell. Financial Literacy and Planning: 

Implications for Retirement Wellbeing. University of Michigan Retirement Research Center, MRRC Working Paper 

n. 2006-144. 22 The list of references at the end of this paper contains multiple sources for research relating to financial literacy 

and retirement saving.
11

Lusardi and Mitchell (2010), using results from the American Life Panel (ALP) survey, found 

that financial literacy relates positively to retirement planning even after accounting for other 

factors, such as age, education, and income.23 The authors note that “lack of financial 

knowledge is a major factor driving poor retirement planning.”24 Thus, individuals who lack 

financial literacy are less likely to plan for retirement and less likely to demonstrate retirement 

readiness.25

Low levels of financial literacy present particularly acute problems for certain demographic 

groups, especially African-Americans and Hispanics.26 Kuan et al. (2015) examined a cohort of 

continuously employed workers at a large, geographically diverse employer over an eight-year 

period (2003-2010) and found significant differences in 401(k) savings rates by employee 

ethnicity.27 Kuan et al. found that, among workers with similar pay, African-American and 

Hispanic workers are less likely to participate in an employer’s 401(k) plan, contribute less to the 

plan when they do participate, and tend to take cash outs of their retirement savings more often.

Lusardi and Mitchell (2014) found that African-Americans and Hispanics generally have low 

levels of financial literacy.

28 The TIAA-CREF Institute specifically examined the financial 

literacy of college-educated Hispanics and found low financial literacy even among this educated 

group; the study found that only 32 percent of college-educated Hispanics demonstrate basic 

financial literacy and only 12 percent demonstrate high financial literacy.29

The lack of financial literacy among these demographic groups translates to average account 

balances in 401(k) plans that are significantly lower for African-Americans and Hispanics than 

other demographic groups.30 At the lowest salary levels, the average account balances of 

African-Americans and Hispanics are only approximately 60 percent of the average for whites. 

The percentage disparity becomes smaller as salaries increase, but even at the highest salary 

levels, the average account balances of African-Americans and Hispanics tend to be 

 23 Lusardi, Annamaria and Olivia S. Mitchell. How ordinary consumers make complex economic decisions: 

Financial literacy and retirement readiness. Center for Financial Studies (CFS) Working Paper No. 2010/11, April 

2010.

24 Ibid. p. 2. 25 Amromin, Gene, Itzhak Ben-David, Sumit Agarwal, Souphala Chomsisenphet, and Douglas D. Evanoff. 

Financial Literacy and the Effectiveness of Financial Education and Counseling: A Review of the Literature. 

Accessed at: http://www.chicagofed.org/digital_assets/others/region/foreclosure_resource_center/more_

financial_literacy.pdf. Amromin et al. reviewed the literature on financial literature and concluded that the surveys 

and studies varied significantly in content and sample population, but generally agreed on the following: “(1) a large 

proportion of consumers are not financially literate, even among the wealthiest and most educated population 

segments, (2) financial literacy rates vary consistently by demographic groups, tending to be high for those with 

more wealth and education, for men (although results vary), and for whites (in the U.S.), and (3) financial illiteracy 

leads to welfare-reducing financial behavior and outcomes.” 26 Ibid, at p. 12. 27 Kuan, Kai Yuan, Mark R. Cullen, and Sepideh Modrek. Racial Disparities in Savings Behavior for a 

Continuously Employed Cohort. National Bureau of Economic Research, NBER Working Paper 20937, February 

2015.

28 Lusardi, Annamaria and Olivia S. Mitchell. The Economic Importance of Financial Literacy: Theory and 

Evidence. Journal of Economic Literature, 52(1), 2014.

29 Hispanic Personal Finances: Financial Literacy and Decisionmaking Among College-Educated Hispanics. 

TIAA-CREF Institute, May 2015. 30 401(k) Plans in Living Color. A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups. Ariel 

Education Initiative, Aon Hewitt, Joint Center on Political and Economic Studies, and the Raben Group, 2012.
12

approximately 70 percent of the average for whites. While a variety of factors (e.g., lower 

participation and contribution rates) account for these disparities, preretirement cash-outs of 

retirement savings represent one significant factor (discussed in greater detail below) affecting 

account balances for all workers, but particularly for minority and ethnic groups.

3. The Benefits of Financial Assistance

Access to financial advice counters the effects of a lack of financial literacy. Even DOL 

acknowledges that there may be so-called “intangible benefits” to financial advice that are not 

measured. In fact, the DOL regulatory analysis for the re-proposed regulations states, with 

respect to studies that discuss the potential benefits of financial advice,

“However, they also find robust evidence that advice affects savings styles and 

levels, and suggest that the higher fees paid by advised clients might reflect 

payment for broader financial advice.”31

A recent report commissioned by the DOL specifically addresses the benefit of financial advice

with respect to unsophisticated (e.g., financially illiterate) investors. Garber et al. (2015) discuss 

the potential economic effects on individual retirement markets and investors of the 2010 DOL 

proposed regulation. 32 This analysis applies to the re-proposed regulations as well. Garber et al. 

state that, without the proposed regulation “unsophisticated investors benefit from time savings” 

by using a financial adviser and “also benefit from help in choosing investment products (relative 

to those making these choices without professional help) and from coaching to open IRAs, 

contribute appropriate amounts, and so on.”33

Garber et al. state that a key question concerning the proposed regulation relates to how the rule 

would affect the well-being or welfare of investors. They note that adopting the rule would 

likely help some investors and hurt others; they conclude by stating “we cannot predict whether 

the benefits to IRA investors would outweigh their costs for any particular type of IRA investor 

or in the aggregate.”34

A 2014 Financial Engines/AOL Hewitt attempts to quantify the use of “help” in defined 

contribution plans.35 The Financial Engines/AON Hewitt study provides important information 

with respect to participants who do not receive any form of help, finding that 60.5 percent of 

non-help participants had inappropriate levels of risk (either too high or too low) and lower 

returns (332 basis points lower, net of fees). The study also found that near retirees needed the 

most help, with this group having the widest variability in risk levels.

 31 U.S. Department of Labor, Fiduciary Investment Advice, Regulatory Analysis, Section 3.2.3.5, Eroded IRA 

Returns, p. 94, April 14, 2015.

32 Garber, Steven, Jeremy Burke, Angela Hung, and Eric Talley. Potential Economic Effects on Individual 

Retirement Account Markets and Investors of DOL’s Proposed Rule Concerning the Definition of a ‘Fiduciary.’ 

Rand Corporation, Rand Labor and Population, RR-1009-DOL, February 2015, prepared for the Department of 

Labor.

33 Ibid. at 23. 34 Ibid. at 26. 35 Financial Engines, AON Hewitt, Help in Defined Contribution Plans: 2006 through 2012, May 2014.
13

While DOL suggests that the use of target-date funds would help individuals who do not have 

access to financial assistance, the Financial Engines/AON Hewitt study noted that defaults drove 

participants into target-date funds, but that most participants viewed target-date funds as 

“additional fund options in their plans and not as an all-in-one fund solution.”36 

A recent study found that, among similarly situated individuals (middle-income Baby Boomers, 

defined as those with annual household income between $25,000 and $100,000), individuals who 

work with a financial professional were more likely (25 percent) to have investable assets over 

$500,000 than those who do not work with a financial professional (less than 10 percent).37 

The length of time an individual has worked with a financial professional also contributes to 

higher levels of assets. Among those who worked with a financial professional for less than two 

years, 43 percent reported assets less than $100,000, 38 percent reported assets between 

$100,000 and $500,000, and 19 percent reported assets exceeding $500,000. On the other hand, 

for individuals who had worked with a financial professional for at least 10 years, 24 percent 

reported assets less than $100,000, 47 percent reported assets between $100,000 and $500,000, 

and 28 percent reported assets exceeding $500,000.

The Consumer Financial Protection Bureau (CFPB) indicates that individuals with lower levels 

of financial literacy need ‘financial capability practitioners,’ or individual advisers who can 

engage in behaviors to improve their financial well-being. The goal is to link individuals’

behaviors to their personal financial goals, while helping them to cultivate important skills and 

strategies. These advisers offer three important areas where financial advisers play an important 

role in developing financial capabilities, including: (1) providing reliable financial information; 

(2) assisting in using this information to make sound financial decisions; and (3) executing 

financial decisions with services to monitor the accounts so that the participant may adapt and 

modify their behaviors, as needed.38

However, these services are often the same as those provided by broker-dealers that provide 

advisory services to IRA and retirement plan participants, both individuals and small businesses. 

Eliminating these services could result in lower levels of financial well-being.

Participant Behavior and the Desire to Avoid Risks – As noted above, participants who select 

their own investments often choose inappropriate levels of risk (either too low or too high). In 

addition to encouraging individuals to begin saving for retirement and to save appropriate 

amounts, financial advisers may help individuals select appropriate levels of risk for their 

retirement savings investments. DOL’s focus on rates of returns neglects to account for the 

many ancillary benefits of using a financial adviser, including risk management.

 36 Ibid. at 42. 37 Center for a Secure Retirement, The Middle-Income Boomer Retirement Gap: Savings, Education, and Advice, 

November 2014. 38 Consumer Financial Protection Bureau, Financial Well-Being: the Goal of Financial Education, January 2015.
14

The 2015 PIMCO Defined Contribution Consulting and Support survey highlights the many 

factors that drive good investment decisions.39 For example, the survey indicates the following 

considerations:

 When evaluating default strategies, over 95 percent of consultants believe it is important 

or very important to evaluate the glide path structure, fees, diversification of underlying 

investments, probability of meeting retirement income objective, and quality of 

underlying investments.

 Consultants ranked “maximizing asset returns while minimizing volatility relative to the 

retirement liability” and “maximizing median participant income replacement” as the 

most important objectives when evaluating glide paths.

 When evaluating income replacement distributions, the vast majority (85 percent) of 

consultants believe a tighter distribution (one with less downside and less upside) is more 

attractive. For example, given a choice of hypothetical distributions, over four times 

(4.3x) as many consultants selected the one with 10 percent less downside and 60 percent 

less upside than the one with the greatest upside.40

 39 PIMCO, Defined Contribution Consulting Support and Trends Survey, 9th Annual 2015 Survey Highlights. 40 Ibid. p. 4.
15

III. Effects of the Re-Proposed Regulations

Understanding the effects of the re-proposed DOL regulations rests on understanding the 

relationships between the various groups identified previously – small businesses, small 

accountholders, IRA accountholders, qualified plan participants, and participants who terminate 

employment with a qualified plan. In addition to identifying these groups, it is important to 

understand the composition of each, particularly with respect to financial literacy and lower than 

average savings and retention rates for retirement plans.

It is also important to distinguish between paid and unpaid financial services that individuals 

receive from advisers and broker-dealers. Individuals who directly hire a financial adviser tend 

to be higher income and have more general education than other individuals. That is not the case 

for individuals who contact a call center or utilize the services of a broker-dealer associated with 

their employer’s retirement plan. Information that we received from financial services firms 

suggests that a wide range of individuals utilize this type of assistance.41 

The counter population to this is the small accountholder, individuals with lower levels of 

educational and financial literacy, as well as low-income individuals. The individuals meeting 

these characteristics tend to be represented by a disproportionately large portion of minority 

individuals. Research indicates that minority populations tend to have lower account balances 

that result from lower levels of financial literacy and lower incomes. Restricting financial advice 

would eliminate an important source of potential information and guidance.

As discussed above, the re-proposed DOL regulations would result in the reduction of financial 

assistance provided with respect to retirement savings, a finding that the DOL does not dispute.42 

Because the re-proposed regulations provide unworkable and costly PTEs, access to financial 

assistance would undoubtedly decline, particularly for small employers with respect to retirement 

plans and small account IRAs.

DOL’s regulatory analysis assumes that financial advisers will develop so-called “low fee” 

alternatives for these groups, but the absence of workable PTEs would likely stymie these efforts 

both in the short and long-run. In fact, an analysis commissioned by the DOL acknowledges that 

the 2010 proposed regulations (and, similarly, the re-proposed regulations) could result in 

substantial increases in direct fees, which could price many retail investors out of the market for 

financial advice.43

DOL suggests that the decline in availability of financial advice may be a desirable outcome of 

the regulations, eliminating what they refer to as “conflicted” advice. However, the decline in 

 41 For example, one company’s call center data for the first quarter of 2013 indicated that nearly 80 percent of the 

calls related to individuals with no more than $50,000 of assets in their retirement savings plan and nearly 50 

percent of the calls related to individuals with no more than $5,000 in the plan. Nearly 60 percent of the calls 

related to individuals under age 50 and more than 60 percent related to individuals with less than 10 years of service 

with the employer.

42 The Garber et al. study commissioned by the DOL confirms this. However, the DOL may question the extent to 

which this result will occur.

43 Garber et al, supra.
16

availability of financial advice is likely to hurt the very populations that most need assistance 

about retirement savings decisions. We discuss the potential effects for these populations below.

Millions of American use the services of broker-dealers and other sources of assistance each year 

to assist them with their retirement savings. For example, millions of employees contact call 

centers associated with their retirement plan each year.44 The financial services firms view their 

call center operations as an important way to help educate employees on the importance of 

preserving their retirement savings. In addition, some employees have direct access to a brokerdealer for assistance. This might occur if an individual has set up an IRA using a broker-dealer 

or if an employer (often a small employer) has a broker-dealer who helped the employer 

establish a retirement plan for employees. 

In many cases, advisers or broker-dealers assist employees who could not otherwise afford to 

hire a financial adviser. While it is more difficult to quantify the extent to which employees 

might access a broker-dealer for assistance for help understanding their options with respect to 

their retirement savings, this access represents another important way in which employees 

receive assistance with respect to their retirement savings and, more generally, their financial 

literacy. As discussed above, a clear relationship exists between access to financial assistance 

and financial literacy.

Moving away from the generalized experiences that plan participants and individuals face, it is 

important to consider the specific groups that will face the potential for unintended consequences 

of the re-proposed regulations. These groups include IRA account holders, small business plans 

(including IRAs and qualified plans), and current or terminating plan participants seeking 

investment options or tax advice.45 

A. Individual Retirement Arrangements 

At the end of the third quarter of 2014, IRA assets totaled $7.3 trillion, representing 30 percent of 

total retirement assets in the United States.46 According to the Investment Company Institute 

(ICI), IRA owners tend to be savers; the median financial assets of IRA-owning households were 

almost six times larger than the median financial assets of other households.47 As indicated 

 44 Some of the calls represent basic transactions, such as a balance inquiry or providing an address change. For 

some companies, the initial call will be handled by a basic service representative, who will handle the most basic 

inquiries and will transfer the caller to a licensed representative for any other question or request. 45 It is also important to understand these specific groups have considerable overlap. For instance, an IRA account 

holder may have made direct contributions to their IRA or rolled over contributions from a qualified plan (after 

terminating employment). The IRA account holder may be a small business person (holding a SEP or SIMPLE 

plans) that would like to transition to a qualified defined contribution plan. Plan participants often rely on the plan 

educational materials (regarding investment diversity) to make their investment decisions and then, after terminating 

employment seek to continue that investment plan through an IRA. 46 The Role of IRAs in U.S. Households’ Saving for Retirement, 2014. Investment Company Institute, ICI Research 

Perspective, Vol. 21, No. 1, January 2015.

47 Ibid. Also, the Oliver Wyman study found that households owning IRAs had median IRA assets of $50,000 and 

median household financial assets of $200,000, compared to median household financial assets of $35,000 for nonIRA households.
17

previously, individuals may make (1) direct contributions (annual) to an IRA or (2) rollover 

contributions from a qualified plan (when terminating participation in that plan). 

The direct contributions may be made to a traditional IRA, Roth IRA, SEP-IRA, or SIMPLEIRA. In each case, the account may represent an individual or small business person. In some 

cases, the direct contribution accounts tended to result in lower account balances, because the 

annual contribution limits for IRAs were historically lower than contribution limits for qualified 

defined contribution accounts. Further, individual or small business investors often open 

multiple IRA accounts over their retirement savings horizon, creating multiple small accounts.48 

Direct Contribution IRAs – Direct IRA contributions (distinguished from rollover contributions) 

totaled over $50.7 billion in 2012. Graph 1 distributes these direct contributions by type of IRA 

account, Traditional, SEP, SIMPLE, or Roth IRA. As shown in the graph, the vast majority 

(65.2 percent) of direct contributions are made to IRAs that offer a current deduction 

(Traditional, SEP, and SIMPLE). However, nearly half of taxpayers (46.4 percent) making a 

direct contribution to IRAs are making contributions to Roth IRA plans.

One of the issues facing account holders with assets held outside of a qualified plan is access to 

information. Research indicates that paid financial advisers favor account holders with higher 

net worth and account balances (over certain thresholds).49 For the adviser or broker-dealer, the 

cost of providing advice to small accounts would exceed the return for their efforts (based on a 

percentage of account balances). Average IRA account balances tend to be quite low for 

 48 While the account holders may rollover these multiple accounts to a single IRA account, empirical evidence 

suggests that this practice does not occurs. Rollovers typically flow from qualified plans to IRAs. Refer to the 

EBRI Issue Brief, No. 399, Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With 

Longitudinal Results, 2010-2012: The EBRI IRA Database, by Craig Copeland, May 2014.

49 Refer to West, Jason, Financial Advisor Participation Rates and Low Net Worth Investors, Journal of Financial 

Services Marketing, Vol. 17, 1, February 2012.

31.6%

8.3%

13.7%

46.4%

27.8%

22.5%

14.8%

34.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

 Traditional IRA plans SEP plans SIMPLE plans Roth IRA plans

Graph 1 Taxpayers Making Contributions to Individual Retirement 

Arrangements and Total Contributions, by Type of Account, 

Tax Year 2012

Source: IRS, SOI, Taxpayers with IRA Contributions, Table 3

Percent of Taxpayers Percent of Contributions
18

younger and lower-income individuals. As shown in Graph 2, the individuals under age 40 have 

relatively low average account balances (less than $30,000). 

A recent study by Oliver Wyman of IRA account holders indicates that 51 percent of all IRA 

account holders had account balances less than $25,000.50 They also reported that the small 

account balances were pervasive across age groups.51 So, while younger IRA holders are more 

likely to have small account balances, as they begin their retirement savings, there are a large 

percentage of older IRA holders with small balances. The balance of nearly 23 percent of IRA 

accounts totals less than $5,000, whereas 9.4 percent of IRA accounts total $250,000 or more in 

assets (see Table 1).

Table 1.—Distribution of IRA Ownership, by 

Account Balance Size, 2013

Account Balance Percentage of 

IRAs

Number of Accounts

(in millions)

Less than $5,000 22.7% 5.86

$5,000 - $9,999 10.4 2.68

$10,000 - $24,999 16.6 4.28

$25,000 - $49,999 14.2 3.66

$50,000 - $99,999 13.6 3.51

$100,000 - $149,999 6.7 1.73

$150,000 - $249,999 6.5 1.68

$250,000 or more 9.4 2.43

Source: Copeland, Craig. Individual Retirement Account Balances, Contributions, and Rollovers, 2013; With 

Longitudinal Results 2010-2013: The EBRI IRA Database. Employee Benefits Research Institute, Issue Brief 

No. 414, May 2015.

 50 Refer to Oliver Wyman, page 10. 51 Ibid.

$11,165 

$11,009 

$17,704 

$29,202 

$42,826 

$59,471 

$80,525 

$108,074 

$147,739 

$191,208 

$192,961 

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 $200,000

Under 25

25 - 29

30 - 34

35 - 39

40 - 44

45 - 49

50 - 54

55 - 59

60 - 64

65 - 69

70 or older

Graph 2 Average Individual IRA Balances, by Age of 

Account Holder, 2012

Source: Copeland, EBRI Issue Brief, May 2014
19

In mid-2014, 71 percent of traditional IRA households indicated that they had a strategy for 

managing income and assets in retirement.52 Of these households, 66 percent had consulted with 

a professional financial adviser when creating this strategy and 58 percent indicated that the 

professional financial adviser represented their primary source for creating a retirement 

strategy.53

Rollover Contributions – Rollover 

contributions to IRAs totaled over $309.4 

billion in 2012, an amount that is six times 

that of direct IRA contributions. One reason 

for this differential is the historical 

discrepancy between contribution limits for 

IRAs compared to qualified plans. Qualified 

plan participants generally may contribute a 

higher amount to their plan and, in many 

cases, receive employer matching amounts (a 

feature not available to Traditional IRA 

account holders). In addition, nearly all 

individuals making rollovers to IRAs do so 

to Traditional IRA plans (which preserves 

the favorable tax treatment of the qualified 

plan contributions).

The IRS SOI reports that approximately 4.1 

million taxpayers made rollover contributions to an IRA plan in 2012, with rollover contributions 

to Traditional plans the most common (3.9 million taxpayers, representing 97.2 percent of the 

contributions and 95.3 percent of taxpayers reporting a rollover). 

Given the pace of rollover activity (representing approximately 6 percent of the 65.8 million 

taxpayers reporting pension coverage on Form W-2), there is clearly a market for financial 

advice, as well as financial education. DOL argues that rollovers are driven by financial advisers 

and that participants would leave their assets with the former employer if they did not receive 

encouragement by financial advisers or call centers. The data on the large number of rollovers 

exceeds the assistance provided to terminating employees. Therefore the data do not support 

DOL’s premise. 

1. Effects on IRA Account Holders

The re-proposed regulations would have a negative effect on IRA account holders, including the 

overall reduction in available advice (and/or advisers), asymmetrical fee disclosures that could 

confuse investors, and small investors being unable to obtain adequate financial information.

 52 ICI Research Perspective, supra. 53 Ibid.

 

Traditional 

IRA, 

97.2%

SEP IRA, 

1.3%

 Roth 

IRA, 1.4%

Graph 3 Rollover Contributions to IRAs, 

Distributed by Type of IRA Plan, 2012

Source: IRS, SOI, Taxpayers with Individual IRA Plans, 

2012, Table 2
20

Under the re-proposed regulation, many IRA investors could be expected to lose access to an 

investment professional through a brokerage relationship. The Oliver Wyman study related to 

the 2010 proposed regulation, but their analysis continues to apply to the re-proposed regulation. 

If individuals lose access to brokerage accounts under the re-proposed regulations, Oliver 

Wyman estimated that, based on account minimums for advisory accounts and IRA data 

available in 2011, 7.2 million IRAs would not qualify for financial assistance through an 

advisory account, solely within the sample size (which was 40% of the IRA market). In 

addition, small IRA investors would lose access to financial advisers for assistance in opening an 

account, making it less likely that these individuals will open an IRA.

Oliver Wyman estimated that the loss of access to brokerage accounts could result in lost 

retirement savings of $96 billion over the 2010 – 2030 period, attributable to the loss of 3.8 

million IRA accounts. This estimate used conservative assumptions of existing IRAs, assuming 

that (1) 60 percent of the 7 million accounts that would be below minimum account levels for an 

advisory account at any firm would migrate to a “low support” brokerage account, (2) 75 percent 

of the 4 million accounts that would be below their firm’s minimum asset level for an advisory 

account but would qualify for such an account at another firm would move to another firm’s 

advisory account IRA, and (3) 100 percent of the nearly 12 million accounts that met the 

minimum for their firm’s advisory account would stay with that firm and migrate to an advisory 

account. Oliver Wyman also estimated that, over the 2010 – 2030 period, an additional 8.5

million IRA accounts that would have been established under current law would not be 

established.

Availability of Investment Advice/Advisers – Garber et al. (2015) looked only at IRA 

investors and qualitatively analyzed the effects of the 2010 regulations on sophisticated and 

unsophisticated IRA investors.54 The authors do not measure these effects, but conclude that 

unsophisticated IRA investors who forego investment advice could have lower rates of return 

and decreases in IRA contributions because coaching helps these investors make the right 

retirement savings decisions. 

Garber et al. indicates that availability of investment advisers serving the IRA market may well 

decline after the re-proposed regulations take effect. They state 

“The number of professional advisers needed to serve the IRA market would be 

expected to decrease as a result of adopting the rule to the extent that brokerdealers exit the IRA market or take steps to reduce their IRA-related advisory 

activities.”55

Small Account Holders – Individuals with small account balances would not be able to 

obtain paid (based on a percentage of assets) investment advice. The Oliver Wyman study 

confirms this, reporting that investors represented in their study group overwhelmingly use the 

brokerage relationship model as opposed to a fee-based advisory model, with 22.4 million or 88 

 54 See Garber et al. (2015), supra, Table 5.1 at p. 27. Garber et al. evaluate the 2010 regulations in terms of the 

effects on IRA investors with respect to (1) total advisory fees, (2) rate of return on IRA portfolio, (3) time spent by 

investor, and (4) IRA contributions. 55 Garber et al., Page 18.
21

percent of IRA accounts holding brokerage IRAs.56 The prevalence of these arrangements 

increased to 99 percent for accounts with less than $10,000.57

Since the brokerage account fee arrangements violate the re-proposed regulations with respect to

IRA investors, advisers will shift to advisory accounts or require larger minimum account 

balances. Garber et al. found that

“We have no empirically grounded basis for predicting whether minimum account 

balances would increase if the Proposed Rule were implemented. Within our 

conceptual framework, however, minimum account balances would increase if . . .

broker-dealers would be unable to create a set of service offerings that could be 

purchased by IRA investors at fee levels that could cover broker-dealers’ costs, 

while retaining the minimum account balances that exist under the status quo.”58

The fixed costs associated with all retirement plans (e.g. research, investment, or administrative 

costs) indicate that small account balances require comparable effort and input as an account 

with larger account balance. Therefore, broker-dealers and advisers would be unable to charge 

fees sufficient to cover their costs, and this would reduce the availability or intensity of 

investment advice for IRA account holders.

B. Small Business Retirement Plans

Small businesses historically adopt retirement plans at significantly lower rates than employers 

of any other size. The latest Bureau of Labor Statistics (BLS) survey of employee benefits in the 

United States found that, in March 2014, 45 percent of small businesses with 1-49 employees 

offered retirement plans, compared to 63 percent of employers with 50 to 99 workers, 78 percent 

of employers with 100-499 employees, and 89 percent of employers with 500 workers or more.59

At the same time, small businesses represent a primary driver of the U.S. economy. Small 

businesses account for approximately half of the nation’s employment and small businesses drive 

job growth in the United States. According to the BLS Business Employment Dynamics data, 

for the third quarter of 2014, small businesses accounted for 59.2 percent of net increases in 

jobs.60

 56 The IRS SOI data indicate that there were over 55 million IRA accounts in 2012. This study provides a 

significant representation of IRA account holders. 

57 Ibid. 58 Garber et al, Page 17.

59 United States Department of Labor, Bureau of Labor Statistics, Employee Benefits in the United States – March 

2014, USDL-14-1348, July 25, 2014. BLS reports the data by establishment size, which is defined as the physical 

location of a specific economic activity. A single firm could be represented by multiple establishments. 60 United States Department of Labor, Bureau of Labor Statistics, Business Employment Dynamics, Table B. Firm 

size percentage share of gross job gains and losses, third quarter 2014, seasonally adjusted.
22

Low adoption rates coupled with 

high job creation rates have led

many government and private 

sector organizations, including the 

DOL, to undertake efforts to 

increase the number of small 

businesses adopting retirement 

plans for their employees. The reproposed regulations make it more 

difficult for broker-dealers to (1) 

service existing small business 

plans and (2) market new plans to 

small employers.

SEP and SIMPLE IRAs – There 

were more than 20 million small 

businesses in the United States in 

2012. However, there were only 

about 6 million SEP and SIMPLE 

IRA plans. As with other IRAs, 

these small business IRA-based 

plans tend to be smaller with lower 

account balances. Recent data from 

the IRS SOI indicate that lowerincome taxpayers with SEP and 

SIMPLE IRAs tend to have 

considerably lower average account 

balances compared to those 

taxpayers with higher incomes. 

This is particularly true for 

taxpayers with less than $100,000 

in adjusted gross incomes who have 

a SIMPLE IRA plan. These 

accounts average less than $25,000, 

an average account balance that is a 

third of the account balance of 

taxpayers in the highest income 

class. 

SEP IRA owners have a similar pattern, with higher average account balances, but taxpayers 

with less than $75,000 of adjusted gross incomes with a SEP IRA have an average account 

balance that is a third of that for taxpayers in the highest income class.61

 61 One possible explanation for the higher account balances is that the IRS SOI data indicate that SEP IRAs accept 

rollover amounts, while SIMPLE IRAs do not. Given the higher level of rollover amounts compared to contribution 

amounts, this would explain the higher account balances.

$12,202 $12,094 

$19,632 $22,436 

$41,795 

$78,145 

$49,785 

$40,057 

$58,691 

$70,553 

$92,433 

$167,169 

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Under $25,000 $25,000 under

$50,000

$50,000 under

$75,000

$75,000 under

$100,000

$100,000 under

$200,000

$200,000 or

more

Graph 4 Average Fair-Market Value of SEP and 

SIMPLE IRA Plans, Distributed by AGI, 2012

Source: IRS SOI, Individual Taxpayers with IRAs, Table 3

SIMPLE IRA Plans SEP IRA Plans

3.73 

3.53 

3.36 3.31 

3.02 2.90 2.78 2.70 2.64 2.50 

 -

 0.50

 1.00

 1.50

 2.00

 2.50

 3.00

 3.50

 4.00

2008 2009 2010 2011 2012

Accounts in Millions

Graph 5 Decline in SEP and SIMPLE IRAs, 

2008 through 2012

(Number of Accounts in Millions)

Source: IRS SOI, Individual Taxpayers with IRAs, Table 3, 

Various tax years

SEP IRAs SIMPLE IRAs
23

The number of SEP and SIMPLE IRAs has continued to decline in recent years. Since 2008, the 

number of SEP IRAs declined from 3.73 to 3.02 million and the number of SIMPLE IRAs 

declined from 2.90 to 2.50 million accounts. (Refer to Graph 5.)

Evidence of Small Business Retirement Plans – Small business retirement plans present 

characteristics consistent with the overall situation that IRA-based small business plans face. As 

employer size increases, the likelihood of a qualified retirement plan also increases. Put another 

way, small businesses offer plans at nearly half the rate of larger employers. According to the 

Bureau of Labor Statistics, 2014 National Compensation Survey, only 44 percent of employees 

of small businesses (fewer than 100 employees) have access to a retirement plan compared to 89 

percent of employees of large businesses (500 or more employees). The Census Bureau 

indicates that 40.2 million employees of small businesses (defined as an employer with fewer 

than 100 employees) worked for employers that did not offer a plan. The majority of these 

employees work for employers with fewer than 50 employees (34.4 million employees).62

The low percentages for small businesses offering retirement plans can be attributed to both the 

focus of small business owners and the costs of adopting and maintaining these plans. A recent 

CNBC/Financial Planning Association (FPA) survey found that small business owners overall 

invest 70 percent of their wealth in their business.63 Developing a retirement plan and exit 

strategy represents the most pressing financial challenge facing small business owners (reported 

by 42 percent of the survey sample). 

Another survey, conducted by TD Bank, found that only about one quarter of small business 

owners are confident they will have enough money to retire comfortably.64 Financial advisers 

identified three key initiatives that could help small business owners.65 Of these, reducing 

dependence on the sale of a business to fund retirement by diversifying savings (e.g., adopting a 

retirement plan) represented the number one initiative.66

The retirement savings of small company workers correlates directly with the lower rates of 

retirement plans by small businesses. A Transamerica Center for Retirement Studies survey 

found that, in 2013, the estimated median household retirement savings for Baby Boomers, who 

were closest to retirement, working for small companies ($92,000) lagged the median retirement 

savings for Baby Boomers working for large companies ($113,000) by $21,000.67 When asked 

what would motivate workers to learn more about saving and investing for retirement, workers 

of all companies indicated that educational materials and a financial adviser were significant 

 62 Refer to EBRI, Issue Brief No. 392, Employment-Based Retirement Plan Participation: Geographic Differences 

and Trends, 2012, Craig Copeland, November 2014. 63 Loannau, Lori. Small-biz owners don’t save enough for retirement: CNBC/FPA poll, CNBC, August 19, 2014. 

Accessed at http://www.cnbc.com/id/101903945. 64 New Survey Finds Small Business Owners Uncertain About Retirement Plan, Finances, May 4, 2015. Accessed 

at http://www.prnewswire.com/news-releases/new-survey-finds-small-business-owners-uncertain-about-retirementplan-finances-300076411.html. 65 CNBC/FPA survey, supra. 66 If small business owners neglect their own retirement planning, their employees also lose the benefits of an 

employer-sponsored retirement savings plan, making it much less likely that these employees will save adequately 

for retirement. For this reason, the Department of Labor and other government and private sector organizations 

conduct outreach programs to encourage the adoption of retirement savings plans by small business owners. 67 The Retirement Readiness Imperative: Overcoming the Challenges Faced by Small Companies, 14th Annual 

Transamerica Retirement Survey. Transamerica Center for Retirement Studies, October 2013.
24

motivators. In fact, the majority of small company workers (56 percent) prefer more information 

and advice on how to reach their retirement goals.68

A recent survey found that a substantial percent (67 percent) of small businesses that do have 

retirement plans rely on a financial adviser or record-keeper to assist in investment selection and 

monitoring (Greenwald & Associates survey).69 Especially in the case of smaller companies 

(10-49 employees), a financial adviser plays an important role in assisting with the retirement 

plan. Contrast this with the fact that a relatively small percentage of small business owners (less 

than one-third) have worked with an adviser on a business plan, suggesting that financial 

advisers play key roles in the establishment of retirement savings plans by small businesses.70 

Thus, if the re-proposed regulations reduce availability of financial advisers for small businesses 

with respect to retirement savings issues, then a corresponding reduction in both the number of 

small businesses offering retirement plans to their employees and a reduction in total retirement 

savings could be expected.

The Greenwald & Associates survey supports this conclusion. The survey examined small 

business owner reactions to the anticipated re-proposed regulations and found that:

 Almost 30 percent of small businesses with a retirement savings plan indicated that it was 

at least somewhat likely they would drop their plan;

 Almost 50 percent with a retirement savings plan indicated they would be at least 

somewhat likely to reduce their matching contributions, offer fewer investment options, 

and increase fees charged to plan participants; and

 Close to 50 percent of small businesses without a retirement savings plan would be less 

likely to adopt a plan, with 36 percent saying the re-proposed regulation would reduce 

this likelihood greatly.

The re-proposed regulations pose two difficulties for small businesses. First, while small 

employers may represent an area of market growth for creating new plans (and building the 

assets associated with that plan), the re-proposed regulations make marketing to these small 

businesses nearly impossible (because neither the best interest contract exemption nor the seller’s 

exception applies). This means that broker-dealers cannot continue to pursue this line of 

business without violating the prohibited transaction rules. Eliminating marketing to small 

businesses will result in a decline in small business retirement plans.

The other potential effect is that, like small account IRAs, broker-dealers are likely to reduce the 

overall effort for investment information and advice for small business plans (that are more 

likely to have small account balances) so that it is commensurate with the return on the plan. 

Relative to a larger business’s plan, this suggests a significantly restricted level of service.71

 68 Ibid. 69 The Impact of the Upcoming Re-Proposed Department of Labor Fiduciary Regulation on Small Business 

Retirement Plan Coverage and Benefits, Greenwald & Associates, May 14, 2014. 70 CNBC/FPA survey, supra. 71 Recent data analysis by the Small Business Administration indicates that business owner characteristics are 

changing to reflect the changing demographics of the United States. Specifically, the percentage of minority and 

Hispanic business owners is increasing significantly. Refer to Lichtenstein, Jules, Demographic Characteristics of 

Business Owners, Small Business Administration, Office of Advocacy, Issue Brief, Number 2, January 2014.
25

C. Availability of Advisory Materials to Plan Participants

The DOL re-proposed regulations would create unintended consequences with respect to all 

retirement plan participants because the regulations both prevent meaningful educational 

materials from being provided and prohibit any financial advice with respect to plan distributions 

and rollovers. Data indicate that participants receiving advice and education tend to have higher 

deferral rates, take full advantage of the employer match, and have greater portfolio diversity. 

Further, when a participant terminates employment, the receipt of some form of advice and 

educational materials increases the incentives to preserve retirement savings, either by rolling 

over to an IRA or by retaining the assets in the employer plan.

1. Current Plan Participants

Retirement plans make available educational information to improve financial literacy as well as 

investment advice to improve the performance of their employees’ retirement plans including:

 choosing a financial adviser and the degree of services offered to employees;

 creating savings behaviors and improving financial literacy; and

 creating behavior that continues through employment and beyond (e.g., rollovers to 

another plan or an IRA upon job termination). 

