Serving the Best Interests of Retirement Savers:

Framing the Issues

Martin Neil Baily and Sarah E. Holmes

The Brookings Institution1

Introduction

Americans are enjoying longer lifespans than ever before. Living longer affords individuals the 

opportunity to make more contributions to the world, to spend more time with their loved ones, and to 

devote more years to their favorite activities – but a longer life, and particularly a longer retirement, is 

also expensive. The retirement security landscape is evolving as workers, employers, retirees, and 

financial services companies find their needs shifting. Once, many workers planned to stay with a single 

employer for most or all of their careers, building up a sizeable pension and looking forward to a 

comfortable retirement. Today, workers more and more workers will be employed by many different 

employers. Additionally, generous defined benefit (DB) retirement plans are less popular than they once 

were – though they were never truly commonplace – and defined contribution (DC) plans are becoming 

ever more prevalent. Figure 1, below, shows the change from DB to DC that has occurred over the past 

three decades.

Source: Department of Labor (2014).

1 Baily is a Senior Fellow in Economic Studies where Holmes is a research assistant. This paper is written as part of Brookings 

ongoing research into financial regulation issues and policies. This research is funded from a variety of sources in the form of 

unrestricted contributions to the Economic Studies Program, including foundations, individuals and companies, both financial 

and non-financial. The views expressed are the authors own and do not necessarily reflect Brookings staff and trustees. This 

research was carried out over a quicker timetable than normal and the usual fact-checking period has been compressed. Baily is a 

Director of The Phoenix Companies that sell life insurance and annuities. This paper will not discuss either of these investments.

0

20

40

60

80

100

1975 1980 1985 1990 1995 2000 2005 2010

Millions

Figure 1. Number of Participants in Pension Plans, 

by type of plan, 1975-2012

Defined Benefit Defined Contribution

1

 
In the past many retirees struggled financially towards the end of their lives, just as they do now, 

but even so, the changes to the retirement security landscape have been real and marked, and have had a 

serious impact on workers and retirees alike. DB plans are dwindling, DC plans are on the rise, and as a 

result individuals must now take a more active role in managing their retirement savings. DC plans 

incorporate contributions from employees and employers alike, and workers much choose how to invest 

their nest egg. When a worker leaves a job for retirement or for a different job he or she will often roll 

over the money from a 401(k) plan into an Individual Retirement Account (IRA). While having more 

control over one’s retirement funds might seem on its face to be a net improvement, the reality is that the 

average American lacks the financial literacy to make sound decisions (SEC 2012).

The Council of Economic Advisers (CEA) expressed concern earlier this year that savers with 

IRA accounts may receive poor investment advice, particularly in cases where their financial advisors are 

compensated through fees and commissions. “[The] best recommendation for the saver may not be the 

best recommendation for the adviser’s bottom line” (CEA 2015). President Obama echoed these 

concerns in a speech at AARP in February, asking the Department of Labor (DoL) to update its rules for 

financial advisors to follow when handling IRA accounts (White House 2015). The DoL receives its 

authority to craft such rules and requirements from the 1974 Employee Retirement Income Security Act 

(ERISA) (DoL 2015a).

The DoL recently proposed a regulation designed to increase consumer protection by treating 

some investment advisors as fiduciaries under ERISA and the 1986 Internal Revenue Code (DoL 2015b). 

The proposed rule has generated heated debate, and some financial advisors have responded with great 

concern, arguing that it will be difficult or impossible to comply with the rule without raising costs to 

consumers and/or abandoning smaller accounts that generate little or no profit. Advisors who have 

traditionally offered only the proprietary products of a single company worry that the business model they 

have used for many years will no longer be considered to be serving the best interests of clients.

Rather than offering detailed comments on the DoL proposals, this paper will look more broadly 

at the problem of saving for retirement and the role for professional advice. This is, of course, a well2
travelled road with a large literature by academics, institutions and policy-makers, however, it is 

worthwhile to think about market failures, lack of information and individual incentives and what they 

imply for the investment advice market. 

What Do Retirement Savers Need?