Evidence indicates that plan participants that seek help (defined in a variety of ways, including 

advice from investment advisers and broker-dealers) tend to have better saving habits and 

performance. A recent study by World at Work and the American Benefits Institute confirms 

that the majority of plan sponsors provide investment advice services – defined as professional 

recommendations or guidance to help participants accumulate and manage their retirement 

savings. For example, the study found that 53 percent of plan sponsors surveyed provided such 

professional services (increasing nearly 40 percent since 2008).72 

Deferral Rates – The Financial Engines/AON Hewitt report shows that people using 

managed accounts and online advice have higher average contribution levels than other 

participants.73 

 72 WorldatWork and American Benefits Institute, Trends in 401(k) Plans, March 2013. 73 Refer to Aon Hewitt, Help in Defined Contribution Plans, 2006 through 2012, 2013.
26

Table 2.—Characteristics of Participants, Classified by 

Type of Financial Advice

Managed 

Accounts

Online 

Advice Non-Help

Average Age 48 45 46

Average Balance $93,361 $155,599 $78,713

Average Salary $64,121 $91,923 $58,842

Average Contribution 7.5% 9.0% 6.6%

Source: Aon Hewitt, Help in Defined Contribution Plans, 2006 through 2012

Deferral rates for those using managed accounts or online advice were considerably higher than 

the rates for those not receiving help.

The managed account feature and online financial advice described in the Aon Hewitt study is 

consistent with the findings of a recent Vanguard report. Vanguard reports that 35 percent of 

plans use online advice (covering 69 percent of participants); and 19 percent of plans used 

professionally managed allocations (covering 52 percent of participants). In addition, Vanguard 

reports that 68 percent of plan offered financial planning services (covering 74 percent of 

participants).74 They find that many of their participants lack the financial planning skills, time 

or interest to make appropriate investment decisions.75

Employer Matching – More than half of all employers offer their employees the ability 

to defer current wages and salary into a defined contribution retirement account (often a 401(k) 

plan).76 These accounts typically offer an employer matching contribution in addition to the 

employee deferrals. In 2011, employees contributed approximately $186 billion and employers 

provided matching contributions of an additional $122 billion.77 

A recent study by Financial Engines Advisory Services estimated that nationwide defined 

contribution plan participants are not saving enough to receive their full employer matching 

contributions. They estimated that this amount total approximately $24 billion annually.78 

However, the study finds that participants that use financial advisory services (including both 

active users of online advice and professional management services) were more likely to 

maximize their matching contributions. The Financial Engines survey found that only 15 percent 

of participants who used advisory services did not save enough to claim the full employer match 

 74 Refer to Vanguard, How American Saves, Managing Participant Accounts, page 56, 2014. 75 According to the Vanguard report, plan sponsors using Vanguard as their record keeper use a range of advice 

services, including online advice, Personal Online Advisor, managed account advisory, Vanguard Managed Account 

Program, and Vanguard Financial Planning Services.

76 Refer to Copeland, Craig, Ph.D., Retirement Plan Participation: Survey of Income and Program Participation

(SIPP) Data, 2012, Employee Benefits Research Institute. The study indicates that, based on the latest Survey of 

Income and Program Participation data from the U.S. Census Bureau, 61 percent of all workers over age 16 had an 

employer that sponsored a pension or retirement plan for any of its employees in 2012. The percentage of workers 

participating in a plan was 46 percent in 2012.

77 U.S. Department of Labor, Employee Benefit Security Administration, Private Pension Plan Bulletin, Abstract of 

2011 Form 5500 Annual Reports, June 2013. 78 Refer to Financial Engines, Missing out: How much employer 401(k) matching contributions do employees leave 

on the table? May 2015. The estimate relies on study data of over 1 million plan participants that did not claim over 

$1.2 billion in employer matching contributions.
27

compared to 26 percent of those who did not use any advisory services. The effects of financial 

advisory services were most pronounced for lower income participants. For the lowest income 

participants ($20,000 of income or less), only 18 percent of those who used advisory services did 

not claim the match compared to 48 percent of those who did not use any advisory services.79

Portfolio Diversity – Another behavior associated with improved retirement plan 

performance is portfolio diversity, including the move away from employer stock as a primary 

investment.80 Studies highlight the importance of investment diversification; however,

participants often lack the financial literacy to select the best allocation for investing their 

savings. 

One important service offered by investment advisers and broker-dealers is the ability to 

diversify portfolios to reflect the level of risk that is comfortable to the participant. Recent 

survey data indicate that participants are moving away from employer stock. In 2003, 23 percent 

invested less than 5 percent in company stock, while 35 percent of plan participants invested 20 

percent or more of their retirement savings in employer stock. In 2012, the trend away from 

employer stock was evident, with 81 percent of participants investing 5 percent or less in 

employer stock and only 7 percent investing 20 percent or more in employer stock.

In its 2011 regulations, the DOL stated that “quality advice will address over concentration in 

employer stock and other failures to properly diversify.”81 With the increases in advisory 

services, the average number of funds available to plan participants has increased substantially, 

with 91 percent of plan sponsors surveyed in the World at Work and American Benefits Institute 

survey responding that they offer 11 or more investment choices to their plan participants.82

One of the unintended consequences of the re-proposed regulations is that advisory services 

could be expected to decline, as broker-dealers and financial advisers attempt to navigate the 

conflict of interest and prohibited transactions rules. In 2011, the DOL estimated that financial 

advice could increase retirement savings by more than $29 billion each year.83 Based on their 

analysis, the converse also holds – loss of financial advice could reduce retirement savings for 

active participants.

2. Terminating Plan Participants

A lack of financial sophistication can be expected to cause a worker to make bad decisions at 

critical points in his or her working life when savings behavior may change. One of the critical 

points in the retirement savings process occurs when an employee changes jobs or retires; at this 

point, an individual must decide what to do with retirement savings accumulated in a former 

 79 Ibid. Differences between participants using advisory service and those that do not continued for individuals with 

income up to $120,000. After that point, the differences remained, but were not as pronounced. 80 Several well-known business failures highlighted the importance of investment diversity, as plan participants 

invested exclusively in the employer’s stock (e.g., Enron). Refer to Mitchell, Olivia, and Stephan Utkus, The Role 

of Company Stock in Defined Contribution Plans, National Bureau of Economic Research Working Paper W9250, 

October 2002 and Meulbroek, Lisa, Company Stock in Pension Plans: How Costly is it? Social Science Research 

Network, March 2002.

81 Federal Register, Volume 76, No. 206, Rules and Regulations, Tuesday, October 25, 2011, page 66154. 82 Refer to WorldatWork and American Benefits Institute, Trends in 401(k) Plans, March 2013. 83 Supra, Federal Register, Volume 76.
28

employer’s plan.84 Pre-retirement cash outs represent one of the biggest risks to retirement 

savings and are estimated to total $70 to $104 billion per year.85 A recent study estimated that 

nearly 25 percent of all taxpayers younger than age 55 with current pension coverage (or 

retirement balances from past contributions) had a gross distribution of retirement savings in 

2010.86

A risk to long-term retirement readiness is the potential for pre-retirement cash outs of retirement 

savings. According to a 2011 survey, 42 percent of employees take a cash distribution of their 

retirement savings at job termination, 29 percent roll their retirement savings to another 

retirement plan or an IRA, and 29 percent leave their assets in the employer’s plan.87 Cash-outs 

are highest among individuals who are younger, have lower wages, and have less tenure with an 

employer. Higher cash-out rates are also an issue for African-Americans and Hispanics. 

Assistance provided by call centers and broker-dealers at job termination plays a key role in 

reducing cash-out rates, particularly among these groups who are least likely to use the services 

of a paid financial planner.88 As a result, reducing access to call center and broker-dealer 

assistance will likely disproportionately affect the individuals who are most vulnerable to cash 

outs.

Individuals who have access to financial assistance are less likely to lose track of their retirement 

savings and more likely to make informed decisions about what to do with their retirement 

savings when they terminate employment. Individuals who make informed decisions are (1) less 

likely to lose track of retirement savings left in a former employer’s plan and (2) less likely to 

cash out their retirement savings.

The re-proposed regulations will prevent financial advisers either directly or through other forms 

of contact (such as online assistance or call in centers) from providing assistance to employees 

who are terminating employment with respect to their retirement savings. This occurs because 

the best interest contract prohibited transaction exemption does not apply to distributions and 

rollovers (and is unworkable even if it were to be made applicable). In effect, the DOL reproposed regulations will leave terminating employees without a form of assistance and will 

likely lead to increased cash outs of retirement savings or the potential for another lost retirement 

savings account.

 84 One of the advantages of a defined contribution plan is that it provides portability for employees upon job change. 

An employee who terminates employment typically has several options with respect to his or her accumulated 

retirement savings; the individual can: leave the retirement savings in the old employer’s plan; transfer or roll over 

their retirement savings to a new employer’s plan or an IRA; or withdraw the accumulated retirement savings and 

use them for nonretirement purposes.

85 Fellowes, Matt and Katy Willemin, The Retirement Breach in Defined Contributions Plans. Size, Causes, and 

Solutions, HelloWallet, January 2013, and Argento, Robert, Victoria L. Bryant, and John Sabelhaus, Early 

Withdrawals from Retirement Accounts During the Great Recession, prepared for presentation at the November, 

2012 National Tax Association annual meetings, November 2012.

86 Argento et al, supra. 87 Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income 

2011, AON Hewitt, 2011. 88 One financial services company indicated that oral communications with employees terminating employment has 

a significant effect on cash-out rates; employees with account balances between $35,000 and $50,000 are 

approximately 3.2 times less likely to cash out their retirement savings if they receive a call rather than only 

receiving written communications.
29

D. Cumulative Loss in Retirement Savings and Reductions in 

Retirement Readiness

1. Loss in Retirement Savings

Estimated effects of the re-proposed regulations on retirement savings must identify the (1) types 

of plans most likely to have reduced investment and financial advice (IRAs and qualified plans);

(2) within those plans, the participants who would seek paid advice (if reductions in investment 

and financial advice occurs); and (3) size of the plan (small business plans and low-balance plans

and accounts).

Conservative estimates of the combined reduction in retirement assets 

attributable to the unintended consequences of the re-proposed regulations 

suggest that the regulations could be expected to result in losses of retirement 

savings of $68-$80 billion each year. 

This total includes the reductions in assets associated with an overall lower level of investment 

services; assets not retained in or rolled over to a retirement plan or IRA; and loss of positive 

saving habits and behaviors associated with advisory services.89 Because of the overlapping 

effects of the various components of the estimate, providing separate estimates for each 

component would provide an inaccurate picture of the potential losses. The analysis does 

consider these potential overlapping effects; for example, reduced contributions to retirement 

plans will lower the level of retirement savings that might be cashed out under the regulations. 

Thus, the estimates of the various components have many interactive effects that must be 

incorporated to provide a more realistic estimate of the total effects.

The analysis also considers the reduction in the positive behavioral effects of investment and 

financial advice on deferral rates, matching contributions, and plan diversification. Reductions 

in financial advice could occur as current participant behavior transitions to pre-financial advice

practices. Finally, the analysis considers the effect on terminating participants if advice becomes 

unavailable. 

Loss in Retirement Savings – Three components comprise the total reductions in retirement 

savings attributable to the re-proposed regulations. First, IRA owners and qualified plan 

participants could be expected to respond generally to the reduction in investment advice (overall 

reduction in financial advice and the intensity of such advice) by changing their retirement 

savings behavior. This reduction includes investment guidance to IRA owners that would violate 

the conflict of interest rules as well as educational information made available to plan 

participants to guide their investment selections.90 Second, increased cash outs can be expected 

 89 Refer to Appendix A for a detailed description of each component of the estimate.

90 IRA owners and qualified plan participants have a degree of overlap, as many contributions held in IRAs were 

originally contributed to a qualified plan. The analysis attempts to eliminate the potential for double-counting or 

overstating the reduction in retirement assets due to the reduction in financial advice. 
30

to occur as retirement plan participants terminating employment (and IRA owners) lose access to 

assistance that will help them keep their assets in retirement savings. Finally, in response to 

reduced financial advice, fewer small business owners will establish and maintain retirement 

plans for their employees.

The components of each of these estimates rely on several steps. 

Response to reduced availability of financial advice for IRA owners and retirement plan 

participants – First, with respect to the estimates of the response of IRA owners and retirement 

plan participants to a reduction in the overall availability of financial advice, the analysis 

constructs a distribution of IRA owners (including small business plans) and qualified plan 

participants with their associated contribution patterns and average account balances.91 The 

analysis creates baseline estimates of the availability and use of financial assistance by IRA 

owners and plan participants, using data from the 2013 Survey of Consumer Finances as well as 

academic research of this use.

92 This provides a basis to simulate the expected utilization of 

advice and/or reduced access to such advice. Finally, the analysis estimates the aggregate 

changes in the following: (1) decreased contribution rates; (2) increased investment errors (e.g. 

inadequate diversification, excessive or inadequate risk); and (3) reductions in matching 

contributions (pertaining to qualified plan participants only).93 Collectively, these effects are 

assumed to reduce contribution levels as well as reduce overall account balances.94

Increased cash outs for plan participants terminating employment and IRA owners – Plan 

participants terminating employment could be expected to increase withdrawals from qualified 

plans, reducing the total assets held in retirement accounts. Based on previous empirical work, 

there is a relationship between financial advice and retaining assets in a qualified retirement 

account. The estimates of increased cash-outs of retirement savings and reduced rollovers to 

IRAs and other qualified plans rely on a number of data sources as well as our estimates of the 

effect of call centers and/or broker-dealer assistance on these cash outs.

The first step in estimating the potential increases in cash-outs from retirement assets and 

reduced rollovers to IRAs and other qualified plans requires estimating pension participation by 

income class. This analysis relies on Internal Revenue Service (IRS) Statistics of Income (SOI) 

tabulations of the elective deferrals claimed on taxpayers’ Form W-2 for 2010.95 Table 3 

displays the number of taxpayers with elective deferrals and the aggregate amount of the 

deferral. 

 91 Data for this analysis relies on IRS SOI data for IRA owners as well as EBRI analysis of their IRA data base.

92 Refer to Leonard-Chamber, Victoria and Michael Bogdan, Why do Mutual Fund Investors Use Professional 

Advisers?, Investment Company Institute Research Fundamentals, 2007.

93 These parameters for these changes follow the methodology used by the Treasury Department in their analysis of 

the increased savings associated with advice and investment assistance from investment professionals. Refer to the 

Federal Register, Vol. 76, No. 206, October 25, 2011.

94 This estimate also accounts for the potential for the regulations to drive some people out of the IRA market 

because they won’t be able to use the brokerage model and their account balances are too small to use the advisory 

model. 

95 The IRS tabulation of W-2 data includes elective deferrals from all employer-provided defined contribution 

amounts for primary and/or secondary taxpayers. Elective retirement contributions are reported on the Form W-2, 

box 12 and includes the following codes: code D (traditional 401k), code E (traditional 403b), code F (SEP), code G 

(457b), code H (501(c)(18)(D), code S (SIMPLE), code AA (Roth 401k), and code BB (Roth 403b). 
31

The second step is to impute aggregate balances for the distribution of taxpayers reporting 

retirement contributions on Form W-2. This information relies on several surveys. Using 

multiple data sources provided an opportunity to verify and corroborate the assumptions applied 

to the taxpayer characteristics.96 The third step is to estimate the qualified plan participants who 

may experience a break in service (through job termination) and face a decision regarding plan 

assets held with their previous employer. The Job Opening and Labor Turnover Survey (JOLTS) 

from the Bureau of Labor Statistics estimated that 37.1 percent of current workers experience 

separation from employment during the year. The definition of separation includes voluntarily 

quitting, being laid off, or being fired.97

From this information, we derive estimates of the potential retirement savings balances that are 

likely to become vulnerable to cash out.98 We assume that those employees cashing out balances 

currently will continue to do so. With respect to employees choosing to leave account balances 

in a former employer’s plan passively (through inaction), we assume that the small number of 

account balances that would have remained passively with the former employer will also be 

likely to remain there. 

The next step involves investigating the role of call center and broker-dealer assistance in 

helping workers retain their retirement savings at job change. Our research relies on a DOLsponsored pilot survey that looks at how current enrollees in employer-sponsored defined 

contribution (DC) plans make retirement decisions.99 Our empirical models suggest that 

retirement savings plan balances are 33 percent higher if a financial planner or broker was 

consulted for financial advice. Our parameter estimates support our theory that consultations 

with call centers or brokers/dealers result in retirement savings in DC plans that are higher by 

about 33 percent. Our model suggests important life-cycle effects are present in retirement 

savings with plan balances increasing with age initially and then increasing at a decreasing rate 

as workers approach retirement age.100

Reduced retirement account and retirement plan creation – Finally, the analysis estimates the 

reduced assets held in retirement accounts attributable to reduced account creation or reduced 

account contributions for small business plans.101 The first step in creating the estimated 

 96 Refer to Appendix A for a detailed description of the data sources and the methodology. 97 Refer to Hathaway, Kendra C., Job openings continue to grow in 2012, hires and separations less somewhat, 

JOLTS Annual Story, Monthly Labor Review, May 2013.

98 In addition, the estimates include an adjustment for the likelihood that workers separating from employment have 

access to a qualified plan.

99 The survey asked the following question: “How do you make decisions about savings and investment related to 

retirement?” The possible responses were: “1) Ask relatives/friends, 2) Talk to financial planners/brokers, 3) Talk 

to lawyers, 4) Read magazines/newspapers/books, 5) Get advice from television, and 6) Other.” Of the respondents 

who had not already retired, approximately 24 percent indicated that they had talked to financial planners/brokers. 

These contacts likely include both consultation with a paid financial planner and contacts through a call center or 

broker-dealer associated with their employer’s retirement savings plan. 100 Theoretically, the regulation could drive some people out of the IRA market because they won’t be able to use 

the brokerage model and their account balances are too small to use the advisory model. However, this effect is 

difficult to quantify separately and the reduced account creation is incorporated in the first component. 101 A number of assumptions regarding the demographics and characteristics of IRA owners and qualified plan 

participants support these estimates. First, lower income individuals and account holders with small account 

balances are assumed to be most likely to respond to reduced advisory services. In addition, the analysis assumes 
32

reduction is to create the distribution of small business plans, as well as future creation of small 

plans. Average contribution levels for small business plans rely on data from the IRS SOI (e.g. 

SEP and SIMPLE contributions) as well as recent survey data. While contributing a very small 

effect to the total reduction in retirement savings, this estimate includes two effects – a reduction 

to the contributions amounts (similar to that described for IRA owners and other plan 

participants) as well as the reduced creation of new small business plans.102

2. Reductions in Retirement Readiness

As discussed previously, retirement readiness provides an important measure of whether 

individuals are saving enough for retirement. Under current law, many Americans face 

challenges in accumulating sufficient retirement assets to live comfortably in their retirement 

years. The fact that many individuals do not begin saving for retirement early enough, do not 

save enough, and access their retirement savings for non-retirement spending all contributes to 

the problem.

The re-proposed regulations would jeopardize retirement readiness for 11.9 

million IRA and retirement participants. This 11.9 million figure consists of 

individuals who either are unlikely to be retirement ready (6.1 million) or are at 

risk of failing to be retirement ready (an additional 5.8 million).

This reduced retirement readiness would occur because the re-proposed regulations likely would 

result in increased pre-retirement cash outs of retirement savings, decreased contributions to 

retirement savings as individuals either reduce their contributions or do not begin saving for 

retirement, and decreased rates of return on retirement savings due to changes in investment 

portfolios. 

The EBRI analysis of retirement readiness indicates that most individuals will fall short of

meeting their retirement readiness goal (defined as 80 percent of preretirement income).103 

Incorporating the results of their simulation into this analysis of participants that will face 

reduced retirement readiness, we find that of these 11.9 million participants, an estimated 6.1 

million participants are already below that 80 percent goal and would fall materially below 

that number by reason of the DOL re-proposed regulations.

 that plan creation will decline among small businesses if dealer-brokers are unable to provide marketing services 

that run afoul of the re-proposed regulations. This effect is likely to be small, as new plan creation among small 

business tends to be low.

102 The level of creation for small business plans is relatively low. Therefore, this effect is likely to be relatively

small. The effect of the reductions in the IRA market for small businesses is included in the first component. 103 Refer to VanDerhei, Jack, What Causes EBRI Retirement Readiness Ratings to Vary: Results from the 2014 

Retirement Security Projection Model, EBRI, Issue Brief No. 396, February 2014. EBRI estimates that 16.8 percent 

of the lowest-income; 52.6 percent of the second-income; and 71.7 percent of the third-income quartiles will fail to 

reach their retirement readiness goal of 80 percent of preretirement income. This estimate applies their estimates to 

the participants that are likely to face adverse effects of the DOL re-proposed regulations.
33

Collectively, these effects lower the trajectory of asset accumulation for retirement.104 While 

there are a number of ways to measure retirement readiness, by any measure, changes to savings 

behavior that have the potential to decrease asset accumulation will result in the loss of 

retirement readiness.

VI. Conclusions

The re-proposed regulations would affect adversely the retirement savings of millions of 

Americans by reducing or eliminating access to financial advice. The adverse effects include (1) 

reduced contributions to retirement savings (due to reduced levels of contributions or the failure 

to being saving for retirement, (2) changes in investment portfolios that will result in increased 

risk or inappropriate diversification, (3) a decline in the number of small business retirement 

plans, and (4) increased pre-retirement cash outs of retirement savings.

These effects would result in an estimated reduction in retirement savings of $68-$80 billion per 

year and reduced retirement readiness for 11.9 million participants. In addition, an estimated 6.1 

million of these individuals already were likely to fail to meet their retirement readiness goal, but 

would fall materially below that number by reason of the DOL re-proposed regulations.

 104 Refer to Quantria Strategies, LLC, Access to Call Centers and Broker Dealers and Their Effects on Retirement 

Savings, April 9, 2014, that finds that pre-retirement distributions could reduce final retirement account balances by 

26 to 41 percent, making it difficult, if not impossible, for the individual to achieve retirement readiness
34

Appendix A: Detailed Methodology of Estimates

1. IRAs

Analysis of the potential cost of the re-proposed regulations on IRAs relies on data from the 

Internal Revenue Service Statistics of Income (SOI). The following provides a description of the 

empirical analysis of the available SOI data. In addition, the description includes the 

assumptions obtained from recent surveys applied to the data.

The SOI data provides the fair market value of IRA balances by income class. The following 

table provides the distribution of these accounts.

Table 3.—Fair Market Value of Traditional and Roth IRAs, 2012

Source: IRS, SOI, Table 3. Taxpayers with IRA Plans, by Type of Plan and by 

Size of Adjusted Gross Income, Tax Year 2012

(thousands of dollars)

Size of Adjusted

Gross Income

Traditional IRAs Roth IRAs

Number of

Taxpayers

End of Year

Fair Market 

Value

Number of 

Taxpayers

End of Year 

Fair Market 

Value

Under $25,000 6,709,243 424,653,213 1,951,582 35,153,939

$25,000 under $50,000 7,093,809 517,785,304 2,516,255 41,729,777

$50,000 under $75,000 6,875,405 616,586,595 2,686,643 55,067,659

$75,000 under $100,000 5,907,588 631,153,703 2,637,792 55,844,369

$100,000 under $200,000 10,298,361 1,408,859,786 5,000,138 125,171,614

$200,000 or more 4,669,496 1,019,501,810 1,650,075 90,033,167

Total 41,553,902 $4,618,540,411 16,442,485 $403,000,525

The SOI provides additional information for IRAs, including average fair market value of IRAs 

by type of account and adjusted gross income. This provides a basis for excluding certain 

taxpayers, by income class. To estimate account balances, the analysis assumes a normal 

distribution of average account balances within each income class (Table 3 provides an 

abbreviated distribution; however for purposes of this analysis, the detailed income distribution 

utilizes 15 separate income classes). This assumption provides a basis for excluding taxpayers 

that may have higher account balances (attributable to rollover activity or a long contribution 

history), but are at lower income levels.105 

Under the re-proposed regulation, many smaller account IRA investors could lose access to an 

investment professional through a brokerage relationship. The analysis estimates that the 

number of taxpayers within each income class with average account balances that would lose 

 105 In addition, this analysis relied on additional tabulations using the Quantria Strategies individual income tax 

model to supplement and support the information provided by the SOI tables.
35

access to brokerage accounts is approximately 8.5 million taxpayers.106 The analysis excludes 

nearly all taxpayers with adjusted gross incomes in excess of $100,000, because these taxpayers 

are likely to have adequate financial resources to hire professional investment advisers (if they 

are not doing so already). 

Similar to the Oliver Wyman and EBRI estimates, this estimate used conservative assumptions 

of existing IRAs, assuming that 60 percent of the 8.5 million accounts that would be below 

minimum account levels for any advisory account would migrate to a “low support” brokerage 

account.107 This lower level of support will result in lower intensity of financial advice, which is 

likely to result in reduced returns for these accounts. The estimated reduction is assumed to be 

100 basis points applied to the projected fair market value for 2014. 

In addition, the analysis considers the effects of the re-proposed regulations on the incentives to 

open IRAs. It is likely that the re-proposed regulations might discourage IRA creation.

108 Under 

the re-proposed regulation, these new IRA investors would not have access to an investment 

professional and are likely to face diminished returns of approximately 200 basis points. 

2. Qualified Plans

a. Reduced Contributions and Reduced Access to Investment Advice – We first 

estimate pension participation contributions by income class. The SOI data provide the starting 

point for this step. The SOI presents tabular data based on information collected from matched 

samples of Form 1040, U.S. Individual Income Tax Return; and Form W-2, Wage and Tax 

Statement, for Tax Years. 

Data from individual income tax returns rely on a stratified probability sample.109 Information 

on wages and retirement contributions rely on Forms W-2 matched to the sampled individual 

income tax return. The individual income tax return provides information on the gender and age 

of a taxpayer (obtained by matching the primary and secondary Social Security numbers on the 

individual income tax return to information from the Social Security Administration). Form W2, box 12 provides detail on the type of retirement plan. The SOI collects this information on an 

individual taxpayer basis. These estimates retain information on age, gender, filing status, and 

wage and salary income levels to reflect certain characteristics that are likely to affect account 

balances. 

We impute aggregate balances for the distribution of taxpayers reporting retirement contributions 

on Form W-2 relying on data from two surveys, which provides an opportunity to verify and 

corroborate the assumptions applied to the taxpayer characteristics. The first survey is the 

Survey of Consumer Finances (SCF), a survey of U.S. households sponsored by the Board of 

 106 Oliver Wyman estimated that, based on account minimums for advisory accounts and IRA data available in 

2011, 7.2 million IRAs from the survey data would not qualify for financial assistance through an advisory account. 

The survey data represented 40 percent of the IRA market.

107 The EBRI IRA data base indicates that the median IRA account balance is under $25,000. 108 This portion of the analysis excludes new IRAs that would have been created with rollover contributions as these 

are accounted for in our calculations relating to retirement plan participants.

109 Refer to Statistics of Income—2010, Individual Income Tax Returns documentation for the description of the 

sampling procedures and data limitations of Statistics of Income tabulations.
36

Governors of the Federal Reserve System with the cooperation of the U.S. Department of the 

Treasury every three years. The second survey is the Employee Benefits Research Institute and 

the Investment Company Institute (EBRI/ICI) survey of retirement plans. The EBRI/ICI survey 

collects information about individual 401(k) plan participant accounts. As of December 2010, 

the database included information about 23.4 million 401(k) plan participants in 64,455 

employer-sponsored 401(k) plans, representing $1.414 trillion in assets. In addition, the 

EBRI/ICI survey collects data from plan record keepers and, therefore, is able to capture the 

characteristics of the plan activity. The survey retains information on demographic, contribution, 

asset allocation, and loan and withdrawal activity information for millions of participants, which 

enables estimates of the cumulative changes in account balances. Together, these surveys 

provide qualitative information that allows imputation of account balances.

i. Loss of Advice that Contributes to Increased Retirement Savings – In 

addition to the account balance assumptions calculated from SOI and survey data, the 

analysis calculates the estimated deferral rates for these retirement accounts.110 The 

estimate assumes that the differences in deferral rates are consistent with data in the 

Financial Engines/AON Hewitt report that shows people using advice services have 

higher average contribution levels than other participants.111 The reduced deferral rates 

were applied to average income of a subset of retirement plan participants. The subset of 

participants reflects the SOI tabulation data, adjusted for the estimated participants who

seek advice. These assumptions capture individuals who would have saved for 

retirement with a financial adviser, who will no longer save, and individuals who would 

have saved more for retirement with a financial adviser, who will reduce their retirement 

savings amounts when they lose access to a financial adviser.

ii. Reduced Access to Financial Advice – DOL previously estimated that 

retirement plan participants made investment mistakes of approximately $114 billion in 

2010 due in large part to the lack of financial advice. This analysis applies the same 

methodology as described in the 2011 regulations.112 As mentioned above, these 

estimates include only those plan participants who are likely to seek advice. The 

reduction in advisory services is likely to reduce performance for these participants by 

approximately 25 to 75 basis points.

b. Account Balance Leakage – The estimates of increased cash-outs from qualified 

retirement savings rely on a number of data sources as well as our estimates of the effects of 

reducing employee access to assistance through call centers and broker-dealers. The estimates 

attempt to characterize and quantify the potential asset erosion from retirement savings when 

participants are unable to obtain assistance at job change, when they must make decisions 

regarding their retirement plan assets. We first estimate pension participation and IRA 

contributions by income class. Because cashouts of retirement savings at job change tend to 

 110 As the previous discussion indicates, there is likely to be positive effect associated investment diversity and 

seeking employer matching amounts. However, this estimate focuses conservatively on deferral rates, as 

information supporting the other positive effects is limited.

111 Refer to Aon Hewitt, Help in Defined Contribution Plans, 2006 through 2012, 2013. 112 U.S. Department of Labor, Employee Benefits Security Administration, 29 CFR Part 2550, Investment Advice –

Participants and Beneficiaries, D. Regulatory Impact Analysis, Federal Register, Vol. 76 No. 206, Tuesday, October 

25, 2011.
37

correlate negatively with income (i.e., individuals with higher income are less likely to cash out 

their retirement savings at job change), we can use the income distribution of pension and IRA 

participation to help us capture these effects. 

As described above, we impute aggregate balances for the distribution of taxpayers reporting 

retirement contributions on Form W-2 relying on data from the SCF and EBRI/ICI surveys, 

which provides an opportunity to verify and corroborate the assumptions applied to the taxpayer 

characteristics. Based on the survey information, we rely on information on demographic, 

contribution, asset allocation, and loan and withdrawal activity information for millions of 

participants, which enables estimates of the cumulative changes in account balances. Together, 

these surveys provide qualitative information that allows imputation of account balances.

From this base, we estimate those qualified plan participants who experience a break in service 

(through job termination) and face a decision regarding plan assets held with their previous 

employer. The Job Opening and Labor Turnover Survey (JOLTS) from the Bureau of Labor 

Statistics provides current statistics on labor turnover by selected worker characteristics. The 

JOLTS measures hires and separations on a monthly basis. Historical estimates that correspond 

with the reference year data (2010) support these estimates. 

Finally, we investigate the role of financial planners and brokers in helping workers save for 

retirement. Our research (described in detail below) relies on a DOL-sponsored pilot survey 

conducted through the Rand American Life Panel that looks at how current enrollees in 

employer-sponsored defined contribution (DC) plans make retirement decisions. 

Rand American Life Panel (ALP) – Since 2006, the Rand Corporation has fielded a survey of 

approximately 6,000 individuals who have agreed to participate in occasional, on-line surveys on 

topics of interest to policymakers. Approximately 350 surveys have been conducted to date on 

topics as diverse as financial decision-making, financial literacy, self-reported health and wellbeing and Social Security knowledge. Participants in the ALP are selected from several other, 

on-going surveys in the United States including the University of Michigan Monthly Survey, the 

National Survey Project cohort and active recruitment based on the nature of the survey.

For the purposes of this research, we focus primarily on the demographic characteristics of 

workers enrolled in employer-sponsored DC plans, plan balances, the investment decisions of the 

plan participants, indicators of financial literacy, and the decision to rely on a financial planner 

or broker to assist in retirement decisions.

The Model – For this research, we constructed an econometric model of plan balances for 

workers in the Well Being 189 Survey who indicated they were enrolled in a company-sponsored 

DC plan.113 We investigate how access to a financial planner might affect retirement savings 

outcomes. For this purpose, we define plan balances as the sum of (1) current plan balances; (2) 

balances in plans from prior employers; and (3) any IRA or Keogh plan balances that the 

respondent may have. Of the 3,061 survey respondents, 837 met our criteria.

 113 We note that DOL criticized the use of their own survey, but provided no detailed reasons why the results, which 

are consistent with other data on the benefits of access to financial advice, should be rejected. Therefore, we believe 

this survey provides relevant support for this analysis.
38

We also construct several variables from the Survey that we believe should be strong predictors 

of retirement savings:

AGE: The age of the respondent.

AGESQR: The age of the respondent squared (to capture life-cycle effects).

INCOME: Total income of the respondent.

CHRONIC: An indicator if the respondent reported suffering from a chronic 

disease such as cancer, diabetes or stroke.

TENURE: An indicator if the respondent owned a home.

FRACTION_STOCK: The fraction of current plan balance that is invested in stocks.

LITERACY: An index of financial literacy.

PLANNER: An indicator if the respondent said he/she relied on a financial 

planner or broker for assistance.

We expect total plan balances to be positively related to income, which captures the fact that a 

higher income should result in more resources devoted to retirement savings. In contrast, we 

expect retirement savings to be negatively related to health status (as captured in the CHRONIC 

variable) as this could mean time spent out of the labor force, reduced hours of work, or other 

impediments to lifetime earnings. Similarly, we expect retirement savings to be positively 

related to owning a home (TENURE), suggesting that homeowners may have more resources 

that can be devoted to saving for retirement. 

We have no a priori expectation about how the fraction of stock in one’s portfolio might affect 

plan balances. Because stocks generally have higher long-term growth than bonds, we would 

expect this variable to be positively related to plan balances. On the other hand, because the 

survey was conducted in mid-2011, those plans with a large stock component could have 

suffered from the recent financial crisis. We expect financial literacy to be positively correlated 

with plan balances to the extent enrollees make better financial decisions relating to their 

retirement savings. Finally, we expect that plan balances should be positively related to seeking 

planning advice from a professional advisor. 

In order to control for the wide variation and degree of skew in plan balances, we use the natural 

logarithm of total plan balances as our dependent variable. We also use the natural logarithm of 

total income as a predictor variable. Refer to the original Quantria Strategies research, Access to 

Call Centers and Broker Dealers and Their Effects on Retirement Savings, Appendix Table 1 

and Appendix Table 2. These tables show that, of our sample of 837 enrolled workers, the 

average age is 47 years, approximately 32 percent have experienced some type of chronic health 

problem, 78 percent are homeowners, about 74 percent of current plan balances are in stocks, 

and slightly more than half consulted with a financial planner. 

Results – The estimated coefficients conform to our expectations about how certain variables 

relate to plan balances. The positive coefficient on AGE shows that, at least for our sample, plan 

balances at first rise with age, as one would expect. In contrast, the negative coefficient on 

AGESQR indicates that balances begin to increase at a slower rate at some point in the lifecycle, perhaps due to withdrawals or a movement towards safer, fixed-income investments as 

one gets older.
39

Plan balances correlate positively with income and homeownership as indicated by the positive 

coefficients on these two variables and correlate negatively with health status. Both these results 

are expected. The fraction of plan balances held in stocks (FRACTION_STOCKS) suggests a 

strong, positive effect on plan balances. As expected, larger plan balances are positively related 

to financial literacy and the use of a financial planner. Because of the log specification of our 

model for plan balances, we can interpret the coefficient on PLANNER as indicating that plan 

balances are about 33 percent higher if an individual consulted a financial planner or broker for 

financial advice. All the coefficients in our model, except CHRONIC, are statistically significant 

at 95 percent confidence intervals. The adjusted R-square of 0.28 is reasonably high for cross 

section data.

3. Small Business Plans

Analysis of the potential cost of the re-proposed regulations on small business retirement plans 

(including IRAs) relies on data from the Internal Revenue Service Statistics of Income (SOI). 

The following provides a description of the empirical analysis of the available SOI data. In 

addition, the description includes the assumptions obtained from recent surveys applied to the 

data.

The SOI data provides the fair market value of SEP and SIMPLE IRA balances by income class. 

The following table provides the distribution of these accounts. This analysis follows closely the 

analysis of IRAs described above. 

To estimate account balances, the analysis assumes a normal distribution of average account 

balances within each income class (Table 4 provides an abbreviated distribution, however for 

purposes of this analysis, the analysis utilizes detailed income distribution across 15 separate 

income classes). This assumption provides a basis for excluding taxpayers that may have higher 

account balances (attributable to a long contribution history or higher contribution amounts), but 

are at lower income levels.114 

 114 In addition, this analysis relied on additional tabulations using the Quantria Strategies individual income tax 

model to supplement and support the information provided by the SOI tables.
40

Table 4.—Fair Market Value of SEP and SIMPLE IRAs, 2012

Source: IRS, SOI, Table 3. Taxpayers with IRA Plans, by Type of Plan and by 

Size of Adjusted Gross Income, Tax Year 2012

(thousands of dollars)

Size of Adjusted

Gross Income

SEP IRAs SIMPLE IRAs

Number of

Taxpayers

End of Year

Fair Market

Value

Number of 

Taxpayers

End of Year 

Fair Market 

Value

Under $25,000 328,985 16,378,382 271,075 3,307,618

$25,000 under $50,000 387,097 15,506,108 564,237 6,823,720

$50,000 under $75,000 393,333 23,085,005 452,086 8,875,497

$75,000 under $100,000 379,094 26,746,313 392,072 8,796,495

$100,000 under $200,000 887,567 82,040,689 551,285 23,040,813

$200,000 or more 647,032 108,163,780 268,988 21,020,046

Total 3,023,108 $271,920,277 2,499,743 $71,864,189

Based on SOI data, approximately an additional 570,000 SEP and SIMPLE accounts would be 

below minimum account levels for an advisory account and would migrate to a “low support” 

brokerage account. This lower level of support is likely to result in reduced returns for these 

accounts. The estimated reduction is assumed to be 100 basis points applied to the projected fair 

market value for 2014. 

While existing plans may face a reduced level of investment advisory services, this effect is not 

included in this estimate as over time, the account balances may be large enough to warrant a 

higher level of services. However, the re-proposed regulations may reduce availability of 

financial advisers for small businesses with respect to retirement savings plans and a reduction in 

both the number of small businesses offering retirement plans to their employees and a reduction 

in total retirement savings could be expected.115 

A recent survey found that a substantial percent (67 percent) of small businesses that do have 

retirement plans rely on a financial adviser or record-keeper to assist in investment selection and 

monitoring (Greenwald & Associates survey).116 Especially in the case of smaller companies 

(10-49 employees), a financial adviser plays an important role in assisting with the retirement 

plan. Contrast this with the fact that a relatively small percentage of small business owners (less 

than one-third) have worked with an adviser on a business plan, suggesting that financial 

advisers play key roles in the establishment of retirement savings plans by small businesses.117 

 115 This number is likely to be small relative to the difference in investment performance associated with existing 

accounts. However, over time, it is something that would have far reaching impacts.

116 The Impact of the Upcoming Re-Proposed Department of Labor Fiduciary Regulation on Small Business 

Retirement Plan Coverage and Benefits, Greenwald & Associates, May 14, 2014. 117 CNBC/FPA survey, supra.
41

Therefore the analysis includes estimates of the likely number of small business pension plans 

that would not be established, based on data from the EBRI analysis of employment-based 

retirement plans.118

4. Interaction Effects 

As mentioned previously, there are a number of interactions between account holders of 

employer-sponsored retirement plans, IRA holders, and small business accounts. IRAs may be 

held by individuals who currently participant in an employer plan. Small business plans may be 

an IRA or another qualified retirement plan (e.g. 401(k) plan). In addition, participants in 

qualified plans may rollover balances from the employer plan to an IRA. Therefore, to address 

the potential for double counting, the analysis adjusts each estimate for the relative degree of 

overlap, based on available information, which reduces the overall effect of any individual 

component.

 118 Refer to Copeland, Craig, Employment-based Retirement Plan Participation: Geographic Differences and 

Trends, 2013, Employee Benefits Research Institute, No. 405, October 2014.
42

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1

Response to Advanced Analytical Review of Quantria Strategies, LLC Study on 

Access to Call Centers and Broker Dealers

The Department of Labor commissioned a private firm, Advanced Analytical, to critique the 

April 2014 Quantria Strategies, LLC study titled “Access to Call Centers and Brokers Dealers 

and Their Effects on Retirement Savings.” Because the Advanced Analytical report 

misrepresents the Quantria study with respect to certain key points, the analysis below addresses 

these inaccuracies.

1

Importantly, Advanced Analytical notes in its conclusion “the basic idea behind the study – that 

expanded fiduciary responsibilities may reduce financial advice and increase cash outs – is 

possible...depending upon the content of the regulation, there may be a modest increase in cashouts (emphasis added).”

Given the magnitude of rollovers from qualified plans to individual retirement arrangements 

(IRAs), even a modest increase in cash-outs would have an immense economic impact. The 

Internal Revenue Service data indicated that IRAs received rollovers totaling $309.5 billion in 

2012.2 Thus, while Quantria’s estimated $20 – 32 billion increase in cash outs may be 

characterized as “modest” relative to total rollovers, it reflects a significant change in retirement 

savings that warrants careful consideration by the Department.

Advanced Analytical statement – “Quantria Assumed that Re-Proposed Regulations 

Will Eradicate All Forms of Financial Advice on What to Do with Plan Balances on 

Job Separation”

Nowhere in the Quantria study is there a statement that the re-proposed regulations would

“eradicate all forms” (emphasis added) of financial advice on job separation. Rather, the 

Quantria study states that the regulations are “generally expected to create fiduciary 

responsibility for financial service providers that ‘will limit’ (emphasis added) the access to 

assistance provided by call centers and broker dealers when terminating employees face plan 

distribution decisions.”

Limiting access to assistance will have serious adverse effects, but it does not reflect an 

assumption that the proposal would “eradicate all” access to assistance.3

 The point of the 

Quantria Strategies analysis was that adopting regulations without adequate accommodation for 

certain common forms of assistance currently provided to employees, such as the availability of 

a call-in center to help terminating employees make decisions about what to do with their

account balances, could result in the elimination of these forms of assistance. The Quantria 

 1

 It should be noted that Advanced Analytical did not contact Quantria to confirm any of their assumptions made 

about the Quantria report.

2

 Refer to the Internal Revenue Service, Statistics of Income, Matched file of Forms 1040, 1099-R, and 5498 for 

Tax Year 2012, Table 1. Taxpayers with Individual Retirement Arrangement (IRA) Plans, by Type of Plan, Tax Year 

2012. 3

 When the Quantria study was prepared, no information existed on the scope of the re-proposed regulations. 
2

study did not assume and, in no way implied, that the regulations would eliminate all forms of

financial advice.

Advanced Analytical statement – “Quantria Interpreted a Correlation as a Causal 

Effect.”

Quantria explained explicitly in a meeting with the Office of Management and Budget that the 

econometric model used in the Quantria report was not a structural model that could be used to 

show a causal effect. However, Quantria’s regression analysis suggests there is a relationship 

between cash outs and access to financial advice, even accounting for other characteristics, 

including wealth, income, and financial literacy. All of these characteristics are captured in the 

Quantria model. We also note that the Department of Labor inferred a strong relationship 

between access to financial advice and retirement savings behavior based on comparable data in 

the 2011 analysis of the effect of regulations relating to prohibited transaction exemptions.4

Other studies have also found a link between access to financial advice and retirement savings 

outcomes. Despite this, the data cited to support the proposed regulation primarily look at rates 

of return in the commercial market, rather than rates of returns for qualified retirement plans and 

do not consider any other potential effects of financial advice on qualified retirement savings, 

including increased participation rates, increased savings rates, and reduced cash-out rates. 

Advanced Analytical statement – “Quantria Misrepresented Lump Sum Distributions 

as Cash Outs.”

Advanced Analytical focused on a single number that was not a relevant source of Quantria’s 

calculations. While it is true that the number cited represented average lump-sum distributions 

over a period of time, this number was not used as the basis for Quantria’s estimates.

Advanced Analytical is correct that lump-sum distributions can be distinguished from cash outs. 

Cash outs represent “leakage” of retirement savings; in other words, cash outs represent 

distributions that result in pure losses of qualified retirement savings.5

 Quantria relied on a 

number of different data sources to arrive at the assumptions used to quantify the size of cash 

outs. For example, Argento et al. 2013 found that, in 2010, total distributions from retirement 

savings plans for taxpayers under age 55 totaled $241 billion and for taxpayers age 55 or older 

totaled $1,040.2 billion. Table 1 shows the portion of these total distributions that were taxable 

distributions.

 4 Federal Register, Volume 76, No. 206, Rules and Regulations, Tuesday, October 25, 2011. 5

 For this purpose, pure losses of retirement savings mean withdrawals from qualified retirement savings that are 

used for nonretirement purposes by taxpayers who have not yet retired from work. Advanced Analytical noted that 

cash out balances could be used for other purposes, such as investing in a home or business; while this is true, these 

amounts do not represent qualified retirement savings, which was the focus of the Quantria analysis.
3

Table 1. Taxable Retirement Account Distributions, 2010

[Billions of dollars]

Type of Distribution All Returns Age < 55 Age 55+

Taxable, non-penalized 746.7 57.1 689.6

Taxable, penalized 57.8 47.3 10.5

Total, taxable distributions 804.5 104.4 700.1

Source: Argento, Robert, Victoria L. Bryant, and John Sabelhaus. Early Withdrawals from Retirement Accounts 

During the Great Recession. Federal Reserve Board, Washington, DC, Divisions of Research & Statistics and 

Monetary Affairs, Finance and Economics Discussion Series, 2013-22, March 2013.

Distributions that are both taxed and penalized ($57.8 billion in Table 1) represent pure losses of 

qualified retirement savings. In addition, some portion of the $700.1 billion of taxable nonpenalized distributions also represent pure losses of qualified retirement savings; for those age 65 

and over, most taxable, non-penalized distributions likely represent the use of qualified 

retirement savings as retirement income. 

For some taxpayers (particularly those under age 55 and those in the age 55-65 category), a 

significant portion of the taxable, non-penalized distributions will also represent pure losses of 

qualified retirement savings. As a result, in 2010, cash outs of retirement savings totaled 

somewhere between $57.8 billion and $804.5 billion.6 Assuming that no more than 10 percent 

of the taxable, non-penalized distributions represent cash outs, the applicable potential range of 

cash outs for 2010 would be $57.8 to $132.5 billion.

Advanced Analytical statement – “There is No Apparent Connection between 

Quantria’s Calculations of Incremental Cash-Outs and Reduced Lifetime Retirement 

Savings.”

The relationship between cash outs and reduced lifetime savings is not a new concept. 

Policymakers focus on the potential of the current system to create incentives for taxpayers to 

withdraw (through loans, qualified withdrawals for special purposes, and cash outs at various 

times in the working career (e.g. change of employment)). The concern is that such actions will 

result in inadequate accumulation of retirement savings. 

The economic literature offers a number of examples of research that confirms this finding. 

Most recently, research by the Center for Retirement Research at Boston College conducted by 

Munnell and Webb find that aggregate 401(k) and IRA retirement wealth is at least 20 percent 

lower than it would have been without current leakage.7

 

Other examples include the Government Accountability Office, 401(k) Plans – Policy Changes 

Could Reduce the Long-Term Effects of Leakage on Worker’s Retirement Savings; Congressional 

Research Service, Pension Issues: Lump-Sum Distributions and Retirement Security; and earlier 

 6

 Refer to Argento, Robert, Victoria L. Bryant, and John Sabelhaus. Early Withdrawals from Retirement Accounts 

During the Great Recession. Federal Reserve Board, Washington, DC, Divisions of Research & Statistics and 

Monetary Affairs, Finance and Economics Discussion Series, 2013-22, March 2013. 7

 Refer to Munnell, Alicia H. and Anthony Webb, The Impact of Leakages from 401(k)s and IRAs, WP-2015-2, 

February 2015. The Munnell and Webb results, published after the Quantria results, confirm these findings.
4

work by Poterba, Venti, and Wise, Preretirement Cashouts and Foregone Retirement Saving: 

Implications for 401(k) Asset Accumulation.

8

Quantria’s examples were not intended to relate directly to the estimates of increased cash outs, 

but rather were intended (as specifically stated in the report) to show examples of the effects of 

cash outs on retirement savings balances. The Quantria report states that cash outs could “reduce 

the ultimate retirement savings of affected individuals (emphasis added) by 20 to 40 percent.” 

The report did not state nor imply that total retirement savings would decline by 20 to 40 percent.

 8

 Refer to United States Government Accountability Office. 401(k) Plans. Policy Changes Could Reduce the 

Long-Term Effects of Leakage on Workers’ Retirement Savings. Report to the Chairman, Special Committee on 

Aging, U.S. Senate. GAO-09-715, August 2009; Purcell, Patrick. Pension Issues: Lump-Sum Distributions and 

Retirement Income Security. Congressional Research Service, RL30496, January 7, 2009; and Poterba, James M., 

Steven F. Venti, and David A. Wise. Pre-Retirement Cashouts and Foregone Retirement Saving: Implications for 

401(k) Asset Accumulation. National Bureau of Economic Research, Working Paper 7314, August 1999.
NYC-ZPR00111-002 

April 12, 2011 

Oliver Wyman report: Assessment of the 

impact of the Department of Labor’s proposed 

“fiduciary” definition rule on IRA consumers 
Oliver Wyman 

NYC-ZPR00111-002 

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Copyright © 2011 Oliver Wyman 

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1

About this study 

On behalf of a group of 12 financial services firms that offer services to retail investors, 

Davis and Harman LLP engaged Oliver Wyman to analyze the impact on Individual 

Retirement Account (IRA) investors of the Department of Labor’s proposed change to the 

rule defining a “fiduciary” for purposes of the Employee Retirement Income Security Act 

of 1974 (“ERISA”) and section 4975 of the Internal Revenue Code of 1986, as amended 

(the “Code”). 

The firms participating in this study collectively represent over 19 million IRA holders 

who hold $1.79 trillion in assets through 25.3 million IRA accounts. This constitutes 

approximately 40% of IRAs in the United States and 40% of IRA assets. Due to the 

highly sensitive nature of firm-specific information, all data is presented in aggregated 

form in this report. 

In particular, Oliver Wyman was asked to evaluate the potential impact, if enacted, of the 

proposed rule change on smaller retail IRA investors with respect to: 

1. access to investment help and services from a licensed investment professional, 

2. choice of investment professional, relationship model in terms of commission-based 

brokerage versus single fee, “wrap” investment advisory accounts, as well as breadth 

of product choice, and 

3. cost impact to IRA holders. 
 

Copyright © 2011 Oliver Wyman 

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2

Summary of key findings 

IRAs are the fastest growing accounts holding retirement savings. 

IRAs are widely held by small investors. 

 Nearly 40% of IRAs in the study sample had less than $10,000.

Small investors overwhelmingly favor brokerage relationships over advisory 

relationships. 

 98% of investor accounts with less than $25,000 were in brokerage relationships.

The proposed rule could eliminate access to meaningful investment services for over 

7 million IRAs. 

 IRA investors would no longer be able to receive investment services and help from 

an investment professional as part of a brokerage relationship.

 Because of account minimums, 7.2 million current IRAs would not qualify for an 

advisory account with any firm in the study.

The proposed rule could well result in hundreds of thousands of fewer IRAs opened 

per year. 

 In 2010, firms in the study sample opened approximately 890,000 brokerage IRA 

accounts with assets of less than $10,000.

 Under the proposed rule, small investors interested in opening an IRA would have 

less access to investment professionals for guidance and support, making it less likely 

that they would open an IRA.

Many IRA holders would have reduced choice of investment professional, as over 

one-third of client-facing financial professionals in the industry would not be 

licensed to help retail investors with their IRA account needs under the proposed 

rule. 

The brokerage IRA investors who could be served in an advisory model would likely 

face increased costs as a result of the rule-driven change. 

 In the study sample, estimated direct costs would increase by approximately 75% to 

195% for these investors.
 

Copyright © 2011 Oliver Wyman 

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3

1. The outlook for U.S. retirement savings and the role of the IRA 

Personal retirement savings are an essential part of funding the future retired population 

As is well documented in numerous studies, the U.S. population is aging. The number of 

retired Americans aged 65 or over is projected to swell nearly 80% to 72 million by 2030 

compared to 40 million today. 

Figure 1: The U.S. population is aging 

Increase in the 65 and over population, 2010 – 2030 

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72 MM

40 MM

2010 2030

19% of total population

13% of total population

The number of individuals aged 65 

and older is projected to increase 

79% between 2010 and 2030

Source: US Census Bureau 2008 release 

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72 MM

40 MM

2010 2030

19% of total population

13% of total population

The number of individuals aged 65 

and older is projected to increase 

79% between 2010 and 2030

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72 MM

40 MM

2010 2030

19% of total population

13% of total population

The number of individuals aged 65 

and older is projected to increase 

79% between 2010 and 2030

Source: US Census Bureau 2008 release 

At the same time, Americans increasingly need to take on far more proactive personal 

planning for their own retirement income. Former support mechanisms such as employersponsored defined benefit pension plans are disappearing (over 65% of individuals with 

an employer-sponsored retirement plan were in a defined benefit pension plan at the end 

of the 1980s, compared with only 36% of individuals by the mid 2000s1

). Furthermore, 

the Social Security system is coming under increasing stress amid U.S. funding and 

budgetary issues as the population skews towards older individuals in the savings 

decumulation period of their lives. 

We estimate total personal financial assets in the U.S. today amount to $53 trillion, of 

which $40 trillion can be considered investable.2

 As Figure 2 shows, the growth outlook 

for many of the major asset classes is challenged, which we expect will increase the 

 

1

 ICI, 2009, EBRI Databook 

2

 Oliver Wyman analysis, Federal Flow of Funds, Cerulli, American Council of Life Insurers 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

4

importance of personal retirement savings. Of the total, approximately $20.4 trillion 

constitute specific retirement assets in the form of IRAs, pensions, life insurance and 

annuities. 

Figure 2: Retirement assets constitute ~$20 TN of the total $40 TN of investable 

personal financial assets in the U.S. 

U.S. personal retirement assets, year-end 2010 

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Source: Oliver Wyman analysis, Federal Flow of Funds, Cerulli, American Council of Life Insurers

1. Includes public sector DB plans and DC plans (Taft-Hartley, 403(b), 457), and private sector DB and DC plans (401(k), money purchase 

plans, profit sharing plans, Keoghs); category excludes those assets invested in annuities to avoid double-count

2. Includes Federal DB plans (Civil Service Retirement Systems, FERES, Military Retirement Fund, National Railroad Retirement Trust, 

Railroad Retirement Board) and DC plans (Federal Thrift Savings Plan); excludes Social Security

3. Includes general and segregated funds held on behalf of US policyholders and annuitants; excludes life insurance reserves 

4. Includes Corporate equities, Mutual Fund Shares, Money Market Fund Shares, Credit market instruments less IRAs

$53 TN Key trends and outlook

 GDP growth forecast cautiously optimistic but remains fragile

 Sluggish job growth

 Declines in home price levels in post-crisis environment

 The “lost decade”, flat market growth, and historically low 

interest rates driving search for return and yield

 Fastest growing retirement product

 IRA assets now higher than DC pension assets

 Continued shift from DB to DC and increasing number of 

plans closing

 Core retirement product, especially for smaller investors

 Strong outlook

 DB to DC trend starting to mirror the private sector

 Continued post-crisis conservatism

 Anticipate a shift to other asset classes as investors reallocate

2010E

Private employersponsored retirement 

plans1

18%

8% IRA

3%

Cash and deposits

Life ins. and annuities3 9%

12%

Federal pensions2

Taxable investments4 24%

12% Home equity

13% Business equity

$20.4 TN

in 

retirement 

assets $39.6 TN

in 

investable 

personal 

assets

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Source: Oliver Wyman analysis, Federal Flow of Funds, Cerulli, American Council of Life Insurers

1. Includes public sector DB plans and DC plans (Taft-Hartley, 403(b), 457), and private sector DB and DC plans (401(k), money purchase 

plans, profit sharing plans, Keoghs); category excludes those assets invested in annuities to avoid double-count

2. Includes Federal DB plans (Civil Service Retirement Systems, FERES, Military Retirement Fund, National Railroad Retirement Trust, 

Railroad Retirement Board) and DC plans (Federal Thrift Savings Plan); excludes Social Security

3. Includes general and segregated funds held on behalf of US policyholders and annuitants; excludes life insurance reserves 

4. Includes Corporate equities, Mutual Fund Shares, Money Market Fund Shares, Credit market instruments less IRAs

$53 TN Key trends and outlook

 GDP growth forecast cautiously optimistic but remains fragile

 Sluggish job growth

 Declines in home price levels in post-crisis environment

 The “lost decade”, flat market growth, and historically low 

interest rates driving search for return and yield

 Fastest growing retirement product

 IRA assets now higher than DC pension assets

 Continued shift from DB to DC and increasing number of 

plans closing

 Core retirement product, especially for smaller investors

 Strong outlook

 DB to DC trend starting to mirror the private sector

 Continued post-crisis conservatism

 Anticipate a shift to other asset classes as investors reallocate

2010E

Private employersponsored retirement 

plans1

18%

8% IRA

3%

Cash and deposits

Life ins. and annuities3 9%

12%

Federal pensions2

Taxable investments4 24%

12% Home equity

13% Business equity

$20.4 TN

in 

retirement 

assets $39.6 TN

in 

investable 

personal 

assets

IRAs are a critical and rapidly growing part of U.S. retirement savings 

Since their introduction in 1974, IRAs have grown to represent around 8% of total 

personal financial assets in the U.S. today3, representing $4.5 trillion. 49 million U.S. 

households hold an IRA and for 8% of households IRAs represent the only form of 

retirement savings.4 IRAs are the fastest growing investment accounts holding retirement 

savings and have become an ever more important part of U.S. households’ future funding, 

increasing from 16% of retirement market assets to 27% in the 20 years from 1990 to 

2010.5

 

3

 Federal Flow of Funds, Cerulli, American Council of Life Insurers, Oliver Wyman Analysis 

4

 ICI, Research Fundamentals, 2010 

5

 ICI, The U.S. Retirement Market for Q3 2010, released 2011 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

5

Figure 3: IRAs are growing rapidly with traditional IRAs continuing to dominate6

IRA growth and distribution by type, 1990 – 2010 

SIMPLE

2%

Roth

5%

Traditional

88%

SEP & 

SAR-SEP

5%

1990 2000 2010 Q3

$0.6 TN

$4.5 TN

$2.6 TN Employer-sponsored 

account designed for 

small employers

Personal savings IRA similar 

to Traditional IRA with 

different tax rules

Employer-sponsored 

account designed for 

self-employed individuals

Personal 

savings IRA with 

tax advantages

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Source: ICI Q3 2010, Cerulli 2009 Retirement Markets, Oliver Wyman estimates

As a tax-advantaged savings vehicle, IRAs play a critical role in private savings. Subject 

to certain conditions, IRAs enable investors to retire with more wealth than if they had 

invested through a taxable account. Similarly, IRAs help eliminate distortions in asset 

allocation and investment risk by allowing investors to defer taxes on investment income, 

thereby leveling the field between capital gains-oriented equities and income-generating 

investments such as bonds and dividend-paying stocks. Finally, IRAs and other taxdeferred products enable investors to make optimal portfolio rebalancing decisions 

independent of tax considerations. 

The retail financial services industry currently offers a range of relationship models in 

response to the diversity of investor needs 

With investment savings, like many things, the most difficult step is often the first one, 

and many retail investors seek support from a financial advisor and/or brokerage firm 

serving as an IRA custodian to help them through the technical, and largely tax-driven 

requirements of setting up and funding an IRA through cash contributions or rolling 

money over from an existing qualified retirement plan. Opening a retirement account is 

 

6

 Source: ICI Q3 2010, Cerulli 2009 Retirement Markets, Oliver Wyman estimates 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

6

just the beginning, however. It takes personal discipline to remain on track, and investors 

need to continue to make regular contributions to their account over a long time period in 

order to benefit from compounded growth of their investment savings. 

Investors seek a wide range of assistance – from more basic tax information and asset 

allocation modeling to sophisticated, investment-specific guidance from investment 

professionals. Two primary IRA business models have evolved to serve all investor types. 

These two primary channels through which individuals access IRA savings accounts are 

summarized in Figure 4 and described in further detail below. 

Figure 4: There are two main IRA business models today 

Key attributes of IRA business models 

Investment 

services needs

 Broad financial planning 

and investment advice

 Product-specific 

investment information, 

access to principallytraded products and 

range of third party and 

proprietary products

 Product-specific 

investment information, 

access to principallytraded products and 

range of third party and 

proprietary products

Level of service  Personalized access to 

an investment 

professional

 Highest ongoing advice 

and account 

surveillance 

 Personalized access to 

an investment 

professional

 Information to help 

investors set up an IRA 

account and select 

suitable investments

 Often offer access to an 

investment professional 

through a branch or call 

center 

 Online investment 

information, research, 

tools and calculators to 

help investors set up an 

IRA account and select 

suitable investments

Cost  Tends to be highest cost  Balanced cost, with 

costs based on level of 

trading activity

 Lowest cost, depending 

on trading activity

Investment 

services needs

 Broad financial planning 

and investment advice

 Product-specific 

investment information, 

access to principallytraded products and 

range of third party and 

proprietary products

 Product-specific 

investment information, 

access to principallytraded products and 

range of third party and 

proprietary products

Level of service  Personalized access to 

an investment 

professional

 Highest ongoing advice 

and account 

surveillance 

 Personalized access to 

an investment 

professional

 Information to help 

investors set up an IRA 

account and select 

suitable investments

 Often offer access to an 

investment professional 

through a branch or call 

center 

 Online investment 

information, research, 

tools and calculators to 

help investors set up an 

IRA account and select 

suitable investments

Cost  Tends to be highest cost  Balanced cost, with 

costs based on level of 

trading activity

 Lowest cost, depending 

on trading activity

Key Attributes

Full service Discount

Advisory

NYC-ZPR00111-002

Brokerage

Advisory IRAs offer ongoing advice that may include investment-specific advice, 

portfolio monitoring, and account surveillance to determine both product-level investment 

suitability and account make-up. Advisory IRAs involve a relationship with a Registered 

Investment Adviser (RIA) or dual-registered broker-dealer/RIA. Fees on such IRA 

accounts are virtually always structured as a “wrap” fee (i.e. an annual client charge of a 

percentage of account assets). 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

7

Brokerage IRAs are offered today in two ways: 

 Full service brokerage IRAs, in which an investor makes investment decisions, and 

has regular access to a registered broker representative, plus a range of investment 

solutions. This typically involves non-continuous, point-in-time help and investment 

services. In this approach, the brokerage firms are compensated through transactionspecific direct commissions, annual account fees, and various “indirect” sources of 

compensation (such as marketing and distribution fees paid by mutual funds). 

 

 Discount brokerage IRAs, in which an investor makes investment decisions with 

more limited personal contact (which may occur at a branch or call center), and which 

often have a full suite of tools to help investors evaluate investment products and 

transact online. Discount brokerage relationships often have reduced transactionspecific direct commissions, account fees, and indirect compensation. 

These two IRA channels have different service models, with different underlying cost 

structures. Fee-based advisory IRAs involve a number of services that are not present in 

either of the brokerage channels, such as: 

 Ongoing fund and manager research 

 Ongoing account surveillance 

 Detailed investment performance modeling 

 Formalized asset allocation modeling 

 Ability for the financial advisor or the firm to utilize discretion with respect to the 

accounts (a feature in most advisory programs) 

Offering these services to advisory investors involves higher costs to the provider, 

reflecting the required technology investment and compensation for the time financial 

advisors and support personnel need to spend on each account. In addition, pricing of 

advisory relationships must reflect the overall liability risk of such relationships. Pricing 

for the different IRA channels reflects these different underlying cost structures. 

Accordingly, fee-based advisory IRAs generally represent the highest service level and 

cost channel for investors. 

2. Proposed changes to IRA regulation 

In October 2010, the U.S. Department of Labor's Employee Benefits Security 

Administration announced a proposed rule change to the definition of “fiduciary 

investment advice” for ERISA-covered qualified retirement plans and IRAs. The 

proposed change would greatly expand the range of conditions under which an individual 

who merely provides investment services in a brokerage context would be subject to 

ERISA fiduciary rules. After receiving a significant amount of public commentary about 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

8

the proposed change, the Department of Labor held public hearings on March 1 and 2, 

2011, and subsequently opened a 15-day window to receive additional comments. 

Given the magnitude of potential change for both investors and providers, and a lack of 

sufficiently granular publicly-available data, Davis and Harman LLP engaged Oliver 

Wyman on behalf of a group of 12 financial services firms offering retail investment 

services to analyze the potential impact of the proposed rule on IRA investors. The group 

of firms participating in this study contributed proprietary firm-level data on their IRAs to 

create a large sample of IRA market participants. In particular, Oliver Wyman was asked 

to use the aggregated dataset to analyze the proposed rule with respect to its potential 

impact on investors’ access to investment services and help; investors’ choice of 

relationship model, advisor, and product set; and investors’ cost of service. 

The study sample in this report provides a unique window onto today’s IRA investors, as 

well as the distribution of key account characteristics such as size and type of account 

The aggregate study sample provides an unprecedented view into the range of IRA 

account characteristics. The participant group in this study represents 40% of both total 

IRA assets and number of accounts in the U.S. A comparison with publicly available data 

suggests that the sample broadly mirrors the entire IRA market in type of IRAs held, age 

of IRA holders, and asset allocation. 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

9

Figure 5: The study sample data appears to be highly representative of the total U.S. 

IRA investor population 

Comparison of study sample data to total U.S. IRA population

NYC-ZPR00111-002

Source: Cerulli 2008, Oliver Wyman 

study sample

Note: Asset composition follows Cerulli data; for 

Oliver Wyman study, life insurance includes 

variable annuities; bank and thrift includes cash 

and cash equivalents, UITs, REITS, etc.; 

brokerage includes fixed income and equity 

individual securities, structured products, and 

alternatives

Source: Investment Company Institute 2010, 

Oliver Wyman study sample

Note: Public data indicates age of the sole or codecision maker for household savings and 

investment; Oliver Wyman data indicates age of 

individuals holding IRAs 

Source: Investment Company Institute 2010, 

Oliver Wyman study sample

IRA assets by type of account IRA owners by age segment IRA assets by investment product

89% 85%

7%

5% 6%

7%

Public data Study

sample data

Traditional 

(contributory 

and rollover)

Roth

SEP and 

SIMPLE

21% 26%

21%

26%

24%

23%

18%

15%

16% 10%

Public data Study

sample data

<35 years

35-44 years

45-54 years

54-65 years

>65 years

44% 48%

37% 32%

11% 13%

8% 7%

Public data Study

sample data

Mutual 

funds

Brokerage

Bank and 

Thrift

Life 

Insurance

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Source: Cerulli 2008, Oliver Wyman 

study sample

Note: Asset composition follows Cerulli data; for 

Oliver Wyman study, life insurance includes 

variable annuities; bank and thrift includes cash 

and cash equivalents, UITs, REITS, etc.; 

brokerage includes fixed income and equity 

individual securities, structured products, and 

alternatives

Source: Investment Company Institute 2010, 

Oliver Wyman study sample

Note: Public data indicates age of the sole or codecision maker for household savings and 

investment; Oliver Wyman data indicates age of 

individuals holding IRAs 

Source: Investment Company Institute 2010, 

Oliver Wyman study sample

IRA assets by type of account IRA owners by age segment IRA assets by investment product

89% 85%

7%

5% 6%

7%

Public data Study

sample data

Traditional 

(contributory 

and rollover)

Roth

SEP and 

SIMPLE

21% 26%

21%

26%

24%

23%

18%

15%

16% 10%

Public data Study

sample data

<35 years

35-44 years

45-54 years

54-65 years

>65 years

44% 48%

37% 32%

11% 13%

8% 7%

Public data Study

sample data

Mutual 

funds

Brokerage

Bank and 

Thrift

Life 

Insurance

Note that due to limitations in some firms’ data, specific analyses may be based on 

substantial subsets of the entire study sample. 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

10

3. IRA investment behavior of smaller investors 

As shown in Figure 6, approximately half of IRA investors in the study sample have less 

than $25,000 in IRA assets, and over a third have less than $10,000. 

Figure 6: The majority of IRA account holders have lower asset levels 

IRA account holders by total IRA asset size segment, year-end 2010 

10K-<25K

15%

25K-<50K

14%

≥250K

9%

100K-<250K

13%

50K-<100K

13%

<10K

36%

Source: Oliver Wyman study sample

NYC-ZPR00111-002
 

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11

Although some of these small investors are young and therefore only at the beginning of 

their savings lifetime, a significant number are also in older age brackets, highlighting the 

importance of the IRA as a savings vehicle to individuals in their peak savings years. 

Figure 7: Very small investors are fairly evenly distributed across age brackets 

IRA investor age distribution by asset size segment 

0%

20%

40%

60%

80%

100%

<10K 10K - <25K 25K - <50K 50K -

<100K

100K -

<250K

≥250K

NYC-ZPR00111-002

>65 years

55-64 years

45-54 years

35-44 years

<25 years

25-34 years

Source: Oliver Wyman study sample

0%

20%

40%

60%

80%

100%

<10K 10K - <25K 25K - <50K 50K -

<100K

100K -

<250K

≥250K

NYC-ZPR00111-002

>65 years

55-64 years

45-54 years

35-44 years

<25 years

25-34 years

Source: Oliver Wyman study sample

Investors represented in the study group overwhelmingly use the brokerage relationship 

model as opposed to a fee-based advisory model, with 22.4 million or 88% holding 

brokerage IRAs. Brokerage IRAs are more common across all account sizes analyzed, 

ranging from a high of 99% for accounts with less than $10,000 to a low of 66% for 

investors with more than $250,000 in their IRAs. 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

12

Figure 8: Investors prefer transactional, commission-based brokerage accounts over 

asset-based fee advisory models for IRAs 

Proportion of IRAs using each relationship model by asset size segment, year-end 2010 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

<10 K 10 K-

<25 K

25 K-

<50 K

50 K-

<100 K

100K-

<250K

≥250K

Brokerage IRAs

Advisory IRAs

Commission based brokerage 

accounts represent a majority 

of IRAs, ranging from 66% to 

99% depending on investment 

size

NYC-ZPR00111-002

Source: Oliver Wyman study sample

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

<10 K 10 K-

<25 K

25 K-

<50 K

50 K-

<100 K

100K-

<250K

≥250K

Brokerage IRAs

Advisory IRAs

Commission based brokerage 

accounts represent a majority 

of IRAs, ranging from 66% to 

99% depending on investment 

size

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Source: Oliver Wyman study sample

Of the 2.4 million new IRAs opened with study participants in 2010, nearly 1 million 

contained assets of less than $10,000 by year end. Not surprisingly, these accounts also 

conducted fewer trades on average than larger accounts. Figure 9 shows a summary of 

IRA holder activity through the study group firms in 2010. 

Figure 9: Summary of IRA account holder activity 

Year-end 2010 

Source: Oliver Wyman study sample. Some analyses based on a sub-set of participants, depending on data availability

NYC-ZPR00111-002

Investor size segment <$10K 10K-<25K 25K-<50K 50K-<100K 100K-<250K ≥250K Total

Number of IRA 

accounts (MM)

10.1 4.2 3.4 3.0 2.9 1.6 25.3

Number of new IRA 

accounts opened in 

2010 (MM)

0.9 0.3 0.3 0.3 0.3 0.2 2.4

Average number of 

trades per account

3 5 8 15 25 36 11

Investor size segment <$10K 10K-<25K 25K-<50K 50K-<100K 100K-<250K ≥250K Total

Number of IRA 

accounts (MM)

10.1 4.2 3.4 3.0 2.9 1.6 25.3

Number of new IRA 

accounts opened in 

2010 (MM)

0.9 0.3 0.3 0.3 0.3 0.2 2.4

Average number of 

trades per account

3 5 8 15 25 36 11

For smaller investors with low trading activity, the brokerage model with predominantly 

per-transaction charges may be more affordable than the advisory model
 

Copyright © 2011 Oliver Wyman 

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13

4. How the rule change will reshape services for IRA investors 

Under the proposed rule, Oliver Wyman expects retail brokerage firms would presume 

that current brokerage account and service offerings would create a fiduciary duty, and 

respond by limiting the provision of help and investment services to the fee-based 

advisory model only 

Figure 10: Expected financial industry response and IRA investor impact

Full service brokerage

 Model becomes 

unsustainable for 

current providers

 Likely need to shift 

clients to advisory, 

“low support”

brokerage model or 

exit brokerage IRA 

market

Discount brokerage

 Can offer only a “low 

support” brokerage 

model

 Would become 

dominant model for 

access to an 

investment 

professional for IRAs

Fee-based advisory

NYC-ZPR00111-002

Provider 

implications

Retail 

investor 

impact

 Reduced access to 

investment 

information, research, 

online tools and 

calculators

 Call center and 

branch support 

significantly reduced

 Loss of choice of 

investment provider 

and range of payment 

structures

 Reduced access to an 

investment 

professional

 Loss of investment 

information and 

product choice

 Loss of choice of 

investment provider 

and range of payment 

structures

 Only available for 

accounts meeting 

minimum balance 

requirements

 Highest cost model

Investors today who have an IRA account through a brokerage relationship receive a 

range of investment services and help as part of that relationship. However, the proposed 

rule would appear to make practically every investment-related conversation or 

interaction with a client subject to fiduciary duty. Interactions that could trigger a broker 

fiduciary duty to IRA owners under the proposed rule include: 

 discussion of investments within an IRA account; 
 

Copyright © 2011 Oliver Wyman 

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14

 discussions that clients have with brokers about other, non-retirement account 

investments if such discussions "may be considered" by the client in an IRA 

account as well; 

 communications regarding firm-wide research on securities; 

 valuations of hard-to-value assets; 

 IRA “education” (if the Department of Labor does not amend the proposed rule to 

bring education for IRA owners clearly in scope as non-fiduciary); and 

 conversations about rollovers, if the Department of Labor, as discussed in the 

preamble to the proposed rule, withdraws its prior guidance indicating that such 

conversations are non-fiduciary. 