Planning for retirement includes two distinct phases: (1) accumulation of assets during one’s working 

years, and (2) decumulation of assets during retirement, with the goal of using the financial resources 

without running out of money. Most households accumulate benefits from a variety of sources, usually 

some combination of employer-sponsored DB and DC plans, IRAs, longevity and long-term-care (LTC) 

insurance, and Social Security. The amount necessary to live comfortably throughout retirement depends 

on several variables, including retirement age, pre-retirement earnings, desired standard of living, and 

medical and LTC expenses. However, even when savers set a goal for their retirement savings, they are 

unlikely to meet that goal by the time they reach retirement age. Workers estimate that they will need to 

accumulate $1,000,000 in savings by the time they retire, but the median retirement savings for a worker 

over age 60 is just $172,000. Less than 40 percent of workers over age 60 have saved $250,000 or more 

for retirement (TCRS 2015). Just 15 percent of workers have a written retirement strategy, and over 80 

percent of workers plan to work, or are already working, past age 65. Some of them do not expect to 

retire at all (TCRS 2015). Woolley (2015) paints an especially dismal picture: workers between the ages 

of 55 and 64 have a median retirement account balance of $104,000. Households in that age group 

without retirement accounts have on average only $14,500 in savings. 

Many Americans are not adequately prepared for retirement and the first prescription for this 

problem is that households need to save aggressively during the accumulation phase and spend carefully

during the decumulation phase. Without these practices in place, households are unlikely to be able to 

support themselves comfortably in retirement, especially in light of our ever-lengthening life 

expectancies. A related second goal is age-appropriate investing which can provide strong inflation3
adjusted returns but also guard against excessive risk. In fact it is this second issue of returns that is the 

focus of the Administration’s concern.

A third important aim is to get value for money when professional advice is used. Fees on 

retirement accounts are generally levied in one of two ways, either as a load fee, an amount that is paid up 

front, or a wrap fee. A 2 percent load fee means that if a saver puts in $100, only $98 is actually placed 

into the retirement fund, the other $2 is taken as a fee. Load fees range from 2 percent up to around 5 

percent for small accounts. This may also apply to additional amounts added to the fund. Wrap fees are 

paid each year as a percent of the asset value and they cover the expenses of a fund as well as payments to 

an adviser. Wrap fees vary substantially from a low of about 50 bps (half a percentage point) up to 200 

bps or more. A load fee basically reduces the final value of the retirement portfolio proportionally to the 

fee, a 5 percent load fee becomes a 5 percent smaller final retirement fund. Wrap fees may seem to take 

less of the investor’s funds, but that is not usually the case. John Bogle (2013) the founder of Vanguard, 

describes the problem as follows: Imagine you’re getting a 7 percent return in the market, and paying 2 

percent to do business with your financial advisor. At the end of 50 years, approximately 70 percent of 

the market returns will have gone to advisors and others, while only 30 percent will have gone to 

investors. Bogle’s example is designed to show his point, because few users of IRAs hold them for 50 

years, but still he is right in pointing to the costliness of high wrap fees with investments over multiple 

years. Regulations that push savers into accounts with wrap fees instead of loads may not be in their best 

interests.

The key here, however, is getting value for money. Advisors are not going to provide their 

services for free. High net worth clients can afford to pay for advice but a low-income family does not 

have a lot of money to put to work even though teaching them about investment options and good 

investment decisions may be quite time-consuming. We return to this point.

Fraud can also be a problem for retirement savers. Bernie Madoff fooled some very educated and 

financially literate savers, although in general people in this group are less susceptible to fraud. 

Education and financial literacy are correlated with income, which means that the poorest suffer the most 

4
from problems as they prepare for retirement (Lusardi & Mitchell 2005, Campbell 2006, Gale & Levine 

2010). 

A fourth important goal is for retirement savers to take advantage of provisions in the tax code 

that allow them to maximize their retirement returns. Up to a limit, retirement saving can be done on a 

pre-tax basis with taxes paid upon withdrawal, when tax rates may be lower. This is a good strategy for 

most moderate or high income households. One concern is that households may decide to withdraw all 

their accumulated assets at once when they retire, incurring a large tax liability.

The path to achieve retirement goals is therefore four-fold: (1) save enough, and spend sensibly;

(2) make sound, age-appropriate investments; (3) avoid fraud and excessive fees; and (4) minimize one’s 

tax liability. While all four objectives are important, in this paper we focus on items (2) and (3), since 

they are most tied to the DoL’s proposed regulation. 

Information Failures and Household Saving

In a market economy the first assumption is that households should have the freedom to make their 

own consumption, saving, and investment decisions. If policymakers are to intervene in the market, they 

should have good reasons for doing so and policy must be respectful of the rights of individuals. At the 

same time, it is important to recognize that even though the goals of retirement saving seem relatively 

simple, the path to achieving those goals is extremely difficult and many people make mistakes. We do

not wish to suggest that those who struggle on the path to a secure retirement are unintelligent; on the 

contrary, we find that low financial literacy and the attendant financial missteps are the result of a lack of 

information, not a lack of comprehension. Retirement insecurity plagues people of all walks of life. Even 

experts in this subject make serious savings and investment mistakes sometimes. Saving for retirement is 

incredibly challenging, particularly when information and resources are limited, and especially when the 

available information and resources are distributed unequally across various demographic groups. With 

that caveat in mind, we point to three major issues that make it difficult for savers to adequately prepare 

for retirement.