Because of the broad range of triggering interactions, as a practical matter, firms would 

need to assume that any IRA investor offered typical brokerage interactions and 

investment services would be treated as receiving fiduciary services (even if the actions 

described in the last two bullets do not trigger fiduciary status).7

 Indeed, if a registered 

representative is found to be a fiduciary, any transactions performed on behalf of a client 

could be transformed into prohibited transactions giving rise to severe sanctions (e.g. 

requirement that transactions be undone) and penalties to the holder. The risk of such 

sanctions is not one that financial firms will likely bear. 

As fiduciaries under the Department of Labor’s proposed rule, firms and their associated 

representatives may not receive different levels of compensation based on the investment 

choices of retail investors in protected IRA accounts. However, the current brokerage 

model that has developed to serve IRA accounts is incompatible with this requirement, 

often involving both direct and indirect fees, such as shareholder servicing fees, sales and 

distribution fees, revenue-sharing and other fees. These fees frequently vary by product 

based on factors such as complexity, advisor time requirements (e.g. to explain the risks 

and benefits and determine client suitability), and services performed such as shareholder 

servicing. As it stands, the current IRA market has developed around these pricing and 

risk assumption structures. It would likely be almost impossible to renegotiate myriad 

contracts with different product manufacturers and create a new level-fee brokerage 

paradigm just for IRA accounts. 

Under the proposed rule, brokerage firms would likely only offer today’s level of 

investment services and guidance to IRA investors through fee-based advisory accounts, 

which would also include additional services such as ongoing account surveillance 

required to satisfy a fiduciary duty relationship. 

It may be possible for firms to preserve a brokerage IRA option, but this model would 

likely involve very low support. Such a service model would likely need to involve strict 

 

7

 The proposed rule would also apply an ERISA fiduciary standard to any entity that is registered as an investment 

advisor, generally regardless of whether the entity is actually acting in advisory capacity. 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

15

limits on baseline services such as offering investment services. Even interactions which 

are a common part of many discount brokerage relationships today, such as discussions 

with call center and branch staff, could be curtailed (so as to avoid inadvertently 

establishing a fiduciary duty). 

In addition, some firms without a registered investment advisor may choose to exit the 

IRA market completely rather than incur the expense involved in setting up an investment 

advisor and licensing its representatives. (For example, see Figure 13.) 

For investors with existing IRA accounts within a brokerage relationship model, we 

therefore see three potential outcomes: 

1) Move to an advisory relationship – this will not be feasible for all affected 

investors, as many may be too small to serve economically as part of an advisory 

relationship. Indeed smaller IRA holders with low trading activity levels may 

experience higher fees in this model 

2) Move to a “low support” brokerage model – this option may not be suitable or 

even practical for many investors, given the time and expertise needed to 

understand tax-advantaged investing without outside support, thus significantly 

impacting current and future IRA holders 

3) Move existing funds out of the tax-advantaged retirement account market – this 

could have significant impacts on ultimate savings available to support the 

retirement of affected investors 

Beyond the impact on existing IRA investors, the proposed rule would engender major 

long-term changes to the ways in which investment services and help could be offered to 

future investors. Brokerages will no longer have an economic incentive to develop 

relationships with investors who can only fund a small IRA balance. Instead, firms will 

look to offer investment services and support only to those whose larger account size can 

be economically served under the advisory model. 

Below, we examine the number of IRA investors in our study sample that could be 

affected by the changes in service described above. 

5. Impact of the proposed rule change on retail investors in the 

study sample 

The proposed rule change would affect the overwhelming majority of investors who rely 

on brokerage IRA accounts in terms of access, choice, and affordability – this would 

notably disadvantage small investors 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

16

5.1. Reduced access to a licensed professional advisor 

In the study sample alone, 7.2 million current retail brokerage IRAs would not qualify for 

an advisory account with any firm in the study 

All firms in the study have account minimums for accessing their advisory channels. At 

today’s account minimums, 10.7 million current retail accounts would have insufficient 

assets to gain access to an advisory account at their current firm. Of these, 3.5 million 

would have sizeable enough balances for an advisory relationship but the holders would 

need to switch firms to find an advisory channel with a lower minimum asset 

requirement. Finally, 7.2 million accounts would have insufficient assets to qualify for the 

advisory channel at any firm. 

Based on studies of consumer behavior in similar situations, we expect significant 

numbers of these investors would likely drop out of the IRA market. For example, we 

believe that a large number of small balance investors forced to switch to a new firm to 

access the advisory channel would be likely to take a cash distribution rather than 

successfully re-invest in a new IRA. We also believe that only a portion of investors who 

are not able to access the advisory channel at any firm will open an online IRA, given the 

extensive restrictions on outreach to these clients under the proposed rule. 

Box 1 

Example long term investor impact estimation – illustrative only 

As an example of the potential impact of this proposed rule change, we have estimated a 

reduction in tax advantaged retirement savings over a 20 year period using high-level 

assumptions. Clearly, a large number of factors come into play when considering the 

long term evolution of retirement savings in the U.S., and this example does not attempt 

to factor in all of these. Rather, it is intended to provide some sense of the potential 

magnitude of the impacts over time. The assumptions used are clearly stated at each 

stage. 

As discussed in Section 4, we believe there are three possible outcomes for the 22.4 

million brokerage IRAs that are included in the study sample and that would be impacted 

in some way by the proposed rule change: 

1. We assume that each of the 11.7 million investor accounts that have sufficient assets 

to qualify for the advisory channel in their current firm would successfully migrate to 

this channel with no account holders choosing to take a distribution. 

2. Prior consumer behavior studies8 have analyzed investor behavior when individuals 

leave a workplace sponsored retirement plan. We use these as a proxy for the likely 

 

8

 Hewitt 2009: The erosion of retirement security from cash-outs 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

17

behavior of the 3.5 million accounts that have insufficient assets to qualify for their 

own firm’s advisory channel but would qualify at another firm. This analysis suggests 

that approximately 75% may open an IRA with a new firm. 

3. For the remaining 7.2 million investors who do not qualify for any firm’s advisory 

channel, we assume that 60% open an IRA in the “low support” model. We believe 

that there is a high probability that the number of people who successfully open a 

“low support” IRA would in fact be lower (i.e. less than 60%), given the significantly 

reduced investment services that would be allowed under the new rule in this channel. 

This estimation process results in 3.8 million IRA accounts exiting the retirement savings 

pool. This is illustrated in Figure 11. 

 

Figure 11: In current sample, high-level estimates suggest that 3.8 million accounts 

could exit the retirement market under the proposed rule 

12 

MM

4 

MM

7 

MM

All Brokerage Accounts

Source: Oliver Wyman assumptions and analysis of participant data, Hewitt 2009: The Erosion of Retirement Security from 

Cash-Outs

12 MM 12 MM

Total Migrated

3.Below all firms' 

minimum asset 

levels for 

advisory channel

1.Could migrate 

to own firm’s 

advisory IRA

1 MM

4 MM

3 MM

Total Exits IRA Opens

advisory IRA

with new firm

22 MM brokerage accounts

3 MM

7 MM

4 MM

Total Exits IRA Opens "low

support"

brokerage

acct

4 MM accounts exit

2.Could move 

from own firm 

to another firm's 

advisory IRA 

 60% of these

individuals open a 

low-support IRA

Assumptions

 All individuals 

migrate 

successfully (i.e. 

none are 

discouraged by 

higher costs)

 Asset minimums to 

enter the advisory 

channel remain as 

today

 Other firms have 

the capacity to 

take on these 

additional account 

holders

 75% of these

individuals open 

an advised IRA at 

another firm

3.

2.

1.

Illustrative only

NYC-ZPR00111-002
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

18

The average assets of each IRA that exits the market would be approximately $8,000 in 

this scenario. Using baseline assumptions for market appreciation as shown in Figure 12, 

this amount could grow to $25,500 by 2030, suggesting a reduction of approximately $96 

BN across all IRAs that exit the market. 

Figure 12: Potential lost retirement savings of $96 BN in accounts that exit the IRA 

market

$8.0 K $8.0 K

$17.5 K

2010 2030

$25.5 K

Growth

• No annual funding

• No distributions

• 6% market appreciation

2010 Base

Average assets 

in each IRA 

that exits the IRA 

market

Source: Oliver Wyman study sample, Oliver Wyman analysis

NYC-ZPR00111-002

Illustrative only

Assets exiting IRA market $30 BN $96 BN

Finally, it is worth considering the impact of elimination of support from the full service 

brokerage model on potential future investors. In 2010, firms in the study sample opened 

approximately 890,000 brokerage IRA accounts with assets of less than $10,000. If the 

proposed rule change were assumed to take effect at the beginning of the year and were to 

result in the impacts suggested in this report, we estimate as many as 360,000 brokerage 

IRAs would potentially no longer be opened in 2011. This estimate uses similar investor 

behavior assumptions to those employed for the analysis of existing small IRA account 

holders who would lose access to a full service brokerage model (i.e. 60% of investors 

would open a “low support” brokerage IRA). Given the lack of support such investors 

could have in navigating the complexities of opening a new IRA, we believe these are 

conservative assumptions. Additionally, in future years, we estimate the number of 

foregone new full service brokerage IRA accounts could grow to a total of approximately 

8 million by 2030, assuming the number of IRA holders grows in line with population 

growth in the 20 plus age group. 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

19

5.2. Reduced choice of investment professional, level of investment guidance, 

and investment products 

Investors will likely have reduced access to help and investment guidance as 36% of U.S. 

financial professionals in contact with clients are not currently licensed to help retail 

investors with their IRA account needs under the proposed new rule 

As Figure 13 shows, in the study sample 37,000 current investment professionals (36% of 

the work force) are currently registered exclusively as registered representatives of a 

broker dealer, not as investment advisor representatives under the Investment Advisers 

Act of 1940 or dual-registered9. 

Figure 13: Workforce by registration type, year-end 2010 

Dual-registered

64%

Registered 

representatives

36%

Investment 

Advisers

<1%

Source: Oliver Wyman study sample

Investment 

advisor 

representatives 

only

<1%

NYC-ZPR00111-002

Existing investors who have a personal relationship with a financial professional could 

find themselves forced away from this individual, regardless of their preference or 

relationship history. Without additional training and licensing, registered broker 

representatives may no longer be able to provide help and investment services to retail 

investors seeking to open or manage an IRA account. Not all firms have both broker 

dealers and investment advisor representatives, however, and it may not make sense for 

them to incur the cost and expense of setting up an advisory channel to support IRA 

accounts. 

Nearly 90% of IRA investors will be impacted by the proposed rule 

 

9

 Industry-wide this number has been estimated by other studies at 317,000 due to the low number of dual-registered 

individuals in smaller firms 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

20

Over 22.4 million accounts and 17.6 million people in our sample have personally elected 

to save in an IRA account under a brokerage model. As discussed, some would be able to 

move to an advisory relationship. However, the remainder will lose the benefits of 

working with a financial professional and be forced to migrate to a purely “low support” 

brokerage model to continue their IRA retirement savings with little access to investment 

services, research and tools. 

Investors will lose access to a range of product types found predominantly in brokerage 

IRAs today 

Investors will lose access to principal transactions which they may value to provide 

liquidity to obtain certain investments at favorable prices. In addition, a range of product 

choices currently offered predominantly in brokerage IRA relationships may no longer be 

able to be offered, such as some variable annuities, proprietary products to which clients 

may want specific access, unique structured products, as well as a wide array of thirdparty solutions available at those firms. 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

21

Figure 14: Asset allocation comparison shows investors favor brokerage accounts 

for holding individual fixed income securities and variable annuities 

Allocation of assets (%) by IRA account size and model, year-end 2010 

NYC-ZPR00111-002

Asset allocation in brokerage IRA accounts

Allocation of assets (%) by IRA account size, 

year-end 2010

Source: Oliver Wyman study sample

1. Includes cash, money market funds, fixed and deferred annuities, etc. <10 K 10 K-<25 K 25 K-<50 K 50 K-<100 K 100 K-<250 K

≥250 K

Mutual funds

Alternatives

Fixed income 

individual securities

Structured products

Variable annuities

Other products1

Equity individual

securities 

Asset allocation in advisory IRA accounts

Allocation of assets (%) by IRA account size, 

year-end 2010 <10 K 10 K-<25 K

25 K-<50 K

50 K-<100 K

100 K-<250 K

≥250 K

Mutual funds

Alternatives

Fixed income 

individual securities

Structured 

products

Variable annuities

Other products1

Equity individual 

securities 

Investor size segment Investor size segment

NYC-ZPR00111-002

Asset allocation in brokerage IRA accounts

Allocation of assets (%) by IRA account size, 

year-end 2010

Source: Oliver Wyman study sample

1. Includes cash, money market funds, fixed and deferred annuities, etc. <10 K 10 K-<25 K 25 K-<50 K 50 K-<100 K 100 K-<250 K

≥250 K

Mutual funds

Alternatives

Fixed income 

individual securities

Structured products

Variable annuities

Other products1

Equity individual

securities 

Asset allocation in advisory IRA accounts

Allocation of assets (%) by IRA account size, 

year-end 2010 <10 K 10 K-<25 K

25 K-<50 K

50 K-<100 K

100 K-<250 K

≥250 K

Mutual funds

Alternatives

Fixed income 

individual securities

Structured 

products

Variable annuities

Other products1

Equity individual 

securities 

Investor size segment Investor size segment

Asset allocation in brokerage IRA accounts

Allocation of assets (%) by IRA account size, 

year-end 2010

Source: Oliver Wyman study sample

1. Includes cash, money market funds, fixed and deferred annuities, etc. <10 K 10 K-<25 K 25 K-<50 K 50 K-<100 K 100 K-<250 K

≥250 K

Mutual funds

Alternatives

Fixed income 

individual securities

Structured products

Variable annuities

Other products1

Equity individual

securities 

Asset allocation in advisory IRA accounts

Allocation of assets (%) by IRA account size, 

year-end 2010 <10 K 10 K-<25 K

25 K-<50 K

50 K-<100 K

100 K-<250 K

≥250 K

Mutual funds

Alternatives

Fixed income 

individual securities

Structured 

products

Variable annuities

Other products1

Equity individual 

securities 

Investor size segment Investor size segment

5.3. Increased cost 

Based on the study sample, a significant share of brokerage accounts may be able to 

continue receiving investment help and guidance by moving to an advisory relationship. 

Such investors would then face increased annual costs, due to the higher cost of servicing 

and maintaining these accounts. As shown in Figure 15, investors would pay an average 

of 73% to 196% more in direct costs in a fee-based advisory model. 

Figure 15: Fee-based advisory accounts are more expensive for investors of all 

account sizes 

Direct per account costs1

 for brokerage and fee-based accounts, 2010 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

22

10K-<25K 25K-<50K 50K-<100K 100K-<250K ≥250K

Brokerage $80 $135 $230 $455 $1,070

Advisory $135 $275 $555 $1,245 $3,165 

% cost difference 

(advisory – brokerage) 

73% 106% 142% 173% 196%

10K-<25K 25K-<50K 50K-<100K 100K-<250K ≥250K

Brokerage $80 $135 $230 $455 $1,070

Advisory $135 $275 $555 $1,245 $3,165 

% cost difference 

(advisory – brokerage) 

73% 106% 142% 173% 196%

Source: Oliver Wyman study sample

1. Excludes marketing and distribution, shareholder services, and other fees not directly paid by investors

NYC-ZPR00111-002

In addition to direct costs paid by investors, firms may also receive marketing, 

distribution, shareholder services, and other fees in connection with providing brokerage 

IRA services not paid directly by investors. Firms vary in whether they receive such fees 

and how they account for them. If the Department of Labor’s proposal were to be adopted 

as proposed, such fees would likely be restricted or eliminated for many IRAs. To the 

extent such fees are considered, the cost difference between the brokerage and advisory 

IRA models would narrow, though brokerage would continue to be less expensive across 

all account sizes in the study sample. 

These increased investment costs would serve as a drag on long-term investment gains, 

and therefore on the ultimate retirement savings available to impacted account holders. 

Figure 16 illustrates this point for a hypothetical 40-year old individual with $25,000 in 

an IRA and 25 years of saving before retiring at age 65. 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

23

Figure 16: The impact on retirement savings of the higher-cost advisory model is 

compounded over time 

Comparison of difference in direct fees paid and foregone investment gains over 25 years 

for a hypothetical investor under brokerage and fee-based advisory models 

Advisory Brokerage

$23 K in direct 

advisory fees 

$9 K in in direct 

brokerage fees 

$17 K in foregone 

investment gains on 

advisory fees paid

$7 K in foregone 

investment gains on 

brokerage fees paid

Key assumptions

 Investor is 40 years old 

today and will save for 

25 years before 

retirement

 Initial contribution is 

$25K, with annual 

contributions of $4K 

 Investment gains of 6% 

per year

 There are no 

distributions or rollovers 

over the 25 year period

$40 K

$16 K

Source: Oliver Wyman study sample, Oliver Wyman analysis

Note: Cost of advisory and brokerage accounts based on actual direct costs observed in study sample, of 0.60%-0.80% 

for advisory accounts and 0.20%-0.50% for brokerage accounts, varying by wealth segment

Costs exclude marketing and distribution, shareholder services, and other fees not directly paid by the investor – the 

cost differential between the two models is still significant if these fees are included

By age 65, the brokerage 

investor would save 

$311 K, compared to 

$287K – a differences of 

$24 K in final savings (8%)

NYC-ZPR00111-002

In this illustrative example, the IRA investor would have an additional $24,000 (8%) of 

retirement savings available at age 65 under the brokerage model, in comparison to the 

advisor model. 

6. Conclusions 

The Department of Labor’s proposed rule change is motivated by a laudable objective: to 

ensure a high standard of care for retirement plan participants and account holders with 

regard to the receipt of services and investment guidance, amid an increasingly complex 

financial marketplace. However, we find that the proposed Department of Labor 

“fiduciary” definition rule is likely to have serious negative and unintended effects on the 

very individuals the change is supposed to help. 

Based on the unprecedented collection of data on IRA account holders assembled to 

support our analysis, we conclude that the proposed rule will disproportionately 
 

Copyright © 2011 Oliver Wyman 

NYC-ZPR00111-002 

24

negatively affect small balance IRA investors – those individuals most in need of support 

in reaching their retirement goals. The proposed rule is likely to change an important 

avenue through which retail investors save for retirement, denying millions of current and 

future IRA investors access to professional investment help and investment services, 

limiting choice of how they receive and pay for investment services, and increasing 

overall costs for such support when available. 
 

Oliver Wyman, Inc. 

1166 Avenue of the Americas, 29th floor 

New York, NY 10036 

1 212 541 8100 
i

ACCESS TO CALL CENTERS AND BROKER 

DEALERS AND THEIR EFFECTS ON 

RETIREMENT SAVINGS

Prepared by

Quantria Strategies, LLC

Final

April 9, 2014

 
i

CONTENTS

EXECUTIVE SUMMARY ........................................................................................................1

I. FINDINGS AND OVERVIEW OF RESEARCH........................................................3

A. Findings.................................................................................................................3

B. Overview of Research...........................................................................................4

II. RETIREMENT SAVINGS AND FINANCIAL LITERACY ....................................6

A. American Workers Lack Financial Literacy.........................................................6

B. Job Turnover Creates Retirement Savings “Choke Point” ..................................7

C. Cashouts of Retirement Savings Erode Long-Term Retirement Security ...........9

D. Cashouts More Likely Among Certain Groups..................................................13

E. DOL Regulations May Reduce Access to Call Center and Broker-Dealer 

Assistance for Terminating Employees..............................................................14

F. Access to Call Center and Broker-Dealer Assistance Reduces Cashouts...........15

III. EFFECTS OF REDUCING AVAILABILITY OF CALL CENTER OR BROKERDEALER ASSISTANCE ON RETIREMENT SAVINGS........................................17

A. Increased Withdrawals from Retirement Savings...............................................17

B. Long-Run Effects on Retirement Security..........................................................19

C. Affecting the Most Vulnerable Populations .......................................................22

REFERENCES..........................................................................................................................23

APPENDIX A – TECHNICAL EXPLANATION OF STUDY ESTIMATES....................33
ii

LIST OF TABLES

Table 1 – Average Retirement Account Balance, by Salary, 2007 and 2010..........................7

Table 2 – Employee Actions Taken Upon Job Termination, Percentages by Racial and Ethnic 

Group .....................................................................................................................14

Table 3 – Taxpayers with Elective Retirement Contributions, by Size of Adjusted Gross 

Income, 2010..........................................................................................................18

Table 4 – Effects of Cashing Out Retirement Savings, with Job Changes Early in the Work 

History....................................................................................................................20

Table 5 – Effects of Cashing Out Retirement Savings, with Job Changes After 10 Years...21

Appendix A - Table 1 – Description of Variables Used in the Model .......................................35

Appendix A - Table 2 – Mean and Standard Deviation of Variables Used in the Model ..........36

Appendix A - Table 3 – Estimation Results for Total Plan Balances in 2010 ...........................37

LIST OF GRAPHS

Graph 1 – Total Distributions from Retirement Accounts, by Selected Type of Distributions

for Taxpayers Under Age 55, Tax Year 2010 .......................................................10

Graph 2 – Total Distributions from Retirement Accounts Subject to a Tax Penalty, for 

Taxpayers Under Age 55 .......................................................................................11

Graph 3 – Treatment of Retirement Plan Assets, after Employment Terminations, Percentage 

of Employees .........................................................................................................12

Graph 4 – Lump-Sum Distributions at Job Change, by the Size of the Distribution .............12

Graph 5 – Percentage of Terminating Employees Who Cash Out Retirement Savings, by age, 

2010........................................................................................................................13

Graph 6 – Effects of Cashing Out Retirement Savings at Job Changes, During the Early Years 

of Employment.......................................................................................................20

Graph 7 – Effects of Cashing Out Retirement Savings at Job Changes, After Ten Years of 

Employment...........................................................................................................21
1

EXECUTIVE SUMMARY

RE-PROPOSED REGULATIONS THAT ARE ANTICIPATED FROM THE DEPARTMENT OF LABOR 

(DOL) ARE GENERALLY EXPECTED TO CREATE FIDUCIARY RESPONSIBILITY FOR FINANCIAL 

SERVICE PROVIDERS THAT WILL LIMIT THE ACCESS TO ASSISTANCE PROVIDED BY CALL 

CENTERS AND BROKER-DEALERS WHEN TERMINATING EMPLOYEES FACE PLAN DISTRIBUTION

DECISIONS. LIMITING ACCESS TO THIS ASSISTANCE COULD INCREASE ANNUAL CASH OUTS OF 

RETIREMENT SAVINGS FOR EMPLOYEES TERMINATING EMPLOYMENT BY $20 – 32 BILLION. 

THESE WITHDRAWALS COULD REDUCE THE ACCUMULATED RETIREMENT SAVINGS OF 

AFFECTED EMPLOYEES BY 20 TO 40 PERCENT.

 If expected DOL re-proposed regulations apply the fiduciary standard to advice to retirement 

plan participants concerning their distribution options, millions of participants could lose access 

to call center and broker-dealer assistance upon job termination. Approximately 50 million job 

terminations occur each year among wage and salary workers in the United States.1 Terminating 

employees often need to make decisions about their retirement savings, including what to do 

with retirement savings accumulated in the former employer’s retirement savings plan. Our 

empirical model indicates that losing access to financial assistance at job termination could have 

significant impacts on long-term retirement savings; our results found that retirement savings 

balances are 33 percent higher for individuals who have access to financial assistance. While 

beyond the scope of this study, we note our results suggest that reduced access to financial 

assistance generally could have broad, long-term effects on plan participants that are not limited 

to plan participants who terminate employment. 2

 According to a 2011 survey, 42 percent of terminating employees take a cash distribution from 

their retirement savings, 29 percent roll their retirement savings to another plan or an IRA, and 

29 percent leave their assets in the employer’s plan.3 Terminating employees cashed out 

approximately 7.3 percent of their total retirement assets. Further, these distributions are more 

likely to occur among individuals who (1) have a low account balance, (2) are under age 30, or 

(3) have lower wages. Higher cash-out rates are also an issue for African-Americans and

Hispanics. 

 Employees are less likely to take cash withdrawals of their retirement savings if they discuss 

their distribution options with a call center or broker-dealer upon job termination. One company 

found that terminating employees with account balances between $35,000 and $50,000 are 

approximately 3.2 times less likely to cash out their retirement savings if they receive a call from 

a licensed representative of the company compared to similarly situated terminating employees 

who only receive written communications.

 DOL’s re-proposed regulations may eliminate access to call centers and broker-dealer assistance 

with respect to distribution advice. A recent Government Accountability Office (GAO) report 

suggests that terminating employees often receive guidance and marketing that could favor IRA 

 

1

 Hathaway, Kendra C. Job openings continue to grow in 2012, hires and separations less so. Bureau of Labor 

Statistics, JOLTS Publications, JOLTS Annual Story, 2012.

2

 The data used in our model do not specifically examine the effect of financial assistance on cash-out behavior, but 

rather look at the overall effects of financial assistance on retirement savings.

3

 Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income, 2011. 

AON Hewitt, 2011. The study found these percentages were consistent with pre-economic downturn numbers.
2

rollovers.

4

 However, very importantly, the GAO also noted the fears of fiduciary liability could

inhibit communications with employees and the provision of information regarding distribution 

options. Inhibiting these communications creates a great risk to retirement savings – that 

terminating employees will take cash distributions instead of leaving their assets in their 

employer’s plan or rolling over the assets to another plan or IRA. From a retirement security 

perspective, retaining the assets in either an employer plan or IRA is preferable to cashing out.

 

4

 United States Government Accountability Office. 401(K) PLANS. Labor and IRS Could Improve the Rollover 

Process for Participants. GAO-13-30, March 2013.

Davis & Harman, LLP commissioned this report on behalf of a coalition of financial services 

organizations that provide retirement services to millions of Americans.
3

I. FINDINGS AND OVERVIEW OF RESEARCH

A. FINDINGS

 Employees need to make numerous decisions about their retirement savings, including 

whether and when to participate in an employer-sponsored retirement plan or IRA, how 

much to contribute, how to invest the assets in the plan or IRA, and when and how to take 

a distribution. A substantial body of research shows that Americans frequently lack the 

basic financial literacy needed to make decisions about their retirement savings. This lack 

of financial literacy causes employees to make suboptimal decisions concerning their 

retirement savings. 

 One of the critical “choke points” in the retirement savings process occurs when an 

employee changes jobs or retires; at this point, an individual must decide what to do with 

retirement savings accumulated in a former employer’s plan. The job termination “choke 

point” will occur multiple times during an employee’s working career; on average, 

approximately 50 million job terminations occur each year among wage and salary 

workers in the United States.5 In 2012, half of all wage and salary workers in the United 

States had been with an employer for less than 4.6 years.6

 Many people do not understand the long-term consequences of taking cash withdrawals 

of retirement savings at job termination. If a terminating employee decides to withdraw 

retirement savings and not roll the assets over to an IRA or another qualified plan, the 

employee loses not only the amount of the withdrawn assets, but also the future earnings 

on these amounts (i.e., the benefits of interest compounding). Furthermore, if an

employee is younger than 591⁄2 years old, she generally would also pay an additional 10

percent tax on the taxable portion of any withdrawal that is not rolled over.

 According to a 2011 survey, 42 percent of employees take a cash distribution from their 

retirement savings at job termination, 29 percent roll their retirement savings to another 

plan or an IRA, and 29 percent leave their assets in the employer’s plan.7 The cash-out 

rate varies by account size; the survey found a 75 percent cash-out rate for participants 

with less than $1,000 in their account and a 10 percent cash-out rate for participants with 

at least $100,000 in their account. Terminating employees cashed out approximately 7.3 

percent of their total retirement assets.

 Cash-outs are more likely to occur among individuals who (1) have a low account 

balance, (2) are under age 30, or (3) have lower wages. Higher cash-out rates are also an 

issue for African-Americans and Hispanics. 

 A recent General Accountability Office (GAO) report suggested that employees who 

change jobs often receive guidance and marketing from service providers’ call centers 

encouraging them to roll their retirement savings into IRAs rather than keeping the 

 

5

 Hathaway, Kendra C. Job openings continue to grow in 2012, hires and separations less so. Bureau of Labor 

Statistics, JOLTS Publications, JOLTS Annual Story, 2012.

6

 Ibid.

7

 Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income, 

2011. AON Hewitt, 2011. The study found these percentages were consistent with pre-economic downturn 

numbers.
4

savings in a 401(k) plan.8 However, this report ignores the fact that the greatest risk to 

retirement savings is that employees will take a cash distribution upon job termination. 

From a retirement security perspective, retaining the assets in either an employer plan or 

an IRA is preferable to cashing out.

 Employees who interact with a call center or broker-dealer to help them understand their 

options upon job termination are less likely to take cash withdrawals of their retirement 

savings. We contacted a number of financial services companies about the interactions 

between terminating employees and call centers. One company found that terminating 

employees with account balances between $35,000 and $50,000 are approximately 3.2 

times less likely to cash out their retirement savings if they receive a call from a licensed 

representative of the company compared to similarly situated terminating employees who 

only receive written communications.

 These statistics are consistent with our analysis of a Department of Labor (DOL) pilot 

survey conducted as part of the Rand American Life Panel. Our empirical models

suggest that access to financial assistance results in plan balances that are 33 percent 

higher than for individuals who do not have access to financial assistance.9

 DOL’s re-proposed regulations may eliminate access to call centers and broker-dealer 

assistance with respect to distribution advice. If this happens, the cash-out rates of 

employees terminating employment will increase and retirement savings will decline in 

both the short- and long-term. We estimate that eliminating the availability of call 

centers and reducing broker-dealer assistance upon job termination will increase annual 

cash outs of retirement savings by an additional $20 – 32 billion. Over the long run, 

these cash outs will result in a significant reduction in overall retirement savings; our 

estimates indicate that these withdrawals could reduce the ultimate retirement savings of 

affected individuals by 20 to 40 percent. 

B. OVERVIEW OF RESEARCH

DOL is expected to issue re-proposed regulations addressing the issue of fiduciary liability with 

respect to retirement savings plans. These re-proposed regulations may limit the ability of 

financial services companies to assist individuals who are terminating employment with respect 

to their distribution options for their retirement savings assets. This limitation would arise 

because DOL’s prohibited transaction rules would generally preclude any advice from a financial 

services company, even if the advice is in the best interest of the individual, unless the DOL 

provides comprehensive exemptions from such rules, Accordingly, we examined the potential 

effects on cash outs of retirement savings when employees terminate employment and the longterm implications for overall retirement savings if the re-proposed regulations apply the fiduciary 

standard to assistance with respect to distribution options without the prohibited transaction 

exemptions needed to permit the kind of assistance that is currently being provided to 

terminating employees by call centers and broker dealers.

 

8

 United States Government Accountability Office. 401(k) Plans. Labor and IRS Could Improve the Rollover 

Process for Participants. GAO-13-30, March 2013.

9

 The survey does not specifically examine the effect of financial assistance on cash-out behavior, but rather looks 

at the overall effects of financial assistance on retirement savings.
5

A substantial body of research in the United States finds that financial literacy presents a 

significant problem for retirement savings adequacy. Individuals tend to make suboptimal 

decisions concerning their retirement savings and the problem is particularly acute for 

individuals in particular demographic groups, including individuals with lower income, 

individuals with less education, the young, and the old (retired or near retired). Women, AfricanAmericans, and Hispanics also face unique challenges in this area. 

Research has also shown that consulting with a financial planner or advisor positively correlates 

with retirement savings balances, suggesting that access to a financial planner or advisor will 

improve retirement savings outcomes. However, most of the research focuses on individuals 

who hire a paid financial planner; these individuals are likely to have characteristics associated 

with positive savings behavior (e.g., such characteristics include higher income and higher 

educational attainment). Generally, individuals with these characteristics have a greater 

propensity to save notwithstanding the consultation with a financial planner or advisor. 

However, none of the research to date has explored the outcomes associated with the assistance 

provided by call centers or broker dealers to a retirement plan participant at termination of 

employment. Generally, this assistance occurs when an individual contacts a call center or 

broker-dealer associated with the employer’s retirement savings plan; these contacts may also 

occur through a proactive contact by a call center. For a terminating employee, these types of 

contacts assist the employee by providing the various options with respect to his or her 

retirement savings and often counsel the employee against cashing out the retirement savings.

This study examines the possible correlation between access to a call center or broker-dealer and 

the short- and long-term accumulation of retirement savings for employees who terminate 

employment. Our analysis expands on existing research by considering the effects on retirement 

savings if terminating employees should lose access to call centers or broker dealers. 

The study relies on data from the Rand American Life Panel (ALP), which follows 

approximately 6,000 individuals who participate in occasional, on-line surveys. The 

approximately 350 surveys conducted to date provide data on financial decision-making, access 

to financial advice, financial literacy, income, retirement savings, demographics, and such other 

topics as self-reported health and wellbeing. This study uses a regression-based model of total 

retirement savings balances to attempt to isolate the effect of financial advice, controlling for 

other variables that may also be important in determining the size of total retirement savings.10

The study also utilizes confidential data provided by several large financial service companies

concerning the volume and outcome of call center assistance provided to employees with respect 

to their retirement savings. This additional data helps to isolate the potential effects of call 

center assistance at employment termination and provides additional support for the results of the 

regression analysis.

 

10

 See Appendix A for a technical discussion of the empirical analysis of the ALP survey results. Because the ALP 

does not specify the type of financial assistance provided, it does not allow a distinction between the use of a paid 

financial advisor for retirement savings assistance and consultation with a call center or broker dealer offered as a 

routine service to employees participating in an employer-sponsored retirement savings plan. Further, the ALP does 

not distinguish between general assistance and specific assistance provided when an employee terminates 

employment with an employer. 
6

II. RETIREMENT SAVINGS AND FINANCIAL LITERACY

A. AMERICAN WORKERS LACK FINANCIAL LITERACY

Employees need to make numerous decisions about their retirement savings, 

including whether and when to participate in an employer-sponsored retirement 

plan or IRA, how much to contribute, how to invest the assets in the plan or IRA, 

and when and how to take a distribution. A substantial body of research shows 

that Americans frequently lack the basic financial literacy needed to make 

decisions about their retirement savings. This lack of financial literacy causes

employees to make suboptimal decisions concerning their retirement savings.

A substantial body of research has explored the causes of suboptimal retirement savings in the 

United States. One of the problems commonly identified in the literature is that many U.S. 

workers lack financial literacy, which means that they lack basic understanding of key financial 

concepts, such as the benefits of interest compounding. Other research has focused on the 

effects of access to financial advice and financial education programs as a way to counter lack of 

financial literacy.

Across all age groups, individuals lack essential knowledge of basic financial concepts, including 

interest compounding, the effects of inflation, and diversification of risk. 11 In multiple surveys 

and studies, the research shows that a significant percentage of U.S. workers (1) cannot answer 

correctly the most simple multiple choice questions on issues of basic financial literacy, (2) fail 

to plan adequately for retirement, (3) consistently underestimate the amount of retirement 

savings they will need, and (4) make decisions, such as cashing out their retirement savings prior 

to retirement age, that adversely impact their long-term retirement savings.12 

Amromin et al reviewed the literature on financial literature and concluded that the surveys and 

studies varied significantly in content and sample population, but generally agreed on the 

following:

“(1) a large proportion of consumers are not financially literate, even among the 

wealthiest and most educated population segments,

(2) financial literacy rates vary consistently by demographic groups, tending to be 

high for those with more wealth and education, for men (although results vary), 

and for whites (in the U.S.), and

(3) financial illiteracy leads to welfare-reducing financial behavior and 

outcomes.”13

 

11

 See, for example, Lusardi, Annamaria and Olivia S. Mitchell. Financial Literacy and Retirement Planning in the 

United States, February 1, 2011. Lusardi, Annamaria and Olivia S. Mitchell. Financial Literacy and Planning: 

Implications for Retirement Wellbeing. University of Michigan Retirement Research Center, MRRC Working Paper 

n. 2006-144.

12 The list of references at the end of this paper contains multiple sources for research relating to financial literacy 

and retirement saving.

13

 Amromin, Gene, Itzhak Ben-David, Sumit Agarwal, Souphala Chomsisenphet, and Douglas D. Evanoff. 

Financial Literacy and the Effectiveness of Financial Education and Counseling: A Review of the Literature. 

Accessed at: http://www.chicagofed.org/digital_assets/others/region/foreclosure_resource_center/more_

financial_literacy.pdf.
7

Low levels of financial literacy present particularly acute problems for certain demographic 

groups, such as individuals with low education. Concerns have also been raised about the 

challenges facing women, African-Americans, and Hispanics.

14

These challenges translate to average account balances in 401(k) plans that are significantly 

lower for African-Americans and Hispanics than other demographic groups.

15

 Table 1 shows 

average account balance, by salary range, for African-Americans, Hispanics, and whites

participating in a 401(k) or 403(b) plan of 60 of the largest business and nonprofit organizations 

in the United States. Across all salary ranges, African-Americans and Hispanics have lower 

average account balances than their white counterparts.

Table 1 – Average Retirement Account Balance, by Salary,

2007 and 2010

Salary African-American Hispanic White

2007 2010 2007 2010 2007 2010

$0 – $29,999 $7,518 $7,557 $7,930 $8,949 $13,836 $14,563

$30,000 – $59,999 $28,169 $24,505 $28,727 $27,823 $44,546 $42,720

$60,000 – $89,999 $71,630 $68,343 $77,991 $76,031 $101,535 $98,290

$90,000 – $119,999 $122,208 $132,222 $125,520 $138,274 $164,897 $182,061

$120,000 and over $173,490 $201,585 $167,781 $206,007 $243,115 $285,341

Source: 401(k) Plans in Living Color. A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups. The 

Ariel/Aon Hewitt Study 2012.

At the lowest salary levels, the average account balances of African-Americans and Hispanics 

are only approximately 60 percent of the average for whites. The percentage disparity becomes 

smaller as salaries increase, but even at the highest salary levels, the average account balances of 

African-Americans and Hispanics tend to be approximately 70 percent of the average for whites. 

While a variety of factors (e.g., lower participation and contribution rates) account for these 

disparities, preretirement cash-outs of retirement savings represents one significant factor 

(discussed in greater detail below) affecting account balances for all workers, but particularly for 

minority and ethnic groups.

B. JOB TURNOVER CREATES RETIREMENT SAVINGS “CHOKE POINT”

One of the critical “choke points” in the retirement savings process occurs when 

an employee changes jobs or retires; at this point, an individual must decide what 

to do with retirement savings accumulated in a former employer’s plan. The job 

termination “choke point” will occur multiple times during an employee’s 

working career; on average, approximately 50 million job terminations occur 

each year among wage and salary workers in the United States. In 2012, half of 

all wage and salary workers in the United States had been with an employer for 

less than 4.6 years.

From a retirement savings perspective, financial illiteracy causes workers to make bad decisions 

at important “choke points” in the retirement savings process. We define choke points as critical 

points in an individual’s working life when savings behavior may change. One of the critical 

 

14

 Ibid, at p. 12.

15

 401(k) Plans in Living Color. A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups. Ariel 

Education Initiative, Aon Hewitt, Joint Center on Political and Economic Studies, and The Raben Group, 2012.
8

“choke points” in the retirement savings process occurs when an employee changes jobs or 

retires; at this point, an individual must decide what to do with retirement savings accumulated in 

a former employer’s plan. At this time, an individual may dis-save (take a cash out of retirement 

savings) or temporarily or permanently stop saving for retirement. Thus, decisions made at the 

job termination choke point affect the ability of an individual to accumulate adequate savings for 

retirement security.

More than half of all employers offer their employees the ability to defer current wages and 

salary into a defined contribution retirement account (often a 401(k) plan).

16

 These accounts 

typically offer an employer matching contribution in addition to the employee deferrals. In 

2011, employees contributed approximately $186 billion and employers provided matching 

contributions of an additional $122 billion.17 

One of the advantages of a defined contribution plan is that it provides portability for employees 

upon job change. An employee who terminates employment typically has several options with 

respect to his or her accumulated retirement savings; the individual can:

 leave the retirement savings in the old employer’s plan;

 transfer or roll over their retirement savings to a new employer’s plan or an IRA; or

 withdraw the accumulated retirement savings and use them for nonretirement 

purposes.

Plan portability can be important because of the mobility of the U.S. workforce. On average, 

approximately 4 million wage and salary workers in the United States separate from service with 

an employer each month for approximately 50 million job terminations per year.18 Most workers 

will change jobs multiple times during their working careers. While it is difficult to estimate the 

number of job changes that individuals will have during their working career, one study (the 

National Longitudinal Survey of Youth 1979) tracked early Baby Boomers (ages 45-53 in 2010-

2011) and found that, on average, this group had held 11.3 jobs from ages 18-46.19

The median job tenure for wage and salary workers in the United States was 4.6 years in 2012, 

meaning that half of all wage and salary workers had been with an employer for less than 4.6 

years.

20

 Job turnover rates are particularly high for some minority and ethnic groups with 51.5 

percent of African-Americans, 56.2 percent of Hispanics, and 53.4 percent of Asians working for 

their current employer for less than five years.21 Less than 30 percent (29.2) of the total wage 

and salary workforce has been employed with their current employer for 10 or more years. 22

 

16

 Refer to Copeland, Craig, Ph.D., Retirement Plan Participation: Survey of Income and Program Participation

(SIPP) Data, 2012, Employee Benefits Research Institute. The study indicates that, based on the latest Survey of 

Income and Program Participation data from the U.S. Census Bureau, 61 percent of all workers over age 16 had an 

employer that sponsored a pension or retirement plan for any of its employees in 2012. The percentage of workers 

participating in a plan was 46 percent in 2012.

17

 U.S. Department of Labor, Employee Benefit Security Administration, Private Pension Plan Bulletin, Abstract of 

2011 Form 5500 Annual Reports, June 2013..

18

 Hathaway, Kendra C. Job openings continue to grow in 2012, hires and separations less so. Bureau of Labor 

Statistics, JOLTS Publications, JOLTS Annual Story, 2012.

19

 U.S. Department of Labor, Bureau of Labor Statistics. Number of Jobs Held, Market Activity, and Earnings 

Growth Among the Youngest Baby Boomers: Results From a Longitudinal Survey. USDL-12-1489, July 25, 2012

20

 Employee Tenure in 2012. Bureau of Labor Statistics, Economic News Release, September 18, 2012.

21

 Ibid.

22

 Ibid.
9

The statistics suggest that job turnover represents a pivotal point in the retirement savings 

process when employees must make decisions about what to do with the retirement savings they 

have accumulated with their employer. This “choke point” occurs multiple times during an 

average working career. Withdrawals from retirement savings that occur upon job change 

represent not only the loss of the amount of accumulated savings, but also the loss of the benefits 

of compounding that occurs when these amounts are withdrawn from retirement savings.

C. CASHOUTS OF RETIREMENT SAVINGS ERODE LONG-TERM 

RETIREMENT SECURITY

If a terminating employee decides to withdraw retirement savings and not roll the 

assets over to an IRA or another qualified plan, the employee loses not only the 

amount of the withdrawn assets, but also the future earnings on these amounts 

(i.e., the benefits of interest compounding).

U.S. retirement assets totaled $20.9 trillion as of June 30, 2013.23 Estimates indicate that

preretirement withdrawals from retirement savings total from $70 to $104 billion each year.24 

While these withdrawals represent a small percentage of total retirement assets (0.34 to 0.50 

percent), even modest withdrawals from individual accounts can reduce the ability of individuals

to attain adequate retirement savings. Further, increases in the cash-out rate could result in 

significant declines in retirement security in the United States.

Preretirement withdrawals (commonly referred to as leakage) from retirement savings can occur 

in a number of ways. Loans, in-service withdrawals (for hardships and life events), and 

distributions that occur at (or following) job change are three forms of leakage that diminish 

retirement savings balances. 

This analysis focuses on withdrawals at job termination, which affect retirement savings in two 

ways. First, if the individual does not replace or rollover the retirement savings to another 

employer plan or an IRA, the withdrawals will reduce the individual’s overall account balance. 

Second, even if the individual replaces the funds at a subsequent time, the individual loses the 

benefits of the tax-deferred earnings on the amounts withdrawn and the compounding effects of 

interest accumulation.

A recent study found that, for tax year 2010, distributions from qualified retirement plans totaled 

$1,281 billion, $241 billion of which went to taxpayers under age 55.

25 Nearly half of this 

amount, $104.3 billion, was subject to tax and, in some cases, subject to early withdrawal 

penalties (see Graph 1). Recognizing the inclination of many individuals not to leave portable 

retirement funds with a former employer, more than $100 billion was rolled over (directly or 

indirectly) to other qualified accounts.

 

23

 Investment Company Institute, Research and Statistics. Retirement Assets Total $20.9 Trillion in Second Quarter 

2013, September 30, 2013. Accessed at: http://www.ici.org/research/retirement/retirement/ret_13_q2.

24 Refer to Fellowes, Matt and Katy Willemin, The Retirement Breach in Defined Contribution Plans Size, Causes, 

and Solutions, HelloWallet, January 2013 and Argento, Robert and Victoria L. Bryant, John Sabelhaus, Early 

Withdrawals from Retirement Accounts During the Great Recession, prepared for presentation at the November, 

2012, National Tax Association annual meetings, November 2012.

25

 Refer to Argento, Robert and Victoria L. Bryant, John Sabelhaus, Early Withdrawals from Retirement Accounts 

During the Great Recession, prepared for presentation at the November, 2012, National Tax Association annual 

meetings, November 2012.
10

The study estimated that nearly 25 percent of all taxpayers younger than age 55 with current 

pension coverage (or retirement balances from past contributions) had a gross distribution in 

2010. Among those taxpayers with a gross distribution, approximately 67 percent of the 

taxpayers had a taxable distribution, and about 40 percent had a penalized distribution. With 

respect to the dollar amounts, approximately 43 percent of the gross distribution amounts were 

subject to tax and nearly 20 percent of the gross distributions (approximately $46.8 billion) were 

subject to early withdrawal penalties. (Refer to Graph 1.)26 Graph 2 shows the annual penalized 

distributions for taxpayers under age 55, for 2004 to 2010.

 

26

 Note there are modest discrepancies in the data reported in the 2010 Argento et al paper. For instance, the 

penalized amount for 2010 is listed in Table 1 is $47.3 billion, but in Table 3, this amount is listed as $46.8 billion. 

However, the discrepancy is small enough to be irrelevant for the purposes of this study. For purposes of our study, 

we report the $46.8 billion figure.

$6.0 

$10.9 $11.1 

$46.8

$57.1 

$92.5 

 $-

 $10.0

 $20.0

 $30.0

 $40.0

 $50.0

 $60.0

 $70.0

 $80.0

 $90.0

 $100.0

Non-Taxable

Distributions - Other

Indirect Rollovers to

Other Qualified

Accounts

Return of After-Tax

Contributions to

Qualified Accounts

Taxable Distributions -

Penalized

Taxable Distributions -

Non-Penalized

Direct Rollover to

Other Qualified

Accounts

Billions of Dollars

Graph 1 Total Distributions from Retirement Accounts, by Selected 

Type of Distributions for Taxpayers Under Age 55, Tax Year 2010 

Source: Argento, Bryant, and Sabelhaus, 2012 
11

When workers make a job change (either voluntarily or involuntarily terminate employment),

they have several options available with respect to their retirement assets – generally, they may 

keep the assets in the original employer’s plan, roll over the assets to an IRA or to a retirement 

savings plan of a new employer, or cash out the balance.

According to a 2011 survey, 42 percent of employees take a cash distribution of their retirement 

savings at job termination, 29 percent roll their retirement savings to another plan or an IRA, 

and 29 percent leave their assets in the employer’s plan.27 The cash-out rate varies by account 

size; the survey found a 75 percent cash-out rate for participants with less than $1,000 in their 

accounts and a 10 percent cash-out rate for participants with at least $100,000 in their accounts. 

Total assets cashed out represented 7.3 percent of total retirement savings assets of terminating 

employees.

Thus, empirical research indicates that nearly half of all workers take cash distributions when 

terminating employment.28 On a plan-asset weighted basis, cash distributions in the 2011 survey 

represented 7.3 percent of the total amounts available at employment termination, with 54.7 

percent of assets remaining in the employer’s plan and 38 percent of assets rolled over to another 

employer retirement plan or an IRA (refer to Graph 3).

 

27 Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income 

2011. Aon Hewitt, 2011.

28 One survey indicated that this percentage could be as high as 68 percent, although the data may be out of date. 

Refer to Moore, James H. and Leslie A. Muller, An analysis of lump-sum pension distribution recipients, Monthly 

Labor Review, May 2002.

$29.5 $30.8 

$34.9 

$39.7 

$42.1 $42.0 

$46.8 

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2004 2005 2006 2007 2008 2009 2010

Billions of Dollars

Graph 2 Total Distributions from Retirement Accounts Subject to a 

Tax Penalty, for Taxpayers Under Age 55

Source: Argento, Bryant, and Sabelhaus, 2012
12

Cashing out tends to be the most prevalent behavior with average distributions of $32,219 (in 

2006 dollars).29 The following graph (Graph 4) displays the range of distribution amounts for 

individuals taking a lump-sum distribution when changing jobs. 

 

29 EBRI Notes, Lump-Sum Distributions at Job Change, Vol. 30, No. 1, January 2009.

Less than $2,500, 

21%

$2,500 less than 

$50,000, 63%

$50,000 or more, 

16%

Graph 4 Lump-Sum Distributions at Job Change, by the Size of 

the Distribution

Source: EBRI Notes, January 2009

Rollover, 29%

Remain in 

Employer's Plan, 

29%

Cash Distribution, 

42%

Graph 3 Treatment of Retirement Plan Assets, after Employment 

Terminations, Percentage of Employees 

Source: Aon Hewitt Survey, 2011
13

D. CASH-OUTS MORE LIKELY AMONG CERTAIN GROUPS

Cash-outs are more likely to occur among individuals who (1) have a low account 

balance, (2) are under age 30, or (3) have lower wages. Higher cash-out rates 

are also an issue for African-Americans and Hispanics. 

Certain participant characteristics provide an indicator of the likelihood that employees will cash 

out their retirement savings at job change. These characteristics relate to the amount of 

retirement savings accumulated, as well as certain demographic characteristics, including the 

employee’s age, income, and race or ethnicity.

1. Account Balances – The likelihood that an employee will cash out a retirement 

account after terminating employment correlates negatively with the employee’s account 

balance. As an employee’s account balance increases, a terminating employee is less likely to 

cash out the account. As noted above, one study estimated that the average cash distribution at 

job change was $32,219 in 2006.30

2. Age of the Workers – Younger workers tend to have lower account balances relative 

to their older cohorts (due to fewer years participating in a qualified plan). In addition, younger 

workers are much more likely to cash out these smaller account balances. The 2011 Aon Hewitt 

retirement survey estimated that 53 percent of terminating employees who were younger than 30 

years of age cashed out their retirement savings.

Yet, research indicates that as an 

individual reaches 40 years of age or 

older, they tend to have financial 

challenges that make it more likely that 

they will use their retirement savings.31 

This is particularly true when an older 

worker terminates employment. In many 

cases, they have more complicated 

financial demands (e.g., retaining a 

primary residence or college-aged 

children) and retirement savings may 

represent the only available form of 

savings. Numerous surveys of plan 

participants report similar findings.32 

However, as participants age, they are 

more likely to retain their retirement 

assets, even following a job change.

3. Lower-Paid Workers – Workers with lower-wage employment also tend to be more 

likely to withdraw or cash-out retirement savings, particularly at job change. Research by 

 

30 Refer to Copeland, Craig, Lump Sum Distributions at Job Change, Employee Benefits Research Institute, Notes 

30(1), January 2009.

31 Refer to Fellowes, Matt and Katy Willemin, The Retirement Breach in Defined Contribution Plans Size, Causes, 

and Solutions, HelloWallet, January 2013.

32 Ibid. Refer also to Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding 

Retirement Income 2011, AON Hewitt, 2011; and How America Saves 2012, The Vanguard Group, Inc., 2012.

53%

44%

41%

32% 32% 31%

0%

10%

20%

30%

40%

50%

60%

20-29 30-39 40-49 50-59 60-64 65+

Percent Taking Cashout

Graph 5 Percentage of Terminating Employees 

Who Cash Out Retirement Savings, by age, 2010

Source: Aon Hewitt Retirement Survey, 2011
14

Butrica, et al. indicates that workers in the lowest income quartile are much more likely (28.6 

percent) to make withdrawals from retirement savings than those in the highest income quartile 

(16.4 percent).33

4. Minority Workers – African-American and Hispanic workers have significantly 

higher cash-out rates than white workers (see Table 2). 

Table 2 – Employee Actions Taken Upon Job Termination, 

Percentages by Racial and Ethnic Group

Action African-American Hispanic White

Leave Balances in Employer Plan 12% 15% 27%

Rollover to New Plan or IRA 25 28 34

Cash-Out With Penalty 63 57 39

Source: 401(k) Plans In Living Color. A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups, the 

Ariel/Aon Hewitt Study 2012.

These higher cash-out rates could occur partially because the average account balances for 

African-Americans and Hispanics are significantly smaller than the average account balances for 

whites with the same salary rate. However, even accounting for size of account balances, 

African-American and Hispanic workers tend to have higher cash-out rates.

E. DOL REGULATIONS MAY REDUCE ACCESS TO CALL CENTER AND 

BROKER-DEALER ASSISTANCE FOR TERMINATING EMPLOYEES

On October 22, 2010, DOL proposed regulations to modify the standards for fiduciary liability 

with respect to retirement savings plans. In 2011, the DOL announced that the regulations would 

be re-proposed.34 The re-proposed regulation is generally expected to apply the revised fiduciary 

standard to assistance provided to terminating employees by call centers and broker dealers. In 

some cases, a terminating employee will contact a call center or broker-dealer associated with an 

employer’s retirement savings plan to understand his or her options with respect to the 

employee’s retirement savings account balance. In other cases, a call center or broker-dealer 

might reach out directly to a terminating employee to help the employee understand his or her 

options. If broker-dealers and call centers become fiduciaries under the DOL regulations as 

expected, such contacts with terminating employees would generally be prohibited under the 

prohibited transaction rules, even if the advice given is in the best interest of the employees, 

unless comprehensive exemptions are provided by the DOL. If the re-proposed regulations fail 

to provide such exemptions for this type of assistance, then employees will lose access to call 

center and broker-dealer assistance at this critical choke point in the retirement savings process.

 

33 Refer to Butrica, Barbara A., Sheila R. Zedlewski, and Philip Issa. Understanding Early Withdrawals from 

Retirement Accounts. The Urban Institute, The Retirement Policy Program, Discussion Paper 10-02, May 2010.

34

 United States Department of Labor News Release, Release Number: 11-1382-NAT, September 19, 2011.
15

F. ACCESS TO CALL CENTER AND BROKER-DEALER ASSISTANCE

REDUCES CASH-OUTS

A recent GAO report suggested that employees who change jobs often receive guidance and 

marketing from service providers’ call centers encouraging them to roll their retirement savings 

into IRAs rather than keeping the savings in a 401(k) plan. However, very importantly, the GAO 

also noted that fears of fiduciary liability could inhibit communications with employees and the 

provision of information regarding distribution options. Inhibiting these communications 

creates a great risk to retirement savings – that terminating employees will take cash 

distributions instead of leaving their assets in their employer’s plan or rolling over the assets to 

another plan or IRA. However, the GAO report ignores the fact that the greatest risk to 

retirement savings is that employees will take a cash distribution upon job termination. From a 

retirement security perspective, retaining the assets in either an employer plan or an IRA is 

preferable to cashing out.

The research on access to financial assistance typically examines assistance in the form of a paid 

financial advisor. However, individuals who seek assistance from a paid financial advisor tend 

to be those individuals who are higher income and have higher levels of financial literacy. 

Individuals with lower education and income, African-Americans, and Hispanics are 

significantly less likely to seek assistance from a paid financial advisor.

In a 2008 paper, Lusardi stated “individuals are most prone to decision-making in specific time 

periods. For example, the start of a new job pushes people to think about saving (often because 

they have to make decisions about their pensions), and it may be very important to exploit such

teachable moments.”35 Lusardi goes on to state that “to be effective, programs have to recognize 

the many differences among individuals, not only in terms of preferences and economic 

circumstances but also of their existing levels of information, financial sophistication, and ability 

to carry through with plans. In other words, relying on ‘one-size-fits-all’ principles can lead to 

rather ineffective programs.”36

One of the key decision-making points for retirement savings is job termination, when an 

employee must decide what to do with their retirement savings with the employer. Employees 

frequently have access to a call center or a broker-dealer to help them understand their options at 

this decision-making point. In fact, most financial services firms make such assistance available 

to help employees make decisions concerning their retirement savings. 

A recent study by the Government Accountability Office (“GAO”) indicated GAO’s strong 

preference for workers keeping their retirement savings in an employer plan, rather than moving 

the funds to an IRA.37 However, this view does not address how to deal with many employees’ 

inclination not to leave their assets at their former employer’s plan, nor with some workers’ 

desires to obtain access to investments that may not be available under a former employer’s plan. 

Further, the GAO indicated that it had made calls to 401(k) and IRA service providers to request 

information about rollover options and IRAs, but it is unclear whether these calls went to sales 

lines or the company’s technical call centers. This clearly makes a significant difference in terms 

of the nature of the assistance. Most importantly, GAO’s report ignores the biggest risk to long-

 

35

 Lusardi, Annamaria. Financial Literacy: An Essential Tool for Informed Consumer Choice? January 2008.

36

 Ibid.

37 Refer to the Government Accountability Office, 401(K) PLANS Labor and IRS Could Improve the Rollover 

Process for Participants, GAO-13-30, March 2013.
16

term retirement security, which is the preretirement cash out of retirement savings. From a 

retirement security perspective, retaining the assets in either an employer plan or an IRA is 

preferable to cashing out. 

None of the research to date has examined the effects of employee access to call center 

assistance on retirement savings. As a result, very little information is available concerning the 

effects of call center assistance on retirement savings outcomes. In order to help fill this gap in 

the research, we conducted interviews of several large financial services firms serving a broad 

range of individuals concerning their call center operations with respect to employer retirement 

savings plans. The information and data collected from these interviews help to construct a 

better picture of how access to call centers assists employees with important retirement savings 

decisions.

Millions of employees contact call centers associated with their retirement plan each year.38 

Some of the calls represent basic transactions, such as a balance inquiry or providing an address 

change. For some companies, the initial call will be handled by a basic service representative, 

who will handle the most basic inquiries and will transfer the caller to a licensed representative 

for any other question or request. 

The financial services firms view their call center operations as an important way to help educate 

employees on the importance of preserving their retirement savings. In addition to responding to 

employees who contact a call center, some companies make proactive calls to employees at key

decision points to make sure employees are educated concerning their options. Companies with 

whom we spoke as part of our research generally indicated that their general approach was to 

discourage terminating employees from cashing out their retirement savings. One company 

indicated that, with terminating employees, they would send a letter explaining the employee’s 

options, followed by a telephone call, generally advising against cashing out. Another company 

indicated that the most impactful way to help plan participants was a proactive call to help with 

options when an employee terminates employment.

In addition, some employees have direct access to a broker-dealer for assistance. This might 

occur if an employee has set up an IRA using a broker-dealer or if an employer (often a small 

employer) has a broker-dealer who helped the employer establish a retirement plan for 

employees. In many cases, broker-dealers assist employees who could not otherwise afford to 

hire a financial advisor. While it is more difficult to quantify the extent to which employees 

might access a broker-dealer for assistance for help understanding their options with respect to 

their retirement savings, this access represents another important way in which employees 

receive assistance with respect to their retirement savings and, more generally, their financial 

literacy.

As a result, call center and broker-dealer assistance is an important source of information to 

employees. The evidence suggests that access to this assistance improves retirement savings 

outcomes. One financial services company reported that cash-out rates for individuals with 

account balances between $35,000 and $50,000 decline significantly when an employee receives 

a proactive call (3.3 percent cash-out rate) relative to those who only receive a written 

communication (10.5 percent cash-out rate). This compares to a cash-out rate for this company 

of 34 percent for all former employees each year.

 

38

 These call centers should be distinguished from the sales forces that may have been involved in the GAO study 

discussed above.
17

III. ESTIMATING THE EFFECTS OF REDUCING AVAILABILITY OF CALL 

CENTER OR BROKER-DEALER ASSISTANCE ON CASH-OUTS OF RETIREMENT 

SAVINGS

When an employee terminates employment, cashing out accumulated retirement savings may be 

appealing. Many employees lack the basic financial literacy needed to make an informed 

decision, which leads to a failure to understand the long-term consequences of these cash-outs. 

In particular, an employee with high debt levels or other financial pressures rarely appreciates 

the importance of keeping the assets in a qualified retirement savings vehicle. Similarly, an 

employee who has a relatively small retirement savings balance does not understand the longterm consequences of cashing out. Finally, the process of rolling over retirement savings into a 

plan of a new employer or an IRA presents complexities that many plan participants fail to 

understand. Having access to a call center or broker-dealer for assistance may help a terminating 

employee gain a clearer picture of all the options with respect to his or her retirement savings 

and the consequences of each option.

If the DOL re-proposed regulations extend fiduciary liability to call center and broker-dealer 

assistance without an exemption to permit the types of contacts that routinely occur when 

employees terminate employment, then cash outs at termination of employment will increase and 

long-term retirement security will decline. The following sections estimate the potential impacts 

of these changes, including estimates of (1) the aggregate potential reduction in retirement 

savings and (2) the effect of cashing out retirement savings on retirement savings accumulations

over a 30-year work history. These potential impacts may affect disproportionately individuals

in the most vulnerable populations.

A. INCREASED WITHDRAWALS FROM RETIREMENT SAVINGS

The estimates of increased cash-outs of retirement savings and reduced rollovers to IRAs and 

other qualified plans rely on a number of data sources as well as our estimates of the effect of 

call centers and/or broker-dealer assistance on these cash outs.

The first step in estimating the potential increases in cash-outs from retirement assets and 

reduced rollovers to IRAs and other qualified plans requires estimating pension participation by 

income class. This analysis relies on Internal Revenue Service (IRS) Statistics of Income (SOI) 

tabulations of the elective deferrals claimed on taxpayers’ Form W-2 for 2010.39 Table 3

displays the number of taxpayers with elective deferrals and the aggregate amount of the 

deferral. 

The second step is to impute aggregate balances for the distribution of taxpayers reporting 

retirement contributions on Form W-2. This information relies on several surveys. Using 

multiple data sources provided an opportunity to verify and corroborate the assumptions applied 

to the taxpayer characteristics.40 

 

39 The IRS tabulation of W-2 data includes elective deferrals from all employer-provided defined contribution 

amounts for primary and/or secondary taxpayers. Elective retirement contributions are reported on the Form W-2, 

box 12 and includes the following codes: code D (traditional 401k), code E (traditional 403b), code F (SEP), code G 

(457b), code H (501(c)(18)(D), code S (SIMPLE), code AA (Roth 401k), and code BB (Roth 403b). 

40

 Refer to Appendix A for a detailed description of the data sources and the methodology.
18

Table 3 – Taxpayers with Elective Retirement Contributions, by

Size of Adjusted Gross Income, 2010

(Dollar Amounts are in thousands)

Adjusted Gross Income Returns Contribution Amount

Under $10,000 628,363 $723,644

$10,000 under $20,000 1,840,733 1,205,130

$20,000 under $30,000 3,569,640 3,990,174

$30,000 under $40,000 4,116,205 6,896,514

$40,000 under $50,000 3,881,058 8,825,907

$50,000 under $75,000 8,927,933 28,557,724

$75,000 under $100,000 7,719,584 33,078,699

$100,000 under $200,000 11,607,079 79,943,732

$200,000 or more 3,495,241 45,992,983

Total 45,785,836 209,214,507

Source: IRS, Statistics of Income tabulations of the elective deferrals claimed on taxpayers’ 2010 Form W-2.

The third step is to estimate the qualified plan participants who may experience a break in 

service (through job termination) and face a decision regarding plan assets held with their 

previous employer. The Job Opening and Labor Turnover Survey (JOLTS) from the Bureau of 

Labor Statistics estimated that 37.1 percent of current workers experience separation from 

employment during the year. The definition of separation includes voluntarily quitting, being 

laid off, or being fired.41

From this information, we derive estimates of the potential retirement savings balances that are 

likely to become vulnerable to cash out.

42

 We assume that those employees cashing out balances 

currently will continue to do so. With respect to employees choosing to leave account balances 

in a former employer’s plan passively (through inaction), we assume that the small number of 

account balances that would have remained passively with the former employer will also be 

likely to remain there. 

Our analysis assumes that the balances most vulnerable to increased cash-out are those currently 

being rolled into IRAs or a new employer plan and those that currently remain in an employer’s 

plan through an employee decision. These amounts reflect those decisions that are most likely to 

be assisted by a call center or broker-dealer. Our estimates indicate that, each year, these 

balances total approximately $117 to $145 billion. 

Our final step involves investigating the role of call center and broker-dealer assistance in 

helping workers retain their retirement savings at job change. Our research relies on a DOLsponsored pilot survey that looks at how current enrollees in employer-sponsored defined 

contribution (DC) plans make retirement decisions.43 Our empirical models suggest that 

 

41

 Refer to Hathaway, Kendra C., Job openings continue to grow in 2012, hires and separations less somewhat, 

JOLTS Annual Story, Monthly Labor Review, May 2013.

42

 In addition, the estimates include an adjustment for the likelihood that workers separating from employment have 

access to a qualified plan.

43

 The survey asked the following question: “How do you make decisions about savings and investment related to 

retirement?” The possible responses were: “1 Ask relatives/friends, 2 Talk to financial planners/brokers, 3 Talk to 

lawyers, 4 Read magazines/newspapers/books, 5 Get advice from television, and 6 Other.” Of the respondents who 

had not already retired, approximately 24 percent indicated that they had talked to financial planners/brokers. These 

contacts likely include both consultation with a paid financial planner and contacts through a call center or brokerdealer associated with their employer’s retirement savings plan.
19

retirement savings plan balances are 33 percent higher if a financial planner or broker was 

consulted for financial advice. Our parameter estimates support our theory that consultations 

with call centers or brokers/dealers result in retirement savings in DC plans that are higher by 

about 33 percent. Our model suggests important life-cycle effects are present in retirement 

savings with plan balances increasing with age initially and then increasing at a decreasing rate 

as workers approach retirement age.

Based on the estimated cash-outs from retirement balances for terminating employees, we 

estimate that reducing the availability of call center and broker-dealer assistance will increase 

annual cash outs of retirement savings at job termination by an additional $20 – 32 billion.

44

B. LONG-RUN EFFECTS ON RETIREMENT SECURITY

Cash outs of retirement savings prior to retirement not only reduce retirement savings by the 

amount withdrawn, but also by the earnings that those amounts would accrue if they were not 

withdrawn.45

The following example shows the effects of withdrawals of retirement savings early in a working 

career, which corresponds to the work history of many workers who may change jobs three or 

four times during the early years of their working career. The first stream of retirement savings 

represents the accumulation of assets assuming no cash out prior to retirement age (i.e., the assets 

either remain in an employer’s plan or the individual rolls over to an IRA or a new employer’s 

plan). This individual, who earns $40,000 in 2014 (assuming 2.5 percent annual increases in 

salary and a 5 percent deferral rate), will accumulate $124,742 during her career (assuming 4 

percent annual earnings on those contributions).46

Assume the same individual changes jobs three or four times during the early years of 

employment and cashes out her retirement savings at each job change with the final cash-out 

occurring after year six. This behavior means the individual is essentially beginning to save for 

retirement in the seventh year of employment. Withdrawing the retirement balances in the early 

years of employment (with consistent savings thereafter) will reduce the individual’s 

accumulated retirement savings by $32,093. 

 

44

 Refer to Appendix A for a detailed description of our empirical work.

45

 In addition, the amounts withdrawn frequently are subject to Federal and state income taxes plus penalty taxes on 

early withdrawals.

46

 This deferral rate is consistent with average deferrals based on Internal Revenue Service Statistics of Income data 

tabulations of the Form W-2 for taxpayers with $40,000 of wage income. 
20

Table 4 – Effects of Cashing Out Retirement Savings, with

Job Changes Early in the Work History

Year

Account Balance

Year

Account Balance

No 

Distributions

Distribution at 

Job Changes No Distribution Distribution at Job Change

2014 $ 2,000 $ - 2028 $ 47,019 $ 26,974 

2015 $ 4,130 $ - 2029 $ 51,797 $ 30,950 

2016 $ 6,396 $ - 2030 $ 56,838 $ 35,157 

2017 $ 8,806 $ - 2031 $ 62,154 $ 39,606 

2018 $ 11,366 $ - 2032 $ 67,760 $ 44,310 

2019 $ 14,083 $ - 2033 $ 73,668 $ 49,280 

2020 $ 16,966 $ 2,319 2034 $ 79,891 $ 54,528 

2021 $ 20,022 $ 4,790 2035 $ 86,446 $ 60,068 

2022 $ 23,260 $ 7,418 2036 $ 93,347 $ 65,914 

2023 $ 26,688 $ 10,212 2037 $ 100,610 $ 72,080 

2024 $ 30,316 $ 13,181 2038 $ 108,252 $ 78,581 

2025 $ 34,152 $ 16,332 2039 $ 116,290 $ 85,432 

2026 $ 38,208 $ 19,676 2040 $ 124,742 $ 92,650 

2027 $ 42,494 $ 23,220 

Both examples assume the individual has a starting salary of $40,000, receives 2.5 percent annual increases, defers 5 

percent of salary each year, and earns 4 percent interest on those contributions.

Graph 6 displays the effect of this behavior on the accumulated earnings. This reduces the 

ultimate retirement savings balance by approximately 26 percent. 

While it is common for younger workers to cash out balances, the average account distribution is 

considerably higher ($32,219) suggesting that cash outs also occur later in a working career. 

Using the same example, this is comparable to a worker cashing out his or her retirement savings 

when changing jobs after 10 years. The effect of this behavior is to reduce the individual’s total 

retirement savings by nearly $52,000 or 41 percent.

$2,000 

$6,396 

$11,366 

$16,966 

$23,260 

$30,316 

$38,208 

$47,019 

$56,838 

$67,760 

$79,891 

$93,347 

$108,252 

$124,742 

$- $- $- 

$2,319 

$7,418 

$13,181 

$19,676 

$26,974 

$35,157 

$44,310 

$54,528 

$65,914 

$78,581 

$92,650 

 $-

 $20,000

 $40,000

 $60,000

 $80,000

 $100,000

 $120,000

 $140,000

2014 2019 2024 2029 2034 2039

Graph 6 Effects of Cashing Out Retirement Savings at Job Changes, 

During the Early Years of Employment
21

Table 5 – Effects of Cashing Out Retirement Savings, with

Job Changes After 10 Years

Year

Account Balance

Year

Account Balance

No 

Distributions

Distributions 

at Job 

Changes

No 

Distribution

Distribution 

at Job Change

2014 $ 2,000 $ - 2028 $ 47,019 $ 14,549 

2015 $ 4,130 $ - 2029 $ 51,797 $ 18,028 

2016 $ 6,396 $ - 2030 $ 56,838 $ 21,718 

2017 $ 8,806 $ - 2031 $ 62,154 $ 25,630 

2018 $ 11,366 $ - 2032 $ 67,760 $ 29,775 

2019 $ 14,083 $ - 2033 $ 73,668 $ 34,163 

2020 $ 16,966 $ - 2034 $ 79,891 $ 38,807 

2021 $ 20,022 $ - 2035 $ 86,446 $ 43,718 

2022 $ 23,260 $ - 2036 $ 93,347 $ 48,910 

2023 $ 26,688 $ - 2037 $ 100,610 $ 54,396 

2024 $ 30,316 $ 2,560 2038 $ 108,252 $ 60,189 

2025 $ 34,152 $ 5,287 2039 $ 116,290 $ 66,304 

2026 $ 38,208 $ 8,188 2040 $ 124,742 $ 72,757 

2027 $ 42,494 $ 11,273 

Both examples assume the individual has a starting salary of $40,000, receives 2.5 percent annual increases, defers 5 

percent of salary each year, and earns 4 percent interest on those contributions.

Graph 7 displays the cumulative effects of cashing out after ten years of employment over the 

remaining working career.

These two examples rely on conservative assumptions and present the effects on a worker 

earning the U.S. median salary. The effects would increase significantly with modest changes in 

the assumptions. For instance, as the interest rate increases, the accumulation gap between not 

cashing out and cashing out grows much wider. In addition, if the individual were to defer the 

maximum amount each year or if the employer provided matching contributions, the effects 

would also multiply. In each of these cases, the gap widens and the effects on retirement 

security become more significant.