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1. A secure retirement requires a lifetime of optimal decisions. In order to be sufficiently prepared for 

retirement, most individuals will need to save throughout their entire career. The decumulation phase 

is generally shorter than the accumulation phase, but it is nonetheless necessary to start making sound 

savings decisions early in life and to continue the pattern throughout one’s working years. The 

economists’ model of behavior assumes rational decision-making over a lifetime even under 

uncertainty about future income, length of life, health outcomes and other factors. In reality most 

people struggle to optimize under these conditions and will defer to popular “rules of thumb” or 

investment advice from friends and family. As a result there is often a serious mismatch between 

one’s savings goals and actual behavior, and a common result is saving too little. This problem of 

myopia – or shortsightedness – is often exacerbated by the fact that in general our society values 

immediate consumption over future consumption. Of course, very low-income households may 

already struggle to meet their day-to-day needs, leaving little or nothing to set aside for use down the 

road.

2. Risk management is key. Most people, even those with high levels of education and experience, find 

it difficult to manage risk or make good decisions under uncertainty. In particular, it is always 

tempting to think about an immediate choice as independent from future opportunities and past data 

(Kahneman & Lovallo 1993). In terms of risk management of a retirement portfolio, some savers 

may be so risk averse that they sacrifice too much potential return, while others may take on too much 

risk, convinced they can successfully time the market despite overwhelming evidence to the contrary 

(Housel 2013, Tuchman 2015). Periods of boom and bust can make this problem worse; booms may 

generate overconfidence, causing individuals to buy high, and busts may inspire panic, causing them 

to sell low. These are common mistakes but they have serious long-term consequences.

3. Compounding can make or break a retirement saving plan. In general, the earlier one starts saving, 

the better. This gives an individual the opportunity to spread his or her savings over a long period of 

time, but it also (and more importantly) allows one to take better advantage of compounding interest 

(Kiersz 2014).

6
Many retirement savers are likely to save too little and regret their decisions as they approach 

retirement and it becomes harder and harder to catch up. They will make mistakes in their investment 

decisions, not because they are foolish but because investing is hard. Harvard economist Sendhil 

Mullainathan sums it up neatly in a recent New York Times column (July 11, 2015): “Saving more and 

consuming less is on par with going to the gym more and eating less. Some people can do it easily. Most 

can’t.” These conclusions tell us that getting good advice in some form is very important for many 

people.

The Market for Investment Advice

The fact that individuals are not expert in making saving and investment decisions does not in itself mean 

that there is a market failure. There are many areas where most individuals lack expertise and the most 

common way to address this deficiency is to seek professional advice and assistance. We typically defer 

to our doctors, our mechanics, and our lawyers in matters that pertain to our health, our car, and our legal 

status, rather than attempting to puzzle through the problems ourselves. But while this is an easy 

solution, it can have complex results. When consumers lack knowledge about where their money is 

going, problems can ensue. In economists’ terms, in situations where there is incomplete and asymmetric 

information, markets may fail or may not perform well.

Economic incentives act as a powerful motivation that may influence decisions by honest and 

trained professionals. Professional norms are shifted by economic factors and then individuals simply 

follow their colleagues’ examples. Pitfalls arise in markets where there is incomplete information and 

this general problem is especially relevant to the world of investment advice, which can have dramatic 

effects on an individual’s future. We consider how professional advice can impact positively or 

negatively the investment decisions of small and moderate savers by revisiting the four goals addressed 

above.

Saving Enough (and Spending Sensibly). Many young people start retirement saving through a 

company 401(k) plan where they are asked to contribute from their salaries to a fund that usually offers 

7
several investment choices. In large part because of the efforts of behavioral economists, it is now 

common for 401(k) plans to automatically enroll workers in a retirement plan.2 (Workers can opt-out of 

the plan if they wish.). By changing the default status from “unenrolled” to “enrolled,” employers nudge 

their workers into saving for retirement.3

 Some employers also make contributions to a retirement plan 

for all employees (usually with a vesting requirement) and others offer matching plans where an employer 

will match the employee contribution up to a limit. Up to a limit, contributions can be made pre-tax.