$2,000 

$6,396 

$11,366 

$16,966 

$23,260 

$30,316 

$38,208 

$47,019 

$56,838 

$67,760 

$79,891 

$93,347 

$108,252 

$124,742 

$- 

$2,560 

$8,188 

$14,549 

$21,718 

$29,775 

$38,807 

$48,910 

$60,189 

$72,757 

 $-

 $20,000

 $40,000

 $60,000

 $80,000

 $100,000

 $120,000

 $140,000

2014 2019 2024 2029 2034 2039

Graph 7 Effects of Cashing Out Retirement Savings at Job Changes, 

After Ten Years of Employment
22

C. AFFECTING THE MOST VULNERABLE POPULATIONS

Individuals who hire a financial advisor tend to be higher income and have more general 

education than other individuals. That is not the case for individuals who contact a call center or 

broker-dealer associated with their employer’s retirement plan. Information that we received 

from financial services firms suggests that a wide range of individuals utilize this type of service 

to help them with their retirement savings decisions. For example, one company’s call center 

data for the first quarter of 2013 indicated that nearly 80 percent of the calls related to 

individuals with no more than $50,000 of assets in their retirement savings plan and nearly 50 

percent of the calls related to individuals with no more than $5,000 in the plan. Nearly 60 

percent of the calls related to individuals under age 50 and more than 60 percent related to 

individuals with less than 10 years of service with the employer.

One of the greatest risks to long-term retirement savings is the potential for pre-retirement cash 

outs of retirement savings. Cash-outs are highest among individuals who are younger, have 

lower wages, and have less tenure with an employer. Higher cash-out rates are also an issue for 

African-Americans and Hispanics. Assistance provided by call centers and broker-dealers at job 

termination plays a key role in trying to reduce cash-out rates, particularly among these groups 

who are least likely to use the services of a paid financial planner. One financial services 

company indicated that oral communications with employees terminating employment has a 

significant effect on cash-out rates; employees with account balances between $35,000 and

$50,000 are approximately 3.2 times less likely to cash out their retirement savings if they 

receive a call rather than only receiving written communications. As a result, reducing access to 

call center and broker-dealer assistance will likely disproportionately affect the individuals who 

are most vulnerable to cash outs.
23

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33

APPENDIX A – TECHNICAL EXPLANATION OF STUDY ESTIMATES

The estimates of increased cash-outs from qualified retirement savings rely on a number of data 

sources as well as our estimates of the effects of reducing employee access to assistance through

call centers and broker-dealers. The estimates attempt to characterize and quantify the potential 

asset erosion from retirement savings when participants are unable to obtain assistance at job 

change, when they must make decisions regarding their retirement plan assets.

We first estimate pension participation and IRA contributions by income class. Because 

cashouts of retirement savings at job change tend to correlate negatively with income (i.e., 

individuals with higher income are less likely to cash out their retirement savings at job change), 

we can use the income distribution of pension and IRA participation to help us capture these 

effects. The Internal Revenue Service Statistics of Income (SOI) data provide the starting point 

for this step. The SOI presents tabular data based on information collected from matched 

samples of Form 1040, U.S. Individual Income Tax Return; and Form W-2, Wage and Tax 

Statement, for Tax Years. 

Data from individual income tax returns rely on a stratified probability sample.47 Information on 

wages and retirement contributions rely on Forms W-2 matched to the sampled individual 

income tax return. The individual income tax return provides information on the gender and age 

of a taxpayer (obtained by matching the primary and secondary Social Security numbers on the 

individual income tax return to information from the Social Security Administration). Form W2, box 12 provides detail on the type of retirement plan. The SOI collects this information on an 

individual taxpayer basis. These estimates retain information on age, gender, filing status, and 

wage and salary income levels to reflect certain characteristics that are likely to affect account 

balances. 

We impute aggregate balances for the distribution of taxpayers reporting retirement contributions 

on Form W-2 relying on data from two surveys, which provides an opportunity to verify and 

corroborate the assumptions applied to the taxpayer characteristics. The first survey is the 

Survey of Consumer Finances (SCF), a survey of U.S. households sponsored by the Board of 

Governors of the Federal Reserve System with the cooperation of the U.S. Department of the 

Treasury every three years. The second survey is the Employee Benefits Research Institute and 

the Investment Company Institute (EBRI/ICI) survey of retirement plans. The EBRI/ICI survey 

collects information about individual 401(k) plan participant accounts. As of December 2010, 

the database included information about 23.4 million 401(k) plan participants in 64,455 

employer-sponsored 401(k) plans, representing $1.414 trillion in assets. In addition, the 

EBRI/ICI survey collects data from plan recordkeepers and, therefore, is able to capture the 

characteristics of the plan activity. The survey retains information on demographic, contribution, 

asset allocation, and loan and withdrawal activity information for millions of participants, which 

enables estimates of the cumulative changes in account balances. Together, these surveys 

provide qualitative information that allows imputation of account balances.

From this base, we estimate those qualified plan participants who experience a break in service 

(through job termination) and face a decision regarding plan assets held with their previous 

employer. The Job Opening and Labor Turnover Survey (JOLTS) from the Bureau of Labor 

Statistics provides current statistics on labor turnover by selected worker characteristics. The 

 

47 Refer to Statistics of Income—2010, Individual Income Tax Returns documentation for the description of the 

sampling procedures and data limitations of Statistics of Income tabulations.
34

JOLTS measures hires and separations on a monthly basis. Historical estimates that correspond 

with the reference year data (2010) support these estimates. 

Finally, we investigate the role of financial planners and brokers in helping workers save for 

retirement. Our research (described in detail below) relies on a DOL-sponsored pilot survey 

conducted through the Rand American Life Panel that looks at how current enrollees in 

employer-sponsored defined contribution (DC) plans make retirement decisions. 

Rand American Life Panel (ALP)

Since 2006, the Rand Corporation has fielded a survey of approximately 6,000 individuals who 

have agreed to participate in occasional, on-line surveys on topics of interest to policymakers. 

Approximately 350 surveys have been conducted to date on topics as diverse as financial 

decision-making, financial literacy, self-reported health and well-being and Social Security 

knowledge. Participants in the ALP are selected from several other, on-going surveys in the 

United States including the University of Michigan Monthly Survey, the National Survey Project 

cohort and active recruitment based on the nature of the survey.

Well-Being Survey 189 is a DOL-sponsored pilot survey to ascertain the retirement plans of 

individuals. The survey was conducted between June and August of 2011 and resulted in 3,061 

completed interviews with a response rate of slightly over 85 percent. In addition to a basic core 

module that provides demographic information on the respondents, the survey also includes 

modules on:

 Retirement Planning;

 Income and Transfers;

 Assets and Liabilities;

 Retirement Savings Behavior;

 Employer Retirement Savings Plans and Design;

 Financial Literacy; and

 Risk and Time Preferences.

For the purposes of this research, we focus primarily on the demographic characteristics of 

workers enrolled in employer-sponsored DC plans, plan balances, the investment decisions of the 

plan participants, indicators of financial literacy, and the decision to rely on a financial planner 

or broker to assist in retirement decisions.

The Model

For this preliminary research, we constructed an econometric model of plan balances for workers 

in the Well Being 189 Survey who indicated they were enrolled in a company-sponsored DC 

plan. We investigate how access to a financial planner might affect retirement savings outcomes. 

For this purpose, we define plan balances as the sum of (1) current plan balances; (2) balances in 

plans from prior employers; and (3) any IRA or Keogh plan balances that the respondent may 

have. Of the 3,061 survey respondents, 837 met our criteria.

We also construct several variables from the Survey that we believe should be strong predictors 

of retirement savings:
35

AGE: The age of the respondent.

AGESQR: The age of the respondent squared (to capture life-cycle effects).

INCOME: Total income of the respondent.

CHRONIC: An indicator if the respondent reported suffering from a chronic 

disease such as cancer, diabetes or stroke.

TENURE: An indicator if the respondent owned a home.

FRACTION_STOCK: The fraction of current plan balance that is invested in stocks.

LITERACY: An index of financial literacy.

PLANNER: An indicator if the respondent said he/she relied on a financial 

planner or broker for assistance.

We expect total plan balances to be positively related to income capturing the fact that a higher 

income should result in more resources devoted to retirement savings. In contrast, we expect 

retirement savings to be negatively related to health status (as captured in the CHRONIC 

variable) as this could mean time spent out of the labor force, reduced hours of work, or other 

impediments to lifetime earnings. Similarly, we expect retirement savings to be positively 

related to owning a home (TENURE), suggesting that homeowners may have more resources 

that can be devoted to saving for retirement. 

We have no a priori expectation about how the fraction of stock in one’s portfolio might affect 

plan balances. Because stocks generally have higher long-term growth than bonds, we would 

expect this variable to be positively related to plan balances. On the other hand, because the 

survey was conducted in mid-2011, those plans with a large stock component could have 

Appendix A - Table 1. Description of Variables Used in the Model 1 /

Name Description

LNBALANCE Natural logarithm of total plan balances in 2010. Includes balances of existing 

plan, plans from prior employment and any IRA or Keogh plans.

AGE Age of survey respondent. 

AGESQR Age of survey respondent squared.

LNINCOME Natural logarithm of total income.

CHRONIC Takes a value of 1.0 if the respondent reports suffering from a chronic illness 

(e.g., cancer, diabetes) and zero otherwise.

TENURE Takes a value of 1.0 if the respondent is a homeowner.

FRACTION_STOCKS The fraction of current plan assets invested in stock.

LITERACY Index of financial literacy equal to the number of correct responses to survey 

questions relating to numeracy, inflation and risk diversification.

PLANNER Takes a value of 1.0 if the respondent indicates he/she has consulted with a 

financial planner or broken in planning for retirement.

1 / Variables are calculated from survey questions contained in the American Life Panel,

 Well Being Survey 189, DOL Pilot.
36

suffered from the recent financial crisis. We expect financial literacy to be positively correlated 

with plan balances to the extent enrollees make better financial decisions relating to their 

retirement savings. Finally, we expect that plan balances should be positively related to seeking 

planning advice from a professional advisor.

In order to control for the wide variation and degree of skew in plan balances, we use the natural 

logarithm of total plan balances as our dependent variable. We also use the natural logarithm of 

total income as a predictor variable. Appendix Table 1 describes the variables used in our 

analysis and Appendix Table 2 reports summary statistics for each.

The statistics show that, of our sample of 837 enrolled workers, the average age is 47 years, 

approximately 32 percent have experienced some type of chronic health problem, 78 percent are 

homeowners, about 74 percent of current plan balances are in stocks, and slightly more than half 

consulted with a financial planner.

Results

Our results are shown in Appendix Table 3. The estimated coefficients conform to our 

expectations about how certain variables relate to plan balances. The positive coefficient on

AGE shows that, at least for our sample, plan balances at first rise with age, as one would expect. 

In contrast, the negative coefficient on AGESQR indicates that balances begin to increase at a 

slower rate at some point in the life-cycle, perhaps due to withdrawals or a movement towards 

safer, fixed-income investments as one gets older.

Appendix A - Table 2. Mean and Standard Deviation of 

Variables Used in the Model 1 /

Variable

Mean 

(N=837)

St. Dev. 

(N=837)

LNBALANCE 9.9285 2.7615

AGE 47.0824 11.3594

AGESQR 2,345.6400 1,073.7000

LNINCOME 10.8762 1.8997

CHRONIC 0.3154 0.4650

TENURE 0.7790 0.4152

FRACTION_STOCKS 0.7384 0.4398

LITERACY 2.3214 0.9638

PLANNER 0.5317 0.4993

1 / Variables are calculated from survey questions contained in

 the American Life Panel, Well Being Survey 189, DOL Pilot.
37

Plan balances correlate positively with income and homeownership as indicated by the positive 

coefficients on these two variables and correlate negatively with health status. Both these results 

are expected. The fraction of plan balances held in stocks (FRACTION_STOCKS) suggests a 

strong, positive effect on plan balances. As expected, larger plan balances are positively related 

to financial literacy and the use of a financial planner. Because of the log specification of our 

model for plan balances, we can interpret the coefficient on PLANNER as indicating that plan 

balances are about 33 percent higher if an individual consulted a financial planner or broker for 

financial advice.

All the coefficients in our model, except CHRONIC, are statistically significant at 95 percent 

confidence intervals. The adjusted R-square of 0.28 is reasonably high for cross section data. Appendix A - Table 3. Estimation Results for Total Plan Balances in 2010 1 /

(Standard Errors in Parentheses)

Dependent Variable

Variable LNBALANCE

AGE 0.18585**

(0.0406)

AGESQR -0.0014**

(0.0004)

LNINCOME 0.36822**

(0.0445)

CHRONIC -0.1334

(0.1857)

TENURE 0.78026**

(0.2058)

FRACTION_STOCKS 1.10525**

(0.1999)

LITERACY 0.31658**

(0.0939)

PLANNER 0.33368**

(0.1666)

Number of Observations 837

Adjusted R-Square 0.2793

F-Value 41.49**

1 / Coefficient estimates from unweighted, ordinary least squares on employed respondents 

 enrolled in a employer-provided defined contribution plan in 2010.

*

 Statistically significant at 90 percent confidence levels.

* * Statistically significant at 95 percent confidence levels.
38

Conclusions and Suggestions for Future Research

Our model of DC plan balances performs quite well. Our parameter estimates supports our 

theory of how certain variables might influence retirement savings. In particular, having access 

to a financial planner or broker appears to result in retirement savings in DC plans that are higher 

by about 33 percent. Our model suggests important life-cycle effects are present in retirement 

savings with plan balances increasing with age initially and then at decreasing rate as workers 

approach retirement age.
Page 1 of 23

May 14, 2014

 

 

THE IMPACT OF THE UPCOMING RE-PROPOSED 

DEPARTMENT OF LABOR FIDUCIARY REGULATION 

ON SMALL BUSINESS RETIREMENT PLAN 

COVERAGE AND BENEFITS

Greenwald & Associates

Co-Sponsored by the United States Hispanic Chamber of Commerce

Davis & Harman LLP commissioned and co-sponsored this report on behalf 

of a coalition of financial services organizations that provide retirement 

services to millions of Americans.
Page 2 of 23

Foreword 

Javier Palomarez

President & CEO, USHCC

The sustainability of American small business is inherently tied to the prosperity of our nation’s 

workers and their ability to plan for tomorrow. Because small business owners create nearly 

two-thirds of net new jobs in the U.S., it is imperative to keep their interests top of mind. 

As you might imagine, Hispanic entrepreneurs are an increasingly vital segment of the small 

business demographic. This thriving community numbers more than 3.1 million Hispanic-owned 

businesses, which will together contribute in excess of $468 billion to the American economy 

this year.

The United States Hispanic Chamber of Commerce (USHCC), the country's largest Hispanic 

business organization, advocates on behalf of these enterprises through our network of more 

than 200 chambers and business associations, as well as over 220 major corporate partners 

nationwide. 

At the USHCC, while we are proud to advocate on behalf of business owners who happen to be 

of Hispanic descent, we never forget that we are first and foremost American businesses. Every 

tax bill we pay, every job we create, every product we manufacture, and every service we 

provide goes to benefit our nation’s economy.

Our association, as well as many financial services organizations and business owners, has 

strong concerns over the possible effects of the U.S. Department of Labor’s (DOL) expected 

regulatory expansion of fiduciary status. This is why the USHCC has proudly partnered with 

Greenwald & Associates, one of the nation’s leading full-service market research firms, to 

launch this survey. By polling over 600 retirement plan decision-makers at firms classified as 

small businesses, this study examines the rule’s prohibitive nature on investment education and 

information that can be provided about retirement-plan accounts. 

The findings presented here show that far-reaching regulatory changes, like a DOL expansion 

of fiduciary status, will only impede the ability of small firms to offer their employees retirementplan accounts, thus hindering American workers from saving for a reliable future. 

This report serves as a reputable source of information for policy makers, business leaders, and 

researchers who seek a thorough examination of DOL’s expected regulatory expansion and 

how small business owners and their employees will be negatively impacted. 
Page 3 of 23

EXECUTIVE SUMMARY

Overview

The purpose of this research is to better understand the impact that a re-proposed Department 

of Labor regulation on the fiduciary status of persons providing investment assistance could 

have on small business qualified plans, particularly the impact on employees. The re-proposed

regulation is generally expected to prohibit retirement plan providers and the advisors who sell 

retirement plans from assisting employers in the selection and monitoring of funds in the 

retirement plan. Instead, employers could either perform the functions themselves or hire an 

independent expert to do it. Please see Appendix 1 for a fuller description of the contemplated 

content of the re-proposed regulation, as provided to survey respondents. 

The findings, as summarized in more detail in the “Summary of Findings” section of this report,

were striking. 

 Almost 30% of small businesses with a plan indicate that it is at least somewhat 

likely that they would drop their plan if this regulation were to go into effect. 

 Almost 50% of small businesses with a plan say that it is at least somewhat likely 

that the regulation would result in them reducing their matching contribution, 

offering fewer investment options, and increasing fees charged to participants. 

 Close to 50% of small businesses without a plan state that the regulation would 

reduce the likelihood of them offering a plan, with 36% saying it would reduce the 

likelihood greatly.

 Over 40% of small businesses without a plan say that the regulation would be at 

least somewhat likely to cause them to charge higher fees to participants and not 

offer matching contributions. 

 Over 80% rate the job that their current advisor or record-keeper does as very 

good or excellent when it comes to investment selection and over 90% are at 

least somewhat satisfied with the plan's investment options.

Scope of Study

This study examines three broad topic areas:

 The current environment when it comes to investment selection and monitoring – how it 

is done today in smaller companies and how good a job small business plan decisionmakers feel that their advisors, their record-keepers, and they do in performing these 

functions. The purpose of these questions is to determine, from the perspective of the 

company, how well the system is functioning. This will provide a baseline understanding 

of the need for additional regulation and provide insights as to what impact such 

regulation might have. 

 How those small companies offering plans feel about the upcoming re-proposed 

regulation and what impact they believe the regulation would have on the likelihood that 

they will continue offering plans. In addition, this research also explores how those 

offering plans might change plan provisions and features if the regulation were to be 

adopted.
Page 4 of 23

 How those not offering plans, but considering doing so, feel about the upcoming reproposed regulation and what impact they believe the regulation would have on the 

likelihood that they will offer plans. In addition, the research examines how they might 

change the provisions of the plan they are considering if the regulation were to be 

adopted.

Thus, this research addresses the potential impact of the proposed regulation, in the eyes of 

employers responsible for offering plans, from several different perspectives. 

Methodology

A total of 607 plan decision-makers were administered a 12-minute telephone survey using a

sample from Dun and Bradstreet1– 505 with defined contribution plans and 102 without. To 

qualify for the survey, the respondent needed to be either the sole decision-maker or part of a 

small group of decision-makers regarding the company's retirement plan (or regarding whether 

or not to offer one) in a company that has been in business for at least two years with over 

$400,000 in gross revenue.

Companies were split into four size categories based on the number of employees working for 

the firm – 10 to 49, 50 to 99, 100 to 249, and 250 to 500. Data was weighted to reflect the 

number of employees nationwide working in each of these size bands. 

The study was conducted from November 18th to January 10th by National Research in 

Washington, DC. 

SUMMARY OF FINDINGS

Current Environment

When examining how investment functions are performed in the smaller plan market and how 

companies evaluate this performance, several key findings suggest that advisors and recordkeepers affiliated with plan providers play an important role.

 Roughly 67% rely on an advisor or record-keeper affiliated with a plan provider to 

provide support in investment selection and monitoring – most rely on the advisor. 

This is especially the case for smaller companies (employee size 10-49).

 When used, these parties predominately play a primary or collaborative role in 

investment selection.

But more importantly, a large majority of those responsible for their company's retirement plans 

give high grades to those helping with investment selection and monitoring, higher grades than 

they would give themselves:

 A large majority are very satisfied with their plan's current investment choices.

 A large majority say that the advisor or record-keeper does a very good or excellent 

job in helping in both the selection and monitoring of investments.

 

1 Dun and Bradstreet (D&B) maintains a database of over 20 million U.S. businesses. Sources from which D&B 

compiles the data include, but are not limited to: yellow page telephone directories, credit reports, public records, 

government registries, financial data, trade directories, web sources and directories, and proprietary files. The 

compilation is reflective of the population of U.S. businesses by employee size.
Page 5 of 23

 In contrast, around 50% of those surveyed say that they either do or would do a fair or 

poor job in selecting and monitoring investments themselves. 

When asked about the mix of "affiliated" and "unaffiliated" funds they use, on balance 

respondents report a somewhat greater use of unaffiliated funds.

These findings suggest that employers are generally satisfied with the current system. 

Furthermore, if the regulation causes companies to try to do more of the investment selection 

and monitoring themselves, this could be problematic. 

Reaction to Proposed New Regulation 

When asked a series of questions about the upcoming re-proposed new regulation, those 

offering plans not only dislike the concept, but also feel that it will impact them to cut back on 

what they would offer employees:

 Sixty-five percent think the regulation is a bad idea.

 Almost 30% feel it is at least somewhat likely they would drop their plan if this 

regulation were to go into effect.

 About 80% would likely hire a third party for guidance and over 70% have some 

concern about whether or not the firm would do a good job.

 A small minority would try to do it themselves, with 51% of these being concerned 

about how good a job they would do.

 Close to 50% say that it is at least somewhat likely that they would cut back on their 

match, cut back on investment options, and increase the fees they would charge 

participants if the regulation were to be passed. Thirty-four percent say it is at least 

somewhat likely they would spend less money on educating employees and spend 

less on other benefits. 

 Results suggest that the impact of the regulation would be most profound on smaller 

companies (employee size 10-49). 

Those currently not offering a plan but considering offering one say that the upcoming reproposed regulation would have a negative impact on the likelihood of their offering a plan and 

on the generosity of the plan they might offer: 

 Close to 50% say that the regulation would reduce the likelihood of their offering a 

plan to some extent – 36% say it would reduce it greatly.

 Close to 50% say that it would be difficult to find an advisor they trust and over 50%

say that having to find a third party expert to guide them on investment selection and 

monitoring would be a major obstacle to the likelihood of their offering a plan.

 Over 40% say that the cost of a third party advisor would be a major obstacle in 

offering a plan.

 Many say that the regulation would cause them to lower their sights when it came to 

the type of plan they would offer. A majority say that it would be at least somewhat 

likely they would offer fewer investment options, raise eligibility waiting times, and 

reduce employee education efforts. Over 40% say they would likely charge higher 

fees and not offer a match.
Page 6 of 23

Thus, findings here suggest that the new regulation could have a negative impact on the 

number of employees who get offered plans and a profound negative impact on the quality and 

generosity of those plans. 

FINDINGS

Those Offering Plans

About the Current Plan

When asked how they came to adapt their current plan, respondents are evenly split between 

those who report that it was their own idea to do so and those who did so based on the 

recommendation of someone else, most often the broker selling them the plan. 

Thirty-two percent report offering ten or fewer options in their plan and 64% report offering more 

than ten options. The smallest companies (employee size 10-49) are most likely to offer the 

fewest options with 44% offering ten or fewer. 

34%

19%

11%

4%

19%

13%

It was your own idea

You were approached by the broker who

sold you the plan

It was recommended by a lawyer or

accountant

You were approached by the recordkeeper that administers your plan

Other

Don't know/Refused Offers retirement plan 

(n=505)

Figure 1. Which of the following best describes how your company came to 

consider adopting your retirement plan? 
Page 7 of 23

Company plan decision-makers strongly like the investment options in their plans. When asked 

how satisfied they are with their current investment options, 71% report that they are very 

satisfied and almost all the rest say they are somewhat satisfied.

Company plan decision-makers were asked to describe the composition of their investments in 

terms of the proportion of funds that are "affiliated" with the provider (manufactured by the 

provider) or "unaffiliated" (manufactured by someone else). On balance, more funds are 

"unaffiliated." A little over 25% say that all (12%) or most (15%) of their fund are "affiliated." In 

contrast, 40% say that most (14%) or all (26%) of their funds are "unaffiliated." Twenty-one 

percent say their fund mix is half and half. Smaller companies (employee size 10-49) are 

slightly more likely to have all "affiliated" funds – 19% do so. 

18%

14%

34%

15%

15%

4%

Less than 6

6 to 10

11 to 20

21 to 30

More than 30

Don't know/Refused Offers retirement plan 

(n=505)

Figure 2. How many investment options do you offer for your retirement plan? 

71%

27%

1% <0.5% 1%

Very satisfied Somewhat

satisfied

Not too

satisfied

Not at all

satisfied

Don't

know/Refused

Offers retirement plan (n=505)

Figure 3. How satisfied are you with your plan’s current investment choices? 
Page 8 of 23

Role of Advisor and Record-keeper

Advisors play a major role in supporting the company's investment functions. When asked who 

they most closely work with to decide what investment options to offer, 57% say it is the advisor 

who sold them the plan, and another 10% say that it is the plan record-keeper. Only 20% hire 

an independent advisor, and 11% make investment selections themselves without any support. 

Smaller companies (employee size 10-49) are less likely to use an independent advisor, with 

only 11% doing so. Larger companies (employee size 250-500) are less likely to use the plan 

provider advisor, with only 40% doing so.

The plan provider advisor or record-keeper plays an important role in the investment selection 

process. Among those that use any type of third party, close to 50% have the party make the 

investment selections either with (38%) or without (9%) the employer’s approval. Another 29% 

12%

15%

21%

14%

26%

13%

All are affiliated

Most are affiliated

Half are affiliated and half are unaffiliated

Most are unaffiliated

All are unaffiliated

Don’t know/Refused Offers retirement plan 

(n=505)

Figure 4. Thinking about the funds you offer your employees, what proportion fall 

into these categories (affiliated and unaffiliated)? 

57%

20%

11%

10%

3%

The financial advisor you bought the plan

from

An independent advisor paid directly by

your company or from plan assets

Your company does it without any

assistance or input

Your plan record-keeper

Don't know/Refused Offers retirement plan 

(n=505)

Figure 5. Who do you work with most closely to decide what investment options 

to make available to your employees in your retirement plan? 
Page 9 of 23

work collaboratively with the third party. Less than 25% take the lead in making the selections 

either with third party advice (20%) or just using the third party for implementation (3%). 

When asked who plays the primary role in monitoring the performance of investments in the 

plan, 49% say it is the advisor who sold them the plan and 16% say that it is the plan recordkeeper. Similarly, 16% say they do it themselves and another 16% hire an independent advisor. 

As with selecting investments, smaller companies (employee size 10-49) are less likely to use 

an independent advisor to monitor investments (only 11%) and larger companies (employee 

size 250-500) are less likely to use the plan provider advisor (34%).

38%

29%

20%

9%

3%

<0.5%

This party makes the selections with your

review and approval

You work collaboratively with this party to

make the selections

This party may give you advice but you

decide what investments will be offered

This party makes the selections for you

You decide what investments to choose

and this party implements it

Don't know/Refused

Offers retirement plan,

works with advisor

or plan record-keeper 

to select investments

(n=444)

Figure 6. Which best describes the role that the plan record-keeper/advisor 

plays? 

49%

16%

16%

16%

4%

The financial advisor you bought the plan

from

An independent advisor paid directly by

your company or from plan assets

Your company does it without any

assistance or input

Your plan record-keeper

Don't know/Refused Offers retirement plan 

(n=505)

Figure 7. Who plays the primary role in monitoring the performance of the 

investments in your retirement plan? 
Page 10 of 23

Views Towards Advisors and Record-keepers

As previous data suggests, most are satisfied with their plan line-up and rely greatly on their 

advisor or record-keeper for support in this area. Thus, it is not surprising that most give high 

grades to the advisor or record-keeper when it comes to working with the plan. 

In the area of selecting or helping to select investments, over 80% evaluate this party as 

excellent (40%) or very good (42%). Another 13% rate this party as good. Only 4% evaluate 

the job done by this party as fair or poor. In the area of monitoring and, if necessary, changing 

the plan line-ups, 75% evaluate this party as excellent (35%) or very good (40%). Another 17% 

rate this party as good. Only 6% evaluate the job done by this party as fair or poor. 

40%

42%

13%

3%

1%

1%

Excellent

Very good

Good

Fair

Poor

Don't know/Refused

Offers retirement plan, 

receives help in selecting 

investments 

(n=425)

Figure 8. How good a job do you think your plan record-keeper/advisor does in 

selecting/helping you select investments for your retirement plan? 

35%

40%

17%

4%

2%

2%

Excellent

Very good

Good

Fair

Poor

Don't know/Refused

Offers retirement plan, 

receives help in monitoring 

investments 

(n=414)

Figure 9. How good a job does your plan record-keeper/advisor do in monitoring 

and, if necessary, changing the investments in the plan?
Page 11 of 23

In contrast, company retirement plan decision-makers give themselves low grades for doing 

investment functions themselves. When it comes to how they do in selecting investments for the 

plan or the job they would do if they were to play this role, 47% say that they do or would do a 

fair or poor job. Only 20% say they do or would do an excellent (6%) or very good (14%) job. 

When it comes to how they do in monitoring and adjusting investments or the job they would do 

if they were to play this role, 53% say that they do or would do a fair or poor job. Only 18% say 

they do or would do an excellent (4%) or very good (14%) job. 

6%

14%

29%

29%

18%

4%

Excellent

Very good

Good

Fair

Poor

Don't know/Refused Offers retirement plan 

(n=491)

Figure 10. How good a job do you do (or would you do) in selecting investments 

for the plan?

4%

14%

26%

32%

21%

3%

Excellent

Very good

Good

Fair

Poor

Don't know/Refused Offers retirement plan 

(n=489)

Figure 11. How good a job do you do (or would you do) in monitoring and 

adjusting investments in the plan? 
Page 12 of 23

Reaction to Proposed New Regulation

In general, small business plan decision-makers do not like the regulation proposed by the 

Department of Labor as presented to them. Respondents were given a description of the new 

regulation (See Appendix 1) and asked for their reaction. Overall, 65% consider it to be either a 

very bad idea (38%) or a somewhat bad idea (27%). Only about 29% consider it to be a very 

good idea (6%) or a somewhat good idea (23%). Larger companies (employee size 250-500) 

are more likely to think that the regulation is a good idea with 40% feeling it is at least a 

somewhat good idea. In contrast, only 26% of smaller companies (employee size 10-49) think 

the regulation is at least a somewhat good idea.

The research suggests several consequences that the new law might create. One is that a 

significant minority might drop their plans. When asked how likely they would be to drop their 

plan if this new regulation was implemented, close to 30% claim that it would be very likely

(10%) or somewhat likely (19%) that they would. Over 65% say it is very likely (42%) or 

somewhat likely (25%) that they would not. Smaller companies (employee size 10-49) are the 

most likely to say that they would be very (13%) or somewhat (22%) likely to drop their plans. 

6%

23%

27%

38%

5%

Very good idea

Somewhat good idea

Somewhat bad idea

Very bad idea

Don't know/Refused Offers retirement plan 

(n=505)

Figure 12. What is your reaction to this new regulation? 
Page 13 of 23

Another potential consequence is that many of these plan decision-makers may not trust their 

ability to choose the right advisor. When asked whether they would hire a third party to select 

and/or monitor funds, over 80% say that they would definitely (38%) or most likely (44%) do so. 

Only slightly over 10% would definitely (4%) or most likely (8%) do it themselves. Among this 

large majority that would hire another party, 76% are at least somewhat concerned about the 

fiduciary risk they might face in picking a firm that would not do a good job. Smaller companies 

(employee size 10-49) express the most concern with 82% being at least somewhat so. 

10%

19%

25%

42%

6%

Very likely

Somewhat likely

Somewhat unlikely

Very unlikely

Don't know/Refused Offers retirement plan 

(n=505)

Figure 13. If this regulation were implemented, how likely is it that you would drop 

your plan? Would you say that it is... 

38%

44%

8%

4%

5%

Definitely hire a third party to get guidance

Most likely hire a third party to get

guidance

Most likely do it yourselves

Definitely do it yourselves

Don't know/Refused

Offers retirement plan,

works with plan record-keeper

or advisor to select 

and/or monitor

(n=390)

Figure 14. If this regulation were implemented and you were to keep your plan, 

what would you do when it came to selecting and/or monitoring funds? 

Would you... 
Page 14 of 23

Of the small minority who would select and/or monitor the investments themselves, 51% are 

very or somewhat concerned about the fiduciary risk they face of making bad decisions based 

on their lack of experience in the area.

47%

29%

16%

8%

<0.5%

Very

concerned

Somewhat

concerned

Not too

concerned

Not at all

concerned

Don't

know/Refused

Would hire independent firm (n=324)

Figure 15. Assuming you were to hire an independent firm to select and/or 

monitor investments, how concerned would you be about the fiduciary 

risk you might face of picking a firm that would not do a good job? 

21%

30% 25% 21%

3%

Very

concerned

Somewhat

concerned

Not too

concerned

Not at all

concerned

Don't

know/Refused

Would handle selection/monitoring themselves (n=47)

Figure 16. Assuming you were to select and/or monitor investments yourself, how 

concerned would you be about the fiduciary risk you might face of 

making bad decisions or having liability based on your lack of 

experience in this area?
Page 15 of 23

Even if small company plan managers do not drop their plans, this research suggest that 

significant numbers would take actions that would have negative financial consequences for

their employees. Close to 50% each say that it is at least somewhat likely that they would cut 

back on their employee match (49%), that they would cut back on the number of investment 

options they offer (47%), and that they would increase plan fees (47%). Roughly 33% each say 

it would be at least somewhat likely that they would spend less on other benefits (34%), that 

they would spend less time on participant education (34%), and that they would increase the 

eligibility waiting time (31%) for the plan.

Smaller companies (employee size 10-49) are the most likely to consider making some of these 

cutbacks. Roughly 40% would spend less time and money on participant education (41%), 

spend less on other benefits (40%) and increase the eligibility waiting time (39%). 

In addition, over 40% say that it is at least somewhat likely they would make less profit (43%).

22%

20%

17%

23%

13%

10%

15%

7%

7%

27%

27%

30%

20%

21%

24%

16%

9%

8%

49%

47%

47%

43%

34%

34%

31%

16%

15%

Cut back on your match (n=387)

Cut back on the number of investment

options you offer

Increase the fees you charge participants

Make less profit

Spend less time and money on participant

education

Spend less on other benefits

Increase the length of time that new

employees must wait before becoming

eligible

Increase the ratio of part-time workers you

employ

Reduce employee compensation

Very likely Somewhat likely

Offers retirement plan (n=505)

Figure 17. How likely is it that the increased cost and risk of fiduciary liability 

associated with this regulation would cause you to... 
Page 16 of 23

Impact of Regulation on Those Considering Starting a Plan

This study also interviewed 102 employers who would at least share in the decision-making 

authority to start a plan for their companies and who reported that they would be at least slightly 

likely to start a plan for their company. Of these, about 60% were at least somewhat likely to 

start a plan and 41% were slightly likely.

Among these employers, the most common reason they do not start a plan is that they cannot 

afford to have one. Forty-one percent consider it to be a very important or critical reason. The 

second most important reason is that workers do not earn enough, with 36% of employers 

considering this to be at least very important. Other somewhat less frequently cited reasons 

include that they don't need it to attract workers and that workers are too transient. 

One interesting finding is that 24% cite the number of risks and rules that they don't understand 

as a very important or critical reason for not offering a plan. 

25%

35%

41%

Very likely

Somewhat likely

Slightly likely Does not 

offer retirement plan 

(n=102)

Figure 18. How likely is it that you will start a retirement plan, such as a 401(k) 

plan or 403(b) plan, for your company in the next five years? 
Page 17 of 23

These employers were given the same description of the proposed Department of Labor 

regulation (See Appendix 1) and asked what impact such regulation would have on the 

likelihood that they would start a plan. Close to 50% claim that it would reduce their likelihood a 

great deal (36%) or to some extent (13%). Another 39% say it would have no impact. Twelve 

percent say it would increase their likelihood of starting a plan.

21%

14%

4%

9%

12%

9%

3%

4%

4%

20%

22%

25%

16%

12%

13%

14%

12%

10%

41%

36%

29%

25%

24%

22%

17%

16%

14%

You can't afford to have one

Workers don't earn enough to have an interest

in one

You don't need it to attract workers

Workers are too transient in your industry

There are too many risks and rules that I don’t 

understand

You would rather spend your money in other

ways

You don't feel it is your responsibility to offer

one

Your company has too many part-time or

contract workers

It is too difficult and time consuming to start

one

Critical Very important

Figure 19. How important are each of the following reasons for why you don't offer a 

plan... 

Does not offer retirement plan (n=102)

36%

13%

39%

10%

2%

1%

Reduce it greatly

Reduce it to some extent

Have no impact

Increase it to some extent

Increase it greatly

Don’t know/Refused Does not offer retirement plan 

(n=102)

Figure 20. What impact would this new regulation have on your likelihood to start 

a new plan? Would it... 
Page 18 of 23

When asked how easy or difficult it would be to look for a third party expert they trust to provide 

investment guidance, over 50% of those responsible for the decision of starting a plan say it 

would be very (15%) or somewhat (39%) easy, and over 40% say that it would be very (18%) or 

somewhat (27%) difficult. 

15%

39%

27%

18%

1%

Very easy

Somewhat easy

Somewhat difficult

Very difficult

Don't know/Refused Does not offer retirement plan 

(n=102)

Figure 21. How easy or difficult do you think it would be to look for a third party 

expert you trust to provide guidance on the selection and monitoring of 

investment options... 
Page 19 of 23

Nonetheless, the effort and cost involved in finding a third party expert does have a dampening 

effect on the likelihood of starting a plan. When asked how big an obstacle the effort and 

potential liability involved in finding a third party expert would be on their likelihood of offering a 

plan, 51% say that it would be a major obstacle. Forty-three percent say that the cost would be 

a major obstacle. 

As with those already offering plans, the impact of the new regulation goes beyond the decision 

of whether or not to offer a plan for those considering one. It also impacts how generous the 

plan they are considering may be, and the impact is stronger than found for those already 

offering plans. Over 60% each say that the regulation would be at least somewhat likely to cut 

back on the number of investments they would offer (66%) and increase the eligibility waiting 

time (62%) Over 40% say they would be at least somewhat less likely to offer a match (44%)

and at least somewhat likely to increase participant fees (43%). Seventy-one percent say it 

would cause them to make less money.

43%

45%

13%

Major

obstacle

Minor

obstacle

Not an

obstacle

51%

36%

14%

Major obstacle

Minor obstacle

Not an

obstacle

Figure 22. How big an obstacle would the effort and potential liability involved in finding a 

third party expert to provide guidance on the selection and monitoring of 

investment options be on your likelihood of offering a plan...

How big an obstacle would the cost of paying a third party expert to provide 

guidance on the selection and monitoring of investment options be on your 

likelihood of offering a plan... 

Does not offer retirement plan, May be difficult 

to look for a third party 

(n=49)

Does not offer retirement plan 

(n=102)

Effort of Finding a Third Party Cost of Paying a Third Party
Page 20 of 23

45%

44%

45%

22%

18%

18%

17%

8%

26%

22%

17%

33%

26%

25%

21%

11%

71%

66%

62%

55%

44%

43%

38%

19%

You would make less money due to

increased expenses

You would cut back on the number of

investment options you offer

You would increase the length of time that

new employees must wait before

becoming eligible

You would spend less time and money on

participant education

You would be less likely to offer a match

You would increase the fees you charge

participants

You would spend less on other benefits

You would reduce employee

compensation

Very likely Somewhat likely

Figure 23. If you were to start a new plan, how likely is it that the cost and 

potential liabilities required by the new regulation would have the 

following impact... 

Does not offer retirement plan (n=102)
Page 21 of 23

Respondent Demographics

Figure 24. Average age of employee population

Offers plan

(n=505)

Does not offer plan

(n=102)

30 or younger 11% 12%

31 to 35 19 34

36 to 40 24 25

41 to 45 27 11

46 or older 16 17

Don’t know/Refused 3 1

Figure 25. Percentage of work force that is part time

Offers plan

(n=505)

Does not offer plan

(n=102)

0% 31% 34%

1 to 9% 36 17

10 to 19% 10 14

20 to 29% 7 7

30 to 39% 5 11

40 to 49% 3 2

50 to 59% 3 2

60 to 69% 1 1

70 to 79% 2 4

80 to 89% 1 7

90 to 99% <0.5 2

100% -- --

Don’t know/Refused <0.5 --

Figure 26. Types of retirement plans offered

Offers plan

(n=505)

401(k) plan 84%

403(b) plan 13%

Profit sharing plan 24%

ESOP or stock bonus plan 5%

Some other type of retirement plan 15%
Page 22 of 23

Figure 27. Percentage of full-time employees that are eligible to participate in 

401(k) or 403(b) plan(s)

Offers 401(k) or 403(b)

(n=484)

Less than 10% <0.5%

10 to 19% 1

20 to 29% 1

30 to 39% <0.5

40 to 49% 2

50 to 59% 3

60 to 69% 3

70 to 79% 6

80 to 89% 9

90 to 99% 19

100% 55

Don’t know/Refused 1

Figure 28. Percentage of plan participants that are currently contributing part of 

their income to the plan(s)

Offers 401(k) or 403(b)

(n=484)

Less than 10% 5%

10 to 19% 5

20 to 29% 7

30 to 39% 7

40 to 49% 7

50 to 59% 10

60 to 69% 11

70 to 79% 14

80 to 89% 11

90 to 99% 10

100% 10

Don’t know/Refused 2
Page 23 of 23

APPENDIX 1

Description of Proposed Regulation

Now I want to describe a proposal for a new government regulation. As a plan sponsor, your 

company currently has a fiduciary responsibility to act in the best interest of your employees 

when it comes to the investment choices that are available in the company retirement plan. 

This includes using a prudent process to select a reasonable group of investment funds and 

monitoring fund performance. Companies have liability to the extent that they do not meet their 

fiduciary duties. 

Currently, many employers depend on their plan provider or advisor to provide assistance on 

the selection and monitoring of funds they offer employees. Such use of assistance is 

permissible under the fiduciary rules as long as it is prudent to do so. The Department of Labor 

is considering prohibiting both retirement plan providers and the advisors who sell retirement 

plans to employers from assisting the employers in the selection and monitoring of the funds in 

the retirement plan. Under possible new rules, the employer would have two options: (a) find an 

independent expert on investments to provide, for an additional fee, guidance on the selection 

and monitoring of investment options, or (b) do the selection and monitoring themselves, subject 

to fiduciary liability if this selection is not done in a prudent manner by someone with sufficient 

expertise. If “a” is chosen, the plan sponsor would be subject to fiduciary liability if the expert is 

not chosen in a prudent manner.
 

The role of financial advisors in the US 

retirement market 

JULY 10, 2015 
ii

Contents 

Contents ii

About this report iii

Executive summary 1

Key findings 5

I. Role of financial advisors in the defined contribution 

plan market 8

II. Role of financial advisors in helping individuals save 

for retirement 16

Appendix I. 41

Appendix II. 43

Report qualifications/assumptions and limiting conditions 45
iii

About this report 

There has been substantial public debate recently about the value of financial advice 

and the importance of financial advisors. Many people continue to believe financial 

advisors perform a critical service helping individuals and small businesses successfully 

navigate complex financial challenges. Others have sought to portray financial advisors 

as self-interested salesmen and saleswomen, who provide conflicted advice to sell high 

cost products. Against this background, Oliver Wyman was engaged to perform a 

rigorous investigation of the role of financial advisors in the US retirement market, and 

quantify differences in investing behavior and outcomes between advised and nonadvised individuals. 

In this report, Oliver Wyman focuses on understanding the impact of financial advisors 

on individuals saving for retirement and small businesses setting up and maintaining a 

workplace sponsored retirement plan. Through a combination of proprietary research 

with individuals and small businesses and analysis of unparalleled datasets from IXI (a 

division of Equifax), we found that advised individuals and small businesses are better 

off in many of the ways that matter most for superior investing outcomes. 

The benefits financial advisors provide are now at risk. On April 14, 2015, the 

Department of Labor issued its Conflict of Interest rule proposal, a replacement for the 

Definition of the Term “Fiduciary” rule proposal withdrawn in September 2011. The new 

Conflict of Interest Rule proposal, like its predecessor, would greatly expand the range 

of conditions under which an individual who provides investment services would be 

subject to ERISA fiduciary rules. The new proposal goes further in some respects. It 

explicitly defines promotional services provided to IRA account holders and small 

businesses as advice subject to ERISA fiduciary rules. While many stakeholders are 

analyzing the technical details and implications, this study considers the impact on 

individuals and small businesses that use financial advisors. We conclude that the 

newly proposed rule, while well intended, would have significant negative 

consequences for many retail investors if implemented with regard to the availability and 

cost of retirement savings help and support. 

Further details on our research sources and methodology 

1. Proprietary research, including two surveys of 4,393 retail investors and 1,216 

small businesses; 

2. Two datasets provided by IXI Services representing approximately 20% ($5.6 

Trillion in 2013) of U.S. consumer invested assets on a household level and 

approximately 30% ($9.7 Trillion in 2013) of U.S. consumer invested assets on 
iv

3. an account level, respectively. This data is broken into different types of 

investment holdings for specific age, income and wealth segments as well as 

between individuals with, and without, a financial advisor; 

4. Widely available secondary data sources. 

Analyses based on data from the Oliver Wyman Retail Investor Retirement Survey and 

IXI invested assets datasets have been controlled for factors such as income, age, and 

assets to ensure they are representative of particular segments of the US retail investor 

population. In addition, responses from the retail investor survey were further scaled 

based on the 2013 Federal Reserve Survey of Consumer Finances to produce a 

representative sample of US retail investors. Unless indicated otherwise, small 

businesses are defined as businesses with established payroll and up to 100 

employees. For additional information regarding our approach and market research, 

please refer to the methodology section of this document contained in the appendices.
v

Table of Figures 

Figure 1: US personal investable assets and retirement assets 8

Figure 2: Active retirement plan participants 9

Figure 3: Defined contribution assets by plan type (2013 YE) 10

Figure 4: Workplace retirement plan access and participation among private sector workers, W-2 

adjusted rates, by firm size (2013) 11

Figure 5: Prevalence of different advisor types among small businesses 12

Figure 6: Value of advice attributed to advisors in choosing to set up a retirement plan 13

Figure 7: Plan formation rates by size of firm and advisor status 14

Figure 8: Frequency of referral to service provider(s), by advisor 15

Figure 9: Total asset levels across relationship status, age, and income 16

Figure 10: Ratio of average asset holdings for advised and non-advised investors 17

Figure 11: Households’ primary reasons for saving 18

Figure 12: Financial advisor services valued by investors 19

Figure 13: Availability and usage of in-plan support options (for respondents with a defined 

contribution plan) 21

Figure 14: Primary reason for most recent rollover among those choosing to roll over assets 22

Figure 15: Retirement plan ownership among investors 23

Figure 16: IRA ownership and assets (2013) – Income: $0-100K, Wealth: $0-100K 24

Figure 17: Comparison of return by portfolio composition 25

Figure 18: Assets and IRA asset class mix for households with and without a financial advisor 27

Figure 19: Assets and IRA asset class mix – Age: 45-54, Income: $0-100K, Wealth: $0-100K 28

Figure 20: Assets and IRA product mix for households with and without a financial advisor 29

Figure 21: Assets and IRA product mix – Age: 45-54, Income: $0-100K, Wealth: $0-100K 30

Figure 22: Percent of assets held in cash or cash equivalents outside of workplace retirement 

plans 31

Figure 23: Cash holdings as a percent of account assets for advised and non-advised investors 32

Figure 24: Cash holdings as a percent of total account assets for investors with and without a 

financial advisor – Segment with <$100K in wealth and income 33

Figure 25: Percentage of individuals taking cash distributions by age and plan type 35

Figure 26: Worked example comparing a cash distribution with an IRA rollover- Illustrative 35

Figure 27: Rebalancing frequency outside of DC plans 37

Figure 28: Example retirement assets by year at median income, 3% contribution rate, and 6% 

growth 44
1

Executive summary 

Oliver Wyman’s study of the role of financial advisors in the US retirement system 

draws upon proprietary surveys of more than 4,300 retail investors and 1,200 small 

businesses, datasets from IXI Services (a division of Equifax), representing 

approximately 20% of U.S. consumer invested assets on a household level and 

approximately 30% of U.S. consumer invested assets on an account level, to provide a 

unique window into the value financial advisors provide to small businesses and retail 

investors for their retirement savings and investments needs. 

With fewer individuals covered by corporate pension plans and the future of social 

security uncertain1, individuals are increasingly responsible for providing for their own 

retirement. Workplace-sponsored defined contribution (DC) plans offer significant tax 

and other advantages to foster increased retirement savings. Indeed, 84% of 

individuals began saving for retirement via a workplace retirement plan.2 When 

available, they are often the primary vehicle for personal retirement savings. However, 

over 19 million people who work for businesses with fewer than 50 employees do not 

currently have access to a workplace retirement plan. 

We found that financial advisors are often a key advisor to small businesses, helping 

business owners through the process of setting up a defined contribution plan for their 

employees. When a financial advisor is involved, small businesses with 10-49 

employees are 50% more likely to set up a workplace retirement plan. In addition, micro 

businesses (1–9 employees) that work with a financial advisor are nearly twice as likely 

to set up a plan. 

Recognizing the growing importance of workplace DC plans, there have recently been a 

number of innovations that have doubtlessly improved the retirement outcomes for 

millions of people, including automatic enrollment and rebalancing features, better 

default investment options and in-plan advice. Yet, in spite of these improvements, 

many individuals continue to under-save (the average default contribution rate for plans 

with automatic enrollment is 3.4%3

 vs. the 6-10% recommended by many experts). 

Many people are uncomfortable tackling retirement savings on their own. By one 

measure, 58% of households with under $100,000 in investable assets, and 75% of 

households with over $100,000 in investable assets solicit professional financial advice4

. 

 

1

 Social Security Administration, (http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html): “Benefits are now 

expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become 

exhausted...[at that point] continuing taxes are expected to be enough to pay 76 percent of scheduled benefits.” 

2

 Oliver Wyman Retail Investor Retirement Survey 2014 

3

 Center for Retirement Research at Boston College, ‘How Does 401(K) Auto-Enrollment Relate To The Employer 

Match And Total Compensation?’, (http://crr.bc.edu/wp-content/uploads/2013/10/IB_13-14.pdf), October 2013 

4

 2013 Survey of Consumer Finances 
2

Advised individuals place the largest value on financial advisors’ support for financial 

planning, monitoring and providing trusted advice for their holistic financial needs. 

In this regard, we found that many investors prefer to seek help from financial advisors 

outside their workplace in part to receive holistic advice on their assets. When changing 

jobs, individuals often choose to roll over assets into an IRA, primarily to consolidate 

assets and avoid leaving assets with a former employer. Just 29% of individuals own 

401(k) plans exclusively, while nearly two-thirds hold assets outside their workplace in 

combination with an IRA or alone in one or more IRAs. 

How well are financial advisors doing their job? On average, we found that individuals 

with a financial advisor have more wealth than non-advised individuals across all age 

and income levels studied. For example, we found that advised individuals aged 35-54 

years making less than $100K per year had 51% more assets than similar non-advised 

investors. These are typical middle-class households in the middle of their accumulation 

years. Moreover, advised individuals are better investors across many key dimensions 

commonly associated with long term investing success. Specifically, we found that 

compared with individuals without a financial advisor, advised individuals 

 Own more diversified investment portfolios 

 Stay invested in the market by holding less cash and cash equivalents 

 Take fewer premature cash distributions; and 

 Re-balance their portfolios with greater frequency to stay in line with their 

investment objectives and risk tolerance. 

The benefits financial advisors provide to their clients are now at risk. On April 14, 2015, 

the Department of Labor issued its Conflict of Interest rule proposal, a replacement for 

the Definition of the Term “Fiduciary” rule proposal withdrawn in September 2011. In 

our 20115

 study reviewing the impact of the previously proposed rule, we concluded that 

the Department of Labor’s proposed rule change was motivated by a laudable objective: 

to ensure a high standard of care for retirement plan participants and account holders 

with regard to the receipt of services and investment guidance, amid an increasingly 

complex financial marketplace. However, we found the proposed rule proposal was 

likely to have serious negative and unintended effects on the very individuals the 

change was supposed to help. 

Many stakeholders are now analyzing the technical details of the newly proposed rule, 

and there is growing concern that the proposal would again result in unintended 

 

5

 Oliver Wyman, ‘Assessment of the Impact of the Department of Labor’s Proposed “Fiduciary” Definition Rule on IRA 

Consumers’, 2011 
3

consequences, including limiting the ability of financial services firms and individual 

financial advisors to offer services to individual IRA holders and small businesses, as 

well as increasing investor costs due to new expenses associated with implementing 

the rule and transitioning many clients to a higher cost advisory model. 

With regard to the impact on individuals, regrettably we reach the same overall 

conclusion as in the prior study. The proposed rule change is likely to have significant 

consequences that will adversely impact individual investors saving for retirement. For 

example, because the rule as proposed will take away the assistance small businesses 

most value, fewer new plans will be established and more plans will likely close6. This 

would directly impact the 19 MM individuals who work for small businesses with fewer 

than 50 employees, who do not currently have access to a workplace retirement plan 

and reduce the likelihood of their gaining access to a retirement plan in the future. 

In the case of IRAs, if the rule is implemented as proposed7

 Millions of existing small balance IRA owners are likely to lose access to the 

financial advisor of their choice or any financial advisor at all 

 The majority of others will face higher costs when providers shift brokerage 

accounts to advisory accounts 

 Individuals without the help and support of financial advisors are less likely to 

open an IRA, leading to increased cash-outs when changing jobs and lower 

savings rates compared with advised individuals8

 Unadvised individuals are likely to carry excess portfolio risk due to less 

diversification and less frequent re-balancing. 

* * * 

 

6

 The new rule proposal explicitly excludes small businesses with fewer than 100 employees with employee-directed 

plans from the prohibited transaction exemption, otherwise made available to larger plans. This will force financial 

advisors to limit the services they currently provide to such small businesses in connection with establishing and 

maintaining retirement plans.

7

 See Oliver Wyman, ‘Assessment of the Impact of the Department of Labor’s Proposed “Fiduciary” Definition Rule on 

IRA Consumers’, 2011 

8

 Prior guidance from the DOL “held that recommendations to a plan participant to take an otherwise permissible 

distribution, even combined with a recommendation as to how to invest distributed funds, is not fiduciary investment 

advice.” K&L Gates, DOL Re-Proposes Rule to make Brokers, Others, ERISA Fiduciaries (Apr. 27, 2015), 

http://www.klgates.com/dol-re-proposes-rule-to-make-brokers-others-erisa-fiduciaries-04-27-2015. 
4

Retirement is too important to get wrong. We encourage key stakeholders from the 

financial services industry and regulators to join together to find workable solutions that 

preserve individuals’ access to help and support from a financial advisor of their choice 

as well as the business model and fee structure that best meet their needs. 

 
5

Key findings 

Workplace sponsored defined contribution plans are critical retirement savings 

vehicles 

 84% of individuals began saving for retirement via a workplace retirement plan9

 Workplace sponsored defined contribution plans represent the primary or only 

retirement vehicle for 67% of individuals who save for retirement with a taxadvantaged retirement plan10

Financial advisors help individuals that work for small businesses gain access to 

workplace retirement plans 

 19 million individuals who work for small businesses with fewer than 

50 employees do not currently have access to a workplace sponsored retirement 

plan 

 Small businesses that work with a financial advisor are 50% more likely to set up 

a retirement plan (and micro business with 1-9 employees are almost twice as 

likely) 

The majority of retail investors seek financial advice – many want personalized 

services from a professional financial advisor outside their workplace for 

financial planning and holistic advice and support on all their investment 

holdings 

 58% of households with under $100,000 in investable assets, and 75% of those 

with over $100,000 in investable assets solicit professional financial advice 

 Individuals most value financial advisors for support with financial planning, 

monitoring and trusted advice for their holistic financial needs 

 Many individuals currently have access to help and advice on their plan assets 

through workplace retirement plans; those that use it save 43% more on average. 

However, fewer than half of workplace retirement plan participants currently use 

in-plan advice features 

 

9

 Oliver Wyman Retail Investor Retirement Survey 2014 

10 Oliver Wyman Retail Investor Retirement Survey 2014 
6

 Two-thirds of investors have retirement savings outside of employer-sponsored 

retirement plans, and many seek advice and support from a professional advisor 

outside their workplace for all of their investment holdings 

Advised investors have more assets than those without a financial advisor 

 We found that advised individuals have a minimum of 25% more assets than 

non-advised individuals 

 In the case of individuals aged 35-54 years with $100,000 or less in annual 

income, advised individuals have an average of 51% more assets than nonadvised individuals 

Individuals with a financial advisor are better long term investors 

 Advised investors have more diversified portfolios -- own twice as many asset 

classes, have more balanced portfolio asset allocations and use more packaged 

products for equity exposure compared with non-advised investors 

 Advised investors stay more invested in the market – Advised individuals hold 

less cash in their investment accounts (36%-57% less than non-advised 

individuals for similar age and wealth cohorts) 

 Advised investors re-balance more frequently, and are 42% more likely to rebalance their portfolios at least every two years 

The Department of Labor’s proposed Conflict of Interest rule would likely reduce 

retirement savings 

 As proposed, financial advisors would be forced to stop providing workplace 

retirement plan set-up and support services to small businesses, due to the lack 

of an exception that would allow providers to market to self-directed plans with 

fewer than 100 participants, which will likely result in many small businesses 

closing existing plans or not establishing new plans due to the additional 

administrative burden 

 Individuals with small balance accounts that are below standard advisory account 

minimums are likely to lose access to retirement help and support with selecting 

appropriate products as a result of providers shifting accounts from brokerage to 

fee-based advisory accounts. In our prior study, we estimated that 7 MM current 

IRAs would not qualify for an advisory account due to low balances11

 

11 Oliver Wyman, ‘Assessment of the Impact of the Department of Labor’s Proposed “Fiduciary” Definition Rule on 

IRA Consumers’, 2011 
7

 Almost all retail investors face increased costs (73% to 196% on average) from 

providers shifting clients to a fee-based advisory model. In our 2011 study, we 

found nearly 90% of the 23 MM IRAs analyzed were held in brokerage accounts 

12

 When changing jobs, individuals will be less likely to open an IRA to manage 

their plan savings, leading to lower savings rates and increased cash-outs13. In 

our 2011 study, we found that as many as 360,000 fewer IRAs would be opened 

every year 

 Unadvised individuals will likely carry excess portfolio risk due to less 

diversification and less frequent re-balancing compared with advised individuals 

 

 

12 Oliver Wyman, ‘Assessment of the Impact of the Department of Labor’s Proposed “Fiduciary” Definition Rule on 

IRA Consumers’, 2011 

13 Prior guidance from the DOL “held that recommendations to a plan participant to take an otherwise permissible 

distribution, even combined with a recommendation as to how to invest distributed funds, is not fiduciary investment 

advice.” K&L Gates, DOL Re-Proposes Rule to make Brokers, Others, ERISA Fiduciaries (Apr. 27, 2015), 

http://www.klgates.com/dol-re-proposes-rule-to-make-brokers-others-erisa-fiduciaries-04-27-2015. 
8

I. Role of financial advisors in the defined contribution 

plan market 

Two-thirds of retirement assets are held in workplace retirement plans 

At an estimated $26.9 TN, US retirement savings represent over half of total personal 

investable assets. Of this amount, workplace sponsored retirement plans such as 

defined benefit (DB) and defined contribution (DC) plans constitute approximately twothirds of retirement assets, while the remaining one-third is held in IRAs and annuities 

(Figure 1). 

Figure 1: US personal investable assets and retirement assets14

 

Individuals are increasingly responsible for saving for their own retirement 

Nearly five times as many individuals are active participants in DC plans as compared 

to DB plans as of 2012 (75.4 million vs. 15.7 million). 15,16 Moreover, as Figure 2 shows, 

 

14 Federal Flow of Funds L.116, B.100: Includes financial assets and defined benefit assets; excludes agency and 

GSE backed securities, other loans and advances, mortgages, consumer credit (student loans), pension 

entitlements and equity in non-corporate business 

Federal Flow of Funds L.116: Retirement assets include household retirement assets 

15 Private Pension Plan Bulletin Historical Tables and Graphs, U.S. Department of Labor, Employee Benefits Security 

Administration, December 2014 

16 Note: Aggregation methodologies were changed in 2004 and 2009, generating anomalies for those years 

U.S. retirement assets by plan type

2014 Q2, US$ TN

U.S. personal investable assets

2014 Q2, US$ TN

13.4

3.5

7.7

3.1

0

5

10

15

20

25

30

35

40

45

50

$ (TN)

Defined benefit plans

Corporate equities

Deposits

Credit market instruments

Mutual fund shares

Other

2014 Q2

48.7

11.1

9.9

7.2

DB plans

DC plans

IRAs

Annuities

2014 Q2

26.9

11.1

6.2

2.4

Approximately 55% 

of $48.7 TN
9

the long-term trend continues to favor DC plans. As a result, the level of retirement 

assets available to individuals is now dependent upon a number of factors both within 

and outside their control, including employment status, personal contribution rate, the 

availability of employer matching contributions, investments selected and market 

performance. 

Figure 2: Active retirement plan participants (see footnotes 8,9) 

Within the broad category of defined contribution plans, there are a number of different 

vehicles such as 401(k), 403(b), 401(a), 457 and profit sharing plans with different 

features to suit the needs of a wide range of business plan sponsors and individuals. As 

illustrated in Figure 3, the most popular vehicle by share of assets is the 401(k). 

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

Defined contribution

Defined benefit

2010

Year

Participants (MM)

1975 1980 1985 1990 1995 2000 2005
10

Figure 3: Defined contribution assets by plan type (2013 YE)17

 

Based on our retail investor survey, we found that workplace retirement plans are vital 

for individuals to start saving for retirement – 84% of respondents began saving for 

retirement via a workplace retirement plan. 

More than 80% of retail investors surveyed began saving for retirement through 

workplace retirement plans 

 

17 Pensions & Investments Research Center: (http://researchcenter.pionline.com/rankings/dc-moneymanager/plantype/2014?limit=213)

11%

2%

15%

401(k)

1%

Profit sharing plan

403(b)

65%

457

6%

Other

401(a)
11

As of 2013, approximately 75 million, or 70% of the 107.0 million full-time and part-time 

US private sector workers, had access to a workplace retirement plan, and 60 million, or 

56% of 107.0 million, chose to participate. Of the 32 million private sector workers 

without access, nearly two-thirds, or 19 million, are employed by small businesses with 

fewer than 50 employees (Figure 4).18

Figure 4: Workplace retirement plan access and participation among private sector 

workers, W-2 adjusted rates, by firm size (2013)

 

 

18The number of employees by firm size is based on Investment Company Institute tabulations of the US Census’ 

Current Population survey (www.ici.org/info/per20-06_data.xls). We use W-2 adjusted self-reported access and 

participation rates, as compiled by Dushi, Iams, and Lichtenstein (‘Assessment of Retirement Plan Coverage by 

Firm Size Using W-2 Tax Records’, Social Security Administration, 2011, 

http://www.ssa.gov/policy/docs/ssb/v71n2/v71n2p53.pdf). This study accounts for under- and over-reporting of plan 

participation by using individual tax filings to identify tax-deferred contributions, and avoids the issues of doublecounting of individuals active in more than one plan and non-active participants in plans with short-form filings 

associated with available DOL data. 

10%

16%

16%

0% 40% 60% 100% 20% 80%

55%

100 or more

employees 16%

35%

Percentage of employees

30%

Fewer than 50

employees

54% 50 to 99

employees

68%

No plan available Plan available but don’t participate Plan available and participate

Number of 

employees 

(MM)

Number of 

employees with 

out access to a 

plan (MM)

34.1 19.1

9.1 2.8

63.8 10.2

TOTAL 107.0 32.0
12

Our research provides interesting insights into reasons for the lower availability rates of 

workplace retirement plans among small businesses. When asked to select their 

reasons for not offering a plan, we found that cost (47% of small business survey 

respondents), prioritization of other employee benefits (24%) and significant use of 

temporary labor (20%) were the most commonly cited barriers to DC plan formation. 

Barriers to small business plan formation include cost, prioritization of other 

benefits and temporary labor 

In contrast to large businesses that often employ investment consultants to assist 

internal governance committees with managing a DC plan, small businesses typically 

rely on a circle of trusted advisors. We found small businesses most commonly seek 

advice from a range of providers including accountants, attorneys, retail banks, 

insurance firms, financial advisors, and outsourced service providers. Figure 5 shows 

the prevalence of these advisors among small businesses. 

Figure 5: Prevalence of different advisor types among small businesses19

 

 

19 Oliver Wyman Small Business Retirement Survey 2014, Respondents were asked to select all of the advisors that 

they consult in the management of their business, hence the sum is greater than 100%. Participants were asked to 

select from the following options: outside accountant (CPA), outsourced service, financial advisor (e.g. Merrill Lynch, 

Morgan Stanley, Independent financial professional), asset management firms (e.g. Vanguard, T. Rowe Price), 

attorney, retail bank (other than private banks and brokerages within banks, e.g. JPMorgan Chase, Bank of America, 

HSBC, Citibank), investment consultants (e.g. Aon Hewitt, Mercer), insurance firms (e.g. Aetna, Nationwide), and 

none (I am solely responsible for all business decisions). 

0

10%

70%

60%

50%

40%

30%

20%

80%

75%

63%

47%

Insurance 

firms

Outside Attorney Retail bank

accountant

Advisor

41%

Percent of businesses

Investment 

consultants

45%

Asset 

management 

firms

Outsourced 

service 

providers

Financial 

advisor

6%

9%

38%
13

Financial advisors help small businesses set up workplace retirement plans 

Small businesses use advisors for a range of services for their DC plans, which vary 

from plan to plan and from advisor to advisor. Examples of typical services include: 

 Development of an investment policy statement covering aspects such as plan 

objectives, investment philosophy and risk appetite 

 Plan design consulting (e.g. choice of funds, use of auto-enrollment, QDIA, autoescalation, and employer matching program), and selection of a record-keeper 

 Participant education and support (e.g. general help and support around plan 

participation, contribution rates and investment options, investment planning and 

IRA rollovers). 

Small businesses perceive financial advisors to be most helpful with respect to 

guidance on retirement plan setup and administration. We asked survey respondents to 

allocate 100 points among their different advisors based upon the value they assigned 

to their help and support in choosing to set up a workplace retirement plan. As shown in 

Figure 6, this statement holds true across all types of advisors and business sizes with 

small businesses allocating between 30% and 36% of value to financial advisors. 

Figure 6: Value of advice attributed to advisors in choosing to set up a retirement plan20

 

20 Oliver Wyman Small Business Retirement Survey 2014, Respondents were asked to allocate 100 points across all 

their advisors in terms of their contribution to the business setting up a workplace retirement plan; presented values 

are calculated as the average score per advisor type. 

5%

6%

7%

8%

21%

12%

36%

6% 12%

5%

7%

8%

15%

4%

16%

33%

13%

5%

10%

8% 14%

5%

15%

30%

Asset management firms

Outside accountant Investment consultants

Financial advisor Insurance firms

Retail bank

Outsourced service providers

Attorney

1–9 employees 10–49 employees 50–100 employees
14

Small businesses with financial advisors are 50% more likely to set up a 

retirement plan overall and micro businesses with financial advisors are nearly 

twice as likely to set up a plan 

We found that 41% of small businesses with 100 or fewer employees work with a 

financial advisor, and that these firms are significantly more likely to set up a retirement 

plan. Specifically, businesses with 1–9 employees with a financial advisor are almost 

twice as likely to set up a retirement plan as are businesses without financial advisors 

(51% vs. 26%). Businesses with 10–49 employees with a financial advisor are 48% 

more likely (77% vs. 52%) and businesses between 50 and 100 employees are 19% 

more likely (89% vs. 75%) to set up a plan. These differences are illustrated in Figure 7 

below. Additionally, micro businesses (1-9 employees) with financial advisors are 18% 

more likely to offer employer matching with a financial advisor (85%) than without (72%). 

Figure 7: Plan formation rates by size of firm and advisor status21

 

21 Oliver Wyman Small Business Retirement Survey 2014 

51%

77%

89%

69%

26%

52%

75%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1-9 10-49 50-100 Overall

Percent of businesses offering retirement plan

Number of employees

FA Non-FA

36% 63% 80% 56% Overall 

plan rate
15

Financial advisors play a key role in referring small businesses to service 

providers, such as plan administrators/ recordkeepers and fiduciary service 

providers 

As Figure 8 shows, a majority of small businesses, ranging from 55%–62% depending 

on size, found their workplace retirement plan provider via a referral from a trusted 

advisor. Financial advisors and accountants were the most common referral sources on 

a relative basis, with financial advisors cited between 33–45% of the time22, depending 

on company size. 

Figure 8: Frequency of referral to service provider(s), by advisor23

 

22 Raw results are normalized to account for relative frequencies of different advisors. For example, in the 1-9 

business segment, financial advisors provide 41% of all referrals on an unadjusted basis. We weighted this figure 

by the prevalence of financial advisor relationships among these businesses (i.e. 38%) and re-scaled all advisor 

scores to total 100%. This approach yields relative referral rates by removing skews associated with advisor 

prevalence. 

23 Oliver Wyman Small Business Retirement Survey 2014 

10%

22%

6%

62%

9% 16%

21%

55%

12% 10%

19%

59%

Other

Independent research

Referral from similar business

Referral from trusted advisor

32%

19%

20%

23%

11% 6%

18%

5%

0% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

50-100

42%

10%

4%

10-49

38%

Percentage of referrals

Firm size

5%

1-9

52%

5% 0%

Investment Consultant

Asset Manager

Other

Financial advisor

Outside Accountant

Attorney
16

II. Role of financial advisors in helping individuals save 

for retirement 

In our Retail Investor Retirement Survey, advised investors had a minimum of 

25% more assets than non-advised individuals, depending on age and income 

levels

A key finding of our research is that individuals with a financial advisor have more 

assets than non-advised individuals across age, income, and wealth segments, as 

shown in Figure 9. 

Figure 9: Total asset levels across relationship status, age, and income24

This finding holds true even when excluding survey respondents who anticipate 

receiving retirement income from either an inheritance or trust fund. 

 

24 Oliver Wyman Retail Investor Retirement Survey 2014 

517

297

204

81

243

196

148

43

0

50

100

150

200

250

300

350

400

450

500

550

Age Group

18-34 65+ 35-54 55-64

Average household assets ($K)

With FA Without FA

<=$100K in annual income 

1,345

820

486

203

892

577

388

115

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

Age Group

18-34 65+ 35-54 55-64

Average household assets ($K)

With FA Without FA

>$100K and <=$250K in annual income 

+86% +38% +51% +113% +76% +25% +42% +51%

% Increased assets of advised households

AB C D A B C D

% Increased assets of advised households

A

B

C

D

A

B

C

D
17

Our analysis of the IXI data, representing ~20% of U.S consumer invested assets, 

further substantiates and expands on this finding. We found that individuals with a 

financial advisor have larger account balances (including IRA assets) across age, 

income and wealth levels. Specifically, in 2013, 98% of accounts examined for advised 

individuals reflected ≥10% more investment assets compared to those of non-advised 

individuals controlling for age, wealth, and income. Moreover, 90% of accounts 

reflected ≥25% more investment assets among advised accounts. 

This finding holds true across multiple time periods for specific wealth and income 

cohorts. Figure 10 illustrates this point for all segments as well as the segment with 

annual income and wealth below $100,000. 

Figure 10: Ratio of average asset holdings for advised and non-advised investors25

As described in detail below, our research finds that individuals with a financial advisor 

are better investors across many dimensions commonly associated with long term 

investing success. 

Advised individuals are better long term investors 

Key elements of a robust long-term investing program typically include: 

A. Developing and maintaining a personalized financial plan 

 

25 IXI account-level time series dataset of U.S. Consumer Invested Assets; Oliver Wyman Analysis 

Recession 

and 

immediate 

aftermath

Recession 

and 

immediate 

aftermath

Total AUM 

measured in 2013:

$9.7 TR

0%

50%

100%

150%

200%

250%

2006 2007 2008 2009 2010 2011 2012 2013

Advised / non-advised account assets

Year

Segment: <$100K wealth, income Overall

Total IRA holdings 

measured in 2013:

$3.1 TR

0%

50%

100%

150%

200%

250%

2006 2007 2008 2009 2010 2011 2012 2013

Advised / non-advised IRA assets

Year

Segment: <$100K wealth, income Overall

Total assets IRA assets
18

B. Commitment to regular saving and investment 

C. Constructing and maintaining a well-diversified portfolio of appropriate 

investment products 

D. Staying invested in the market 

E. Periodically re-balancing investment holdings to restore desired asset allocation 

and risk levels 

We found that financial advisors play an important role in helping individuals adopt each 

of these investing practices commonly associated with better investing outcomes. 

A. Developing and maintaining a personalized financial plan 

Individual investors’ savings goals include liquidity, education and retirement, 

but their primary focus varies with life stage 

Individuals have a range of different investment goals. As indicated in Figure 11, 

investors’ most common investing objectives are ensuring sufficient liquidity; saving for 

retirement; and funding education or a large purchase, such as a home. 

Figure 11: Households’ primary reasons for saving26 

The primary reasons for saving often vary significantly with life stage, however. In a 

recent survey, the Investment Company Institute (ICI) found that Households with a 

head of household younger than 35 primarily save for liquidity purposes (39%), whereas 

 

26 Investment Company Institute, The Success of the U.S. Retirement System, Figure 1 

(http://www.ici.org/pdf/ppr_12_success_retirement.pdf) 

4%

8%

23%

35%

Other

Cannot or do not save

Education, home, or large purchase

Liquidity (cash on hand, emergencies, unexpected needs)

Retirement

30%
19

those in which the head of household is between 50 and 64 years old, are focused on 

retirement savings (48%). 