Other households start saving through an IRA or rollover into an IRA when they change jobs. In 

these cases, a financial advisor has a clear incentive to encourage the client to save more and build up the 

account. Advisors are compensated either on the basis of a fee at the time the investment is made (a “load 

fee”) or from receiving a percentage of the assets (a wrap fee). The more a client saves, the more his or 

her advisor earns. Advisors generally encourage their clients to set up a systematic saving plan and add to 

their retirement assets over time. Evidence is consistent with the view that IRA savers with advice save 

more than those without it. According to Limra (2012), 78 percent of workers who have a financial 

advisor also contribute to a retirement plan, compared to 43 percent of workers without an advisor. This 

is an important contribution from professional advisors. (It is possible that those workers who seek out 

professional advice are already more likely to save for retirement, perhaps because of their education 

level, earnings, or other variables. Individuals who choose to work with financial advisors may selfselect.)

How much should households save? That is too complex to summarize easily and is the subject 

of a wide literature, but a simple illustration is helpful. A rule of thumb provided by advisors is that 

households that withdraw 4 to 5 percent of their assets each year will avoid running out of money. That 

would mean that each $100,000 of assets held at retirement will yield an income of $4,000 to $5,000 a 

year—not very much. To enjoy a retirement income on par with the median U.S. household income 

($51,939), one would need to accumulate assets of between approximately $1.04 and $1.3 million, well 

2 See RSP (2006a, 2006b).

3 See Thaler & Sunstein (2008).

8

 
above the typical retirement portfolio (Census Bureau 2014). Assuming one also receives average Social 

Security benefits (about $15,500 per year), the necessary assets would be reduced to between $730,000 

and $912,000 (SSA 2015). While this is a more achievable goal, it is still significantly more than most 

people are able to save.

Portfolio Choice: Real estate, Stocks, Bonds, and Savings Accounts

For ordinary savers there are effectively four ways in which they save for retirement: real estate, stocks or 

equities, bonds, and savings accounts. Making a wise portfolio choice among these options is an 

extremely important one and the success of a retirement portfolio depends heavily on what choices are 

made.

Real Estate. The real estate option for most households takes the form of buying an owneroccupied house, or perhaps a second home. Until the real estate bubble burst in the financial crisis many 

families believed that owning a home was the best investment they could make, and one of the safest as 

housing prices had never declined on a sustained, nationwide basis in the postwar period. For many 

people owning a home was in fact their best investment. US tax law provides a substantial incentive to 

borrow against a home because it allows mortgage interest and property taxes to be included in itemized 

deductions, up to a limit. Upper income taxpayers are able to gain a sizable benefit from these provisions. 

Owning a home and paying off the mortgage over 30 years also gave a way of saving simply by paying 

the mortgage. Households that retired with their mortgage paid off could live without paying rent, and 

often had several hundred thousand dollars in equity in their homes that could be realized by selling the 

home or borrowing against the value for retirement living expenses if needed.

The value of housing as a form of retirement saving was undermined by the housing bubble. As 

prices escalated there was temptation to use the rising equity value as collateral for buying autos or 

funding college costs. Once prices fell, many households ended up with diminished equity or even found 

they were underwater. Nevertheless, homeownership still remains a potent instrument for retirement 

9
saving. Given the tax advantages and the “nudge” it provides for saving, homeownership will continue to 

be a valuable retirement tool. Home prices are now moving up and are likely to keep pace with inflation.

Stocks and Bonds. The standard advice to those investing in financial assets for retirement is that 

they hold a diversified portfolio of stocks and bonds. Younger savers are encouraged to have a larger 

share of their portfolio in stocks, with the share of bonds rising with the age of the saver in order to reduce 

risk. We do not wish to question the underlying logic of this view, but it is worthwhile reviewing the 

findings in the economics and finance literature about the relative returns of the two classes of assets.

In a classic article in 1985 Rajnish Mehra and Edward C. Prescott pointed out that, based on 

historical data, equity returns were much larger than the return on safe bonds and that it requires an 

extraordinary aversion to risk by investors to justify the “equity premium”. In a 2003 article, Mehra 

revisited the equity premium puzzle and concluded that there remained no convincing explanation of the 

disparity in returns that is consistent with reasonable levels of risk aversion by investors. Mehra reports 

that the mean real return on equities from 1947 to 2000 was 8.4 percent a year and the real return on safe 

bonds was 0.6 percent a year, giving an estimate of the equity premium over this period of 7.8 percent a 

year.4

 Of course, investment in the stock market is riskier than investing in risk-free bonds, but the 

disparity of historical returns is so large it seems as if the market is being irrational. As Princeton 

economist Alan Blinder put it, the only way to explain the equity premium puzzle is if investors have a 

level of risk aversion that would make it hard for them to get out of bed in the morning.