58-75% of non-retired households seek professional financial advice, depending 

on wealth, and most value personalized financial planning, investment monitoring 

and holistic advice 

Many Americans are uncomfortable with investing on their own, and consult with a 

financial advisor to assist with achieving their goals. By one measure, 58% of 

households with under $100,000 in investable assets, and 75% of non-retired 

households with over $100,000 in investable assets, solicit professional financial 

advice27. 

In our research, individuals most value the following services from their financial 

advisor: personalized financial planning, ongoing monitoring of investments and trusted 

advice for all their personal financial affairs (Figure 12). 

Figure 12: Financial advisor services valued by investors28 

 

 

27 2013 Survey of Consumer Finances 

28 Oliver Wyman Retail Investor Retirement Survey 2014 

27

22

21

14

12

3

0 10 20 30

Average score out of 100

Individuals mostly 

value personalized 

and holistic financial 

advice

Financial planning to 

achieve your personal 

financial goals

Ongoing monitoring of your 

personal investments

Trusted advice for all of your 

personal financial affairs

Investment expertise for 

making individual purchases 

or sales of securities

Access to high-quality 

financial products

Trusted advice for helping 

manage your small business

Service 
20

Against investor demand for holistic advice, we observe different help and support 

models available within workplace retirement plans and outside plans. In-plan help and 

advice is often well suited for individuals whose workplace plan represents their primary 

investment savings, while outside plan advice is a better fit for individuals with multiple 

investment accounts seeking advice and guidance on all investment holdings. 

The majority of DC plans now offer a variety of educational materials, tools and advice 

options to enable individuals to make informed investment decisions. Educational 

materials and automated financial tools are the most widely available as well as the 

most used features as shown in Figure 13. In our research, in-plan advice had a 

positive impact on participant behavior for those who used it. We found participants who 

made use of at least one type of support contributed an average of 2.0 percentage 

points29 more of their salary to a DC plan (6.7% vs. 4.7%) – an increase of 43%. When 

done in younger working years, this difference could mean a substantial difference in 

asset accumulation at retirement. 

Participants who use in-plan advice features save 43% more, on average 

We also found that fewer than half of plan participants currently use in-plan advice 

features. While 82% of individuals have access to an investment advisor on the phone 

and 64% have the ability to meet with a financial advisor in-person, utilization of these 

services is low. Of the individuals that participated in our survey, just 25% consulted 

with an advisor on the phone and 25% met with a financial advisor in-person. 

 

29 Oliver Wyman Retail Investor Retirement Survey 2014 
21

Figure 13: Availability and usage of in-plan support options (for respondents with a 

defined contribution plan) 

In-plan advice models are often more limited in scope compared with external 

advisory offerings

A number of financial firms operating in a brokerage model have forged partnerships 

with in-plan advice providers such as Financial Engines, Morningstar and Wilshire 

Associates, instead of establishing a relationship with their financial advisory 

businesses, to provide basic help and advice to plan participants on current plan 

holdings and investment options.30,31,32 Due to legal constraints, this form of advice is 

generally limited to plan assets, which does not meet the full needs of individuals that 

hold assets in multiple DC plans and other brokerage and/or advisory accounts. 

 

30 Financial Engines, 2012 Annual Report (http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9MTc3OTk4fENoaWxkSUQ9LTF8VHlwZT0z&t=1) 

31 Morningstar, 2012 Annual Report, (http://corporate.morningstar.com/us/documents/PR/2012-Morningstar-AnnualReport.pdf) 

32 Wilshire Associates, Retirement Managed Accounts, (http://www.wilshire.com/funds-management/oursolutions/retirement-managed-accounts) 

91%

82%

64%

93%

59%

25% 25%

61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Automated financial tools,

available online

Investment advisor,

available on the phone

Investment advisor,

available in-person

Educational materials

Availability of option

Support Option

Available Used
22

Individuals elect IRA rollovers for many reasons including asset consolidation, 

increased investment options and access to a different financial services 

provider 

Many individuals prefer to access financial help and support outside of their DC plans 

and choose to rollover their DC plan assets to an IRA when changing employers. 

According to a 2014 ICI report, “The Role of IRAs in US Household Saving for 

Retirement”, more than 41 million US households hold an IRA of some type. In addition, 

as shown in Figure 14, ICI further found that nearly half of all rollover decisions were 

motivated by a desire to consolidate assets and avoid leaving assets with the former 

employer. 

Figure 14: Primary reason for most recent rollover among those choosing to roll over 

assets33

Only 29% of workplace plan participants use DC plans exclusively for retirement 

savings; nearly two-thirds use a combination of DC plans and IRAs or IRAs only34

As demonstrated by the distribution of retirement plans within our sample of investors 

(Figure 15), 44% of individuals utilize both DC plans and IRAs in order to take 

advantage of the benefits of each type of account. As noted previously, IRAs offer 

 

33 Investment Company Institute, The Role of IRAs in U.S. Households’ Saving for Retirement, 2014 

(http://www.ici.org/pdf/per21-01.pdf) 

Other includes ‘Were told by a financial advisor to roll over assets’, ‘Wanted to keep assets with the same provider’, 

‘Thought it was easier to roll over assets to an IRA’, and ‘Wanted the same investments as former employer’s plan’. 

34 Oliver Wyman Retail Investor Retirement Survey 2014 

19%

7%

9%

24%

Other

Wanted to use a different financial services provider

17%

Wanted to preserve tax treatment of the savings

Wanted more investment options

24%

Did not want to leave assets with the former employer

Wanted to consolidate assets
23

access to holistic help and support, a wider selection or financial products, and greater 

control. In comparison, DC plans have a higher limit for tax-deferred annual savings 

(e.g. $18,000 for 401(k)s vs. $5,500 for IRAs, excluding catch up contributions) and 

employer matching contributions (where available), making them attractive vehicles for 

new retirement contributions. 

Figure 15: Retirement plan ownership among investors35

B. Commitment to regular saving and investment 

Individuals with a financial advisor are more likely to own an IRA, have greater 

IRA assets and save more of their income in 401(k) plans 

Individuals with a financial advisor are more likely to have an IRA. In 2013, 99.8% of 

households examined belonged to an age / income / wealth segment in which advised 

households were ≥10% more likely to have an IRA compared to non-advised 

households (and 87% of households belonged to segments in which advised 

households were ≥25% more likely to have an IRA). 

Additionally, 94% of households examined belonged to an age / income / wealth 

segment in which advised households held ≥25% more IRA assets compared to nonadvised households. Our findings for IRA ownership and asset levels hold true across 

income, age, and wealth segments. For example, Figure 16 shows IRA ownership and 

 

35 Oliver Wyman Retail Investor Retirement Survey 2014, includes only those with retirement or investment accounts 

5% 3%

29%

44%

None

IRA only

18%

DC only

Both

Other
24

assets for advised and non-advised households within different age groups for the 

cohort with $0-100K in annual income and wealth, respectively. In this cohort, 

increased IRA ownership ranges from 41% higher for households with accounts 

registered to individuals 65 and older to 68% higher for those in the 35-44 age group. 

IRA asset levels for the $0-100K annual income and wealth cohort ranges from 39% 

higher for households with accounts registered to individuals aged 18-34 to 87% more 

for those aged 55-64. 

Figure 16: IRA ownership and assets (2013) – Income: $0-100K, Wealth: $0-100K 36

 

 

These results are consistent with a recent Natixis survey, where individuals with a 

financial advisor were found to hold more assets in their 401(k) across age and income 

segments, compared with non-advised investors. The Natixis survey also found that 

individuals with a financial advisor contributed an average of 1-2% more of their pre-tax 

salary to their 401(k) across age and income segments.37

 

36 IXI household-level dataset of U.S. Consumer Invested Assets; Oliver Wyman Analysis 

37 Saving is Not Enough: Liabilities, shortfalls and the need for active participation in 401(k) plans; Natixis Global 

Asset Management, August 2014 – online survey of 899 participants (427 with FA, 472 without FA) across age and 

groups 

$50

$40

$30

$20

$10

$0

Average Household IRA Holdings ($K)

Age Group

65+

27

49

55-64

24

44

45-54

20

33

35-44

15

24

18-34

9

13

With FA Without FA

47%

59%

56%

51%

41%

33%

38%

34%

31%

25%

60%

50%

40%

30%

20%

10%

0%

% of households with IRA

Age Group

18-34 35-44 45-54 55-64 65+

+39% +55% +66% +87% +83% +64% +68% +65% +56% +41%

% Increased assets of advised households % Increased IRA ownership of advised households

A

B

C

D

E

AB CD E

A

B

C

D

E

AB CD E
25

C. Constructing and maintaining a well-diversified portfolio of appropriate 

investment products 

The benefits of portfolio diversification are well documented. Figure 17 shows how a 

diversified balanced index outperformed the S&P 500 by an average of 1.7 percentage 

points annually (11.2% vs. 9.5%) over a long time period (1965-2012) spanning multiple 

business cycles. 

Figure 17: Comparison of return by portfolio composition38

Individuals with a financial advisor exhibit more diversified investment portfolios 

compared to non-advised individuals across a number of dimensions 

Portfolio diversification refers to the practice of mitigating investment risk by investing in 

a variety of un-correlated products. There are a number of ways to assess portfolio 

diversification. We have attempted to assess relative portfolio diversification between 

advised and non-advised individuals with respect to several basic measures. 

1. The number of asset classes within the portfolio – The correlation between 

investments in different asset classes is typically lower than that between 

investments in the same asset class. Thus, the more distinct asset classes in an 

investor’s portfolio the more diversified the portfolio, on average. 

2. The ratio of equities to fixed income – This is a basic measure of portfolio risk 

with a higher concentration in equities typically signaling a riskier portfolio. A 

“60/40” portfolio consisting of 60% equity and 40% fixed income is widely 

recognized as a balanced portfolio that provides capital appreciation and income 

while limiting volatility and potential loss of capital. A substantial overweighting of 

 

38 DFA Returns 2.0 

Portfolio Mix 1965-1981 1982-1999 2000-9/2012 Total Period

S&P 500 Index +6.3% +18.5% +1.7% +9.5%

Cash +6.7% +6.2% +2.2% +5.3%

Diversified 

Balanced Index +9.9% +15.1% +7.4% +11.2%
26

equities or fixed income could indicate a misalignment between intended and 

actual risk-taking. 

3. The use of packaged products vs. individual securities – Packaged products 

like mutual funds are typically composed of many securities, and have lower nonsystematic risk (i.e. individual company risk exposure) than an equivalent 

investment in a smaller number of individual securities. As a result, investment 

strategies employing packaged products tend to be more diversified than 

strategies that rely only on individual securities. 

Based on each of these three measures of diversification, we found individuals with a 

financial advisor have more diversified portfolios than individuals without a financial 

advisor. 

1. Number of asset classes within the portfolio – Individuals with a financial advisor 

own twice as many asset classes as non-advised individuals

In a 2010 study, Charles Schwab found that financial advisors help clients achieve 

greater investment diversification, and that the average investor receiving professional 

advice invests in over four more asset classes than an investor who does not (e.g. more 

than 8 versus 3.7)39. 

2. Ratio of equities to fixed income -- Advised individuals have more balanced 

portfolios than non-advised investors, and hold, on average, more than 20% less 

equities and nearly twice as much fixed income 

Individuals with a financial advisor have more balanced portfolios with less equity 

exposure and higher fixed income allocations than non-advised individuals. As shown 

in Figure 18, advised individuals held 17 percentage points (more than 20%) less equity 

than non-advised individuals, as well as nearly twice as much fixed income exposure 

(25% vs. 13% as a percent of the total portfolio). IRA holdings show a similar, finding 

where the difference in equity exposure is 8 percentage points (or 10%) less of an 

allocation for advised individuals vs. those without a financial advisor. By contrast, fixed 

income exposure is 38% higher for advised vs. non-advised individuals. 

 

39 Charles Schwab, ‘Advice Matters: New Charles Schwab Study Demonstrates Positive Impact of Professional 

Advice on 401(k) Investor Behavior’, (http://pressroom.aboutschwab.com/press-release/schwab-corporateretirement-services-news/advice-matters-new-charles-schwab-study-demo) 
27

Figure 18: Assets and IRA asset class mix for households with and without a financial 

advisor40

The finding of more balanced portfolios among advised individuals persists when 

controlling for age, income, and wealth, as 72% of households belong to a segment in 

which advised households hold more than 20% less of their assets in equities41. By 

way of further example, Figure 19 shows the same analysis of the segment aged 45-54 

with less than $100,000 in annual income and total wealth, respectively. In this case, 

the difference in equity exposure is 76% vs. 85% of total assets for advised vs. nonadvised individuals. Additionally, advised individuals hold more than twice as much fixed 

income as a percent of total assets, and 1.5 times as much in IRAs. 

 

40 IXI household-level dataset of U.S. Consumer Invested Assets; Oliver Wyman Analysis; percentages may not add 

up to 100% due to rounding 

41 Measured as a percentage of the total portfolio assets 

13%

25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Without FA

12%

63%

Asset Class as % of AUM

With FA

8%

80%

Equities Fixed income Other

13%

18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asset Class as % of IRA

71%

Without FA

8%

79%

With FA

11%

6 : 1 3 : 1 6 : 1 4 : 1

Equity : Fixed income ratio Equity : Fixed income ratio
28

Figure 19: Assets and IRA asset class mix – Age: 45-54, Income: $0-100K, Wealth: $0-

100K42

3. Use of packaged products vs. individual securities – Non-advised individuals 

hold 70% more of their equities exposure in individual securities compared to advised 

individuals

Finally, individuals with a financial advisor hold more of their equity exposure in 

packaged products compared to individuals without a financial advisor. Figure 20 shows 

individuals with a financial advisor hold approximately equal proportions of their equity 

exposure in packaged products and individual securities. By contrast, investors without 

a financial advisor hold 1.7 times as much of their equity exposure in individual 

securities, on average. The mix of IRA holdings again reflects this trend. 

 

42 IXI household-level dataset of U.S. Consumer Invested Assets; Oliver Wyman Analysis 

6%

14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

With FA

85%

9%

76%

Without FA

Asset Class as % of AUM

10%

8% 12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asset Class as % of IRA

Without FA With FA

83%

9%

81%

7%

13 : 1 6 : 1 10 : 1 7 : 1

Equity : Fixed income ratio Equity : Fixed income ratio

Equities Fixed income Other
29

Figure 20: Assets and IRA product mix for households with and without a financial 

advisor43

These trends hold true when controlling for age, income, and wealth. Figure 21 shows 

the findings for one particular segment (i.e. the cohort aged 45-54 with less than 

$100,000 in annual income and total wealth, respectively), where the comparison is 

even more stark. In this case, non-advised individuals hold more than four times as 

much of their portfolios in individual equity securities vs. equity packaged products. 

In the cohort aged 45-54 with less than $100,000 in annual income and wealth, 

non-advised individuals hold four times more equity exposure through individual 

securities compared with advised investors 

 

43 IXI household-level dataset of U.S. Consumer Invested Assets; Oliver Wyman Analysis; percentages may not add 

up to 100% due to rounding of values 

7%

13%

5%

12%

8% 9%

3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

With FA

Asset Class as % of AUM

31%

32%

Without FA

53%

26%

0.5 : 1 1 : 1 1 : 1 2 : 1

Packaged product : Individual security Packaged product : Individual Security

Other

Individual securities - Fixed income

Individual securities - Equities

Packaged product - Variable annuities

Packaged product - Fixed income

Packaged product - Equities

10%

14%

4%

8% 8%

4%

2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

39%

40%

Asset Class as % of IRA

With FA

21%

50%

Without FA
30

Figure 21: Assets and IRA product mix – Age: 45-54, Income: $0-100K, Wealth: $0-100K44

D. Staying invested in the market 

Individuals with a financial advisor hold smaller cash balances – ranging from 

36%-57% less than non-advised individuals for similar age and wealth cohorts 

In our Retail Investor Retirement Survey, we found that individuals with financial 

advisors hold a smaller percentage of their non-retirement assets in cash equivalents. 

As shown below in Figure 22, this finding holds true across all asset and age stratums45. 

As cash equivalent holdings have lower real returns, individuals may potentially achieve 

higher long-term returns by limiting their allocation to cash. 

 

44 IXI household-level dataset of U.S. Consumer Invested Assets; Oliver Wyman Analysis; percentages may not add 

up to 100% due to rounding of values 

45 The differences observed in cash holdings between advised and non-advised households was significant at a 95% 

confidence level for all segments except the group aged 65 or older with $250K-$ 1MM in assets 

12%

9% 7%

6%

3%

1% 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asset Class as % of AUM

With FA

12%

64%

Without FA

52%

33%

8%

11%

9% 5%

2%

1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

With FA

8%

73%

Without FA

34%

49%

Asset Class as % of IRA

1 : 1 4 : 1 1 : 1 6 : 1

Packaged product : Individual security Packaged product : Individual Security

Other

Individual securities - Fixed income

Individual securities - Equities

Packaged product - Variable annuities

Packaged product - Fixed income

Packaged product - Equities
31

Figure 22: Percent of assets held in cash or cash equivalents outside of workplace 

retirement plans46

 

Again, the IXI data supports and expands upon this finding, which holds true over time 

for both total assets as well as retirement assets in IRA accounts across income, wealth, 

and age segments analyzed. For example in 2013, nearly 99% of advised households 

held 25% or more less cash and/or cash equivalents as a percentage of their portfolio 

compared to non-advised.47 

Figure 23 depicts this trend for the overall population analyzed. 

 

46 Oliver Wyman Retail Investor Retirement Survey 

47 IXI account-level time series dataset of U.S. Consumer Invested Assets; Oliver Wyman Analysis 

0

5

10

15

20

25

30

35

% of assets in cash or cash equivalents

Age Group

65+

29%

13%

55-64

31%

15%

35-54

30%

13%

18-34

33%

18%

With FA Without FA

<=$100K in assets

12 11

14

16

18

20

22

28

0

5

10

15

20

25

30

35

Age Group

18-34 35-54 55-64 65+

With FA Without FA

>$100K and <=$250K in assets

(45%) (57%) (52%) (55%)

% Less cash held by advised households

AB CD AB CD

% Less cash held by advised households

A

B

C D A

B

C D

(43%) (36%) (45%) (33%)
Figure 2

investor

Analysis

advised 

(48% les

(Figure 2

 

48 IXI acco

3: Cash ho

rs48

s of the seg

investors h

ss), during 

24). 

 

unt-level time s

ldings as a 

gment with l

held substa

(44% less) 

 

series dataset o

percent of 

less than $

antially less 

and after t

of U.S. Consum

account as

100K in we

cash as a 

he financia

mer Invested A

ssets for ad

ealth and in

portion of to

al crisis (60%

Assets; Oliver W

vised and n

come simil

otal accoun

% by the en

Wyman Analys

non-advised

arly shows 

nt assets be

nd of 2013)

is 

32

d

that 

efore 

). 
33

Figure 24: Cash holdings as a percent of total account assets for investors with 

and without a financial advisor – Segment with <$100K in wealth and income49 

 

The finding of persistently lower cash allocations for advised investors provides strong 

evidence that financial advisors help individuals enter and stay invested in the market 

across market cycles leading, on average and over time, to better investing outcomes. 

Excess cash holdings represent a drag on investment performance. However, premature withdrawal of retirement account assets is an even costlier investing behavior 

that reduces principal and the potential benefit of compounded returns.

 

49 IXI account-level time series dataset of U.S; Morningstar, Oliver Wyman Analysis 

0%

30%

60%

90%

120%

150%

2006 2007 2008 2009 2010 2011 2012 2013

w/o FA w/ FA

Average cash holdings (% of account assets))

Pre

crisis

Peak 

crisis

Post 

crisis+2

Post 

crisis+5

w/o FA 23% 34% 23% 23%

w/ FA 12% 19% 12% 9%

Relative change in cash holdings

(indexed, 2006 = 100%)

Pre-financial crisis investors without 

a financial advisor held nearly 2X as 

much cash as advised investors

A

By 2010, cash allocations for both 

types of investors had returned to 

pre-crisis levels

However, investors with a financial 

advisor held nearly 50% less cash as a 

percent of total investable assets

C

Both types of investors increased 

cash holdings during the crisis

Even after accounting for a sharp drop 

in equity market values, investors 

increased cash holdings1

B

At the end of 2013, advised investors 

held 25% less cash vs. pre-crisis 

levels, while allocations investors 

without an FA remained constant

At year-end 2013, non-advised investors 

held more than 2.5 times as much of 

their portfolios in cash

D

A

B

C D

1 Cash allocations could have increased without any change in investor behavior due to the large decline in equity markets. We analyzed 

the magnitude of the this potential effect in the following manner. Average advised investor pre-crisis (2007) allocation to equities was 60% 

while cash holdings represented 12% of investable assets. Assuming (1) no change in portfolio holdings, (2) only equity values changed, 

and (3) the equities allocation performed similarly to the S&P (as measured by SPY) during the financial crisis, the 38% drop in SPY share 

price in 2008 could have represented at most 3.5% of the 7% point increase cash holdings, i.e. .12/(1-(0.38*0.6))-.12. The equivalent 

figure for non-advised is 8%, i.e. 0.24/(1-(0.38*0.66))-0.24 of the 10% point increase in cash holdings. Since actual equity allocations 

dropped by only 40-45% of that predicted in (3) above, the equity market decline is estimated to account for an even smaller portion of 

increased account cash allocations..
34

Financial advisors help individuals avoid premature IRA distributions - 76% of 

heads of households that made traditional IRA withdrawals in 2013 were retired 

Tax-advantaged workplace retirement plans provide the greatest benefit when 

individuals start saving early and continue to save and invest throughout their working 

years until retirement age. According to a GAO study, “Cashouts [have] the greatest 

ultimate impact on participants’ retirement preparedness [...] Cashouts of 401(k) 

accounts at job separation can result in the largest amounts of leakage and the greatest 

proportional loss in retirement savings.”50

Approximately 9 out of 10 (88%) IRA accounts are held in a brokerage model, where an 

individual has access to a range of different types of advice and support from a financial 

advisor.51 According to ICI, IRA holders tend to keep assets in their accounts until 

retirement. In 2013, 76% of households that made traditional IRA withdrawals were 

retired. This stands in contrast with DC plan behavior, where there is a natural triggering 

event when individuals terminate employment. According to a Vanguard study, 38% of 

individuals in their twenties took cash distributions upon leaving their employer52. 

Moreover, individuals aged 25-34 were more than three times as likely to take a cash 

distribution from a 401(k) compared to an IRA when leaving a job. Different distribution 

rates by age cohort and account type are illustrated in Figure 25. 

 

50 Government Accountability Office, ‘401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage 

on Workers' Retirement Savings’, August 2009 

51 Oliver Wyman, ‘Assessment of the Impact of the Department of Labor’s Proposed “Fiduciary” Definition Rule on 

IRA Consumers’, 2011 

52 Vanguard, ‘How America Saves 2013: A report on Vanguard 2012 defined contribution plan data’, June 2013 
35

Figure 25: Percentage of individuals taking cash distributions by age and plan type53

The value of remaining invested is illustrated in a worked example, shown in Figure 26, 

where we contrast the potential outcomes of two scenarios. In the first scenario, an 

individual with a $10,000 account balance takes a cash distribution 30 years prior to 

retirement. Assuming an early withdrawal penalty of 10%, a federal tax rate of 15% and 

a state tax rate of 3%, they would have $7,200 after penalties and taxes. In the second 

scenario, the individual rolls the same amount of money into an IRA, achieves an 

average annual return of 6% and is subject to the same combined state and federal 

18% tax rate at retirement. In this situation, they would have $44,280 after taxes, or 

approximately $24,500 in current period equivalent dollars, assuming 2% annual 

inflation – an amount 3.4 times greater. 

Figure 26: Worked example comparing a cash distribution with an IRA rolloverIllustrative 

 

 

53 Butrica, Zedlewski, Issa, ‘Understanding Early Withdrawals from Retirement Accounts’, 2010 

2%

10%

8%

6%

4%

0

4.0%

Percent of people taking a cash distribution

3.4%

3.1%

6.6%

55-58

4.5% 4.8%

45-54

4.3%

7.5%

35-44

7.4%

25-34

9.7%

3.2%

0.3%

Age

IRA

401(k)

Penalty or Tax Amount

Early Withdrawal 

Penalty (10% of 

withdrawal amount)

$1,000

Required Federal tax 

withholding $2,000

Federal tax 

withholding refund 

you should receive

$500

State tax you will owe $300

Paid

$2,800

Receieved

$7,200
36

E. Periodically rebalancing asset holdings to restore desired asset allocation and 

risk levels – Individuals with financial advisors are 44% more likely to re-balance 

their portfolios at least every two years

Portfolio re-balancing is an important risk mitigation tool. For example, if an investor’s 

portfolio is valued at $100,000, divided equally between equities and fixed income, and 

the equities portion increases in value by 25% while fixed income increases by a more 

modest 5%, the overall portfolio value increases to $115,000. In this case, the equities 

allocation increases from 50% to 54% of the portfolio value, while the fixed income 

portion decreases from 50% to 46%. Regular re-balancing restores asset allocations to 

target levels to reflect investors’ risk return objectives. In our research, individuals with 

financial advisors rebalanced their portfolios more often than non-advised individuals. 

65% of advised individuals re-balanced at least every two years, compared with 45% for 

non-advised individuals (a difference of 44%). This is illustrated in Figure 27. 

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Asset Value

Years invested

Total assets of 

~$54,000 at 

retirement
37

Figure 27: Rebalancing frequency outside of DC plans54

 

* * * 

Returning to the original question of the value of a financial advisor, the majority of 

individuals across wealth and age segments, as well as many small businesses, seek 

professional financial advice, and value their FA as a trusted advisor. We found 

substantial evidence that advised individuals are more sophisticated and diligent long 

term investors who achieve better investing outcomes. 

The benefits financial advisors provide are now at risk. On April 14, 2015, the 

Department of Labor issued its Conflict of Interest rule proposal, a replacement for the 

 

54 Oliver Wyman Retail Investor Retirement Survey 2014: A KS test is significant at a 95% confidence level 

9%

13%

14%

19%

31%

26%

34%

5%

3%

2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percent of respondents

Relationship Status

With FA

14%

Without FA

31%

Less frequently than every 10 years

Annually or more frequently

Every 3-5 years

Every 1-2 years

Every 6-10 years

Never
38

Definition of the term “fiduciary” rule proposal withdrawn in September 2011. 55 In our 

2011 study reviewing the impact of the previously proposed rule, we concluded that the 

Department of Labor’s proposed rule change was motivated by a laudable objective: to 

ensure a high standard of care toward retirement plan participants and account holders 

with regard to the receipt of services and investment guidance, amid an increasingly 

complex financial marketplace. However, we found the proposed rule was likely to have 

serious negative and unintended effects on the very individuals the change was 

supposed to help. 

Many stakeholders are now analyzing the technical details of the newly proposed rule, 

and there is growing consensus on the implications for financial services providers with 

regard to the prohibited transaction exemptions newly proposed, modified or absent 

from the proposed rule. However, with regard to the impact on individuals, regrettably 

we reach the same overall conclusion as in the prior study. The proposed rule change 

will likely have significant consequences that will adversely impact individual investors’ 

ability to save for retirement. 

 As proposed, financial advisors would be forced to withdraw workplace 

retirement plan set-up and support services from small businesses, due to the 

lack of an exception allowing providers to market to plans with fewer than 100 

participants that are self-directed –many small businesses are likely to close or 

not open plans due to the additional administrative burden as a result. This 

would directly impact the 19 MM individuals who work for small businesses with 

fewer than 50 employees, who do not currently have access to a workplace 

retirement plan by reducing the likelihood these individuals will gain access to a 

plan in the future 

 Individuals with small balance accounts are likely to lose access to retirement 

help and support with selecting appropriate products. We previously estimated 

that 7 MM current IRAs would not qualify for an advisory account due to low 

balances56

 Almost all retail investors would face increased costs (73% to 196% on average) 

from providers shifting clients to a fee-based advisory model. In our 2011 study, 

we found nearly 90% of the 23 MM IRAs analyzed were held in brokerage 

accounts 57

 

55 Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice, 80 Fed. Reg. 21928, 

pp. 21927-21960 (proposed Apr. 20, 2015) 

56 Oliver Wyman, ‘Assessment of the Impact of the Department of Labor’s Proposed “Fiduciary” Definition Rule on 

IRA Consumers’, 2011 

57 Oliver Wyman, ‘Assessment of the Impact of the Department of Labor’s Proposed “Fiduciary” Definition Rule on 

IRA Consumers’, 2011 
39

 Individuals are less likely to open an IRA, leading to lower savings rates and 

increased cash-outs when changing jobs58

 Unadvised individuals are likely to carry excess portfolio risk due to less 

diversification and less frequent re-balancing compared with advised individuals 

* * * 

Retirement is too important to get wrong 59. We encourage key stakeholders from the 

financial services industry and regulators to join together to find workable solutions that 

preserve individuals’ access to help and support from a financial advisor of their 

choosing as well as the business model and fees that best meet their needs. 

 

58 Prior guidance from the DOL “held that recommendations to a plan participant to take an otherwise permissible 

distribution, even combined with a recommendation as to how to invest distributed funds, is not fiduciary investment 

advice.” K&L Gates, DOL Re-Proposes Rule to make Brokers, Others, ERISA Fiduciaries (Apr. 27, 2015), 

http://www.klgates.com/dol-re-proposes-rule-to-make-brokers-others-erisa-fiduciaries-04-27-2015. 

59 [C]onstraints on the availability of investment services that could result from the DOL’s reproposal, particularly for 

smaller plans or individual retirement investors, can undermine the retirement system in various ways.” Sutherland, 

Legal Alert: DOL Reproposes Expanded ERISA Fiduciary Definition and Revised Complex of Exemptions (Apr. 21, 

2015), http://www.sutherland.com/NewsCommentary/Legal-Alerts/172823/Legal-Alert-DOL-Reproposes-ExpandedERISA-Fiduciary-Definition-and-Revised-Complex-of-Exemptions. 
40

Survey methodology 

Our small business survey had 1,216 valid complete responses by owners and HR 

decision makers of payroll-based businesses with between 1 and 100 employees. We 

employed a stratified sampling approach designed to control for the size of the business 

and ensure that a sufficient number of businesses were recorded that did and did not 

consult with financial advisors. Furthermore, we selected three company size cohorts 

for analysis, namely 1–9, 10–49, and 50–100 employees, based the alignment of these 

segments with data available on employee retirement plan access for comparison 

purposes. This design allowed us to isolate the impact that financial advisors have upon 

small businesses. Where appropriate, we report conclusions that are statistically 

significant at a 95% confidence level using standard methods of statistical inference. 

Our retail investor survey had 4,393 valid complete responses by non-retired individuals 

with investments or retirement accounts. Responses were excluded from respondents 

who, at the time of the survey, were: under age 18; retired; not at least partially 

responsible for financial decision making; and non-investors, meaning they did not have 

at least one investment or retirement account. In addition, we excluded incomplete 

responses and those completed in less than 1/3 of the median time to ensure a robust 

data set. Any figures that we report describe this specific sub-population. 

Our stratified sampling approach in this case controlled for age and income as well as 

the presence of a financial advisor. In designing the sample this way, we strove to 

control for the effects that age and income have upon investment decisions and 

retirement planning. However, as our sample does not match the composition of the 

overall population, we utilize scale factors in our analysis to correct for respondent bias, 

by underweighting sample responses that are overrepresented relative to the population 

and vice-versa. Although we sampled based upon age, income and the presence of a 

financial advisor, we scale our sample to the population using age, assets, and the 

presence of a financial advisor, as the distribution of household assets is better 

documented in secondary sources than the distribution of personal income. We 

obtained the population distribution of household age and assets for FA advised and 

non-FA advised households from the survey of Consumer Finances, a triennial crosssectional survey of US families conducted by the Federal Reserve. We utilized the 2013 

survey data. We report conclusions that are statistically significant at a 95% confidence 

level. 
41

Appendix I. 

Methodology for analysis of U.S. retail investor assets 

Our analysis leveraged IXI Services data containing segment-level detail on U.S. 

consumer invested assets. Segments were defined by specific age tiers (five), income 

tiers (eleven), wealth tiers (seven), advisor relationship type (Full Service Brokerage vs. 

Discount Brokerage) and year. For the purposes of this report, we refer to the Full 

Service Brokerage relationship as “with financial advisor” and the Discount Brokerage 

relationship as “without financial advisor.” 

IXI data contained information on total segment: 

 Assets and IRA holdings 

 Asset class distribution 

 Number of households / accounts 

We used two datasets from IXI, which were distinct in the following ways: 

Dataset name 1. Household Point-In-Time 2. Account Time Series 

Time period 2012-2013 2006-2013 

Count type Households60 Accounts 

2013 Assets $5.6 TR $9.7 TR 

2013 Population 21 MM households 71 MM accounts 

Segment criteria Only households with recorded 

age, income and wealth segment 

Includes accounts with no 

recorded age 

While the age segment criterion was analyzed in the Account Time Series dataset, it 

was ultimately eliminated to capture a broader representation of US invested assets. 

This is due to a data limitation whereby only 60% of accounts were associated with a 

specific age. All findings in this study were confirmed across all age, wealth, income, 

and time segments in both the Household Point-In-Time and Account Time Series 

datasets unless indicated otherwise. 

Findings were generated by comparing the segment-level averages of the various 

metrics listed above between the Full Service and Discount Brokerage populations. In 

drawing conclusions from this granular segment-level comparison, we disregarded 

segments with fewer than 500 households (Household Point-In-Time) or 500 accounts 

 

60 IXI could only aggregate account holdings from a single household within a given institution and could not 

aggregate households’ holdings across institutions 
42

(Account Time Series) to eliminate segments with insufficient data points. This resulted 

in the exclusion of 0.01%-0.04% of the population. 
43

Appendix II. 

Automated solutions to address inertia in retirement plans do not 

guarantee optimal retirement outcomes 

It has been well-documented that retirement outcomes are significantly impacted by the 

status quo bias that leads DC plan participants to prefer their current state both in terms 

of non-participation and nature of participation61. This not only affects contribution rates 

but also asset allocations, both with respect to rebalancing and following a risk 

allocation glide path to match investor risk profiles at various ages. 

Standard default contribution rates do not appear to generate sufficient asset levels 

for retirement. 

Automatic features can impact participant behavior, a notable example being autoenrollment features which have been shown to increase plan participation by 45%.65

However, while encouraging participation is certainly a step in the right direction, 

according to EBRI, the most common default contribution rate within a workplace 

retirement plan was just 3% in 201262. This falls well short of an ideal default path to 

encourage sufficient retirement savings, which is suggested by Prudential as, “A 5–6% 

default deferral rate with a 2% annual acceleration up to a cap of at least 10–12%”65. 

Unfortunately, only 21% of plans had an automatic escalation feature in 201363, leading 

us to conclude that inertia leads many participants continue to save at sub-optimal 

default contribution rates. 

The illustrated example shown below in Figure 28 confirms that for the average 

individual, a 3% savings rate results in sub-optimal retirement savings. The example 

utilizes the median income by age according to the US Census, which assumes that an 

income of approximately $36,000 at age 25 grows to an income of $58,000 at age 65. In 

addition, we utilize a constant 3% contribution rate consistent with the most common 

default rate, and 6% annual returns. These assumptions lead to a total asset value of 

approximately ~$220,000 at age 65, which at approximately 3.8 times the illustrative 

ending salary falls short of industry recommendations that suggest that individuals save 

8 times their ending salary64, or approximately $460,000 in this case. In order to retire 

 

61 Overcoming Participant Inertia: Prudential Research: 

(http://research.prudential.com/documents/rp/Automated_Solutions_Paper-RSWP008.pdf) 

62 EBRI September 2012 notes: (http://www.ebri.org/pdf/notespdf/EBRI_Notes_09_Sept-12.HCS-AE.pdf) 

63 JP Morgan Asset Management, 2013 defined contribution Plan Sponsor survey Findings: Evolving Toward Greater 

Retirement Security 

64 Fidelity Investments, ‘Fidelity Outlines Age-Based Savings Guidelines to Help Workers Stay on Track for 

Retirement’, September 2012, (http://www.fidelity.com/inside-fidelity/employer-services/age-based-savingsguidelines) 
44

comfortably while contributing only 3%, our individual would need to work until age 77. 

Conversely, contributing an annual average of 6.3% would allow for retirement by 

age 65. 

Figure 28: Example retirement assets by year at median income, 3% contribution rate, 

and 6% growth 

 

 

$0

$50,000

$100,000

$150,000

$200,000

$250,000

25 30 35 40 45 50 55 60 65

401(k) assets

Age

Total asset 

value of 

~$220,000 at 

age 65
 

 

45

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