In a 1991 article, Gregory Mankiw and Stephen Zeldes quantified the level of risk aversion 

necessary if the historical level of the premium they observed represented the expected outperformance of 

equities over bonds. Investors would have had to prefer a certain payoff of $51,300 to a 50/50 bet paying 

either $50,000 or $100,000. Jeremy Siegel and Richard Thaler note that $1,000 invested in bonds in 1925 

4 Mehra cites other studies that have found different values for the equity premium, being somewhat lower in other countries and 

lower in the United States in the 1970s. Equity returns have of course been risky. As Mehra points out, however, bonds can be 

risky also. Unexpected inflation has greatly eroded bonds values at times and there were defaults of fixed income securities in 

the financial crisis.

10

 
would have been worth $12,720 in 1995, whereas the same $1,000 invested in equities would have been 

worth $842,000 or 66 times as much.

The reason for the aversion to equities is likely because of episodes very deep price declines, such 

as the Great Depression; the 1970s (when the decline in the market rivaled the decline in the 1930s after 

adjusting for inflation) and of course the roller coaster of recent years. The S&P 500 declined from about 

1500 in early 2000 to just over 800 in July of 2002. It rose back to a little above 1500 in July of 2007 

before falling again to just under 800 in July of 2009; and it has risen above 2100 as this is written in July 

2015. People find it hard to understand and manage large risks like these, particularly when they feel they 

have no control over outcomes. In fact, in an attempt to exert control, many investors panic and exit the 

market when prices are low and sometimes then buy back in when prices have risen.

What are the implications for retirement savers? One important lesson is that retirement savers 

are well-advised to hold a significant fraction of their retirement portfolio in a diversified equity fund or 

an equity index fund. There is risk in this strategy, but the higher expected return justifies the higher risk. 

A second lesson is that trying to time the ups and downs of the market is a mistake and a way of losing 

money. A buy and hold strategy is the right one, not because the risk of equities goes away over time, it 

does not, but because holding equities over a long period takes advantage of the compounding of higher 

returns to offset the effect of the short run gyrations of the market.

Savings Accounts. According to computations by the McKinsey Global Institute (2013, Exhibit 

15) using Flow of Funds data, in 2012 Americans held around $8.7 trillion in currency and deposits which 

are currently earning zero or tiny interest returns and negative real returns. One cannot say that all 

Americans hold too much in their bank accounts because many or even most Americans report they could 

not easily come up with even small amounts to cover an emergency funding need. Many households live 

from paycheck to paycheck. Still, there are also many households that decide to keep their retirement 

funds in insured bank deposits or CDs. We understand the desire for safety, but the sacrifice of returns is 

very high indeed and is likely to mean much less security in a family’s standard of living at the time when 

they reach retirement.

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Retirement Results with Alternative Investment Strategies. In order to provide an indication of 

potential outcomes from different retirement saving strategies, we present in Tables 1 and 2 the result of a 

number of alternatives. Throughout, we assume a household with a constant real income of $50,000 a 

year that chooses to set aside a percent of that income for a retirement fund. Households with higher or 

lower incomes would have funds at retirement that would be higher or lower in a simple proportion to the 

amounts shown in the table. We show three alternatives for the percent of income placed into the fund, 

assuming the contributions are made automatically every month. The savings then accumulate over time 

at a rate of return that varies by type of investment. The first alternative shown is based on the 

recommendation of the White House under MyRA, which is to invest in Treasury securities. Based on an 

analysis in the Wall Street Journal of January 29, 2014 the Thrift Savings plan option that invests in 

Treasuries has earned 3.61 percent a year between 2003 and 2012. We assume that this return is 

continued into the future and that inflation is 2 percent a year giving a real rate of return of 1.61 percent a 

year. The second option assumes that the saver divides her or his funds between a stock fund (an index 

fund for example) and a bond fund. Based on the findings shown earlier in this paper, we assume that this 

mixed portfolio earns a 4 percent real return. The third option shows the result of investing in all equities, 

in an index fund that earns a 6 percent real return (an optimistic view of returns going forward). The next 

two columns basically repeat the previous two columns but under the assumption that the saver pays a 1 

percent a year wrap fee that reduces returns correspondingly. Table 1 shows accumulations after 15 years 

and Table 2 shows accumulations after 30 years. Note that all results adjust for 2 percent inflation.

The results show that it is hard for a middle income saver to reach the retirement goals that 

households say they want. A saver that invests 5 percent of their income for 15 years in the very safe 

option of MyRA would have $42,345 at retirement, which would provide an income supplement of 

$1,693 to $2,117 a year, not a whole lot. Saving 15 percent of income for 30 years in MyRA results in an 

accumulation of $288,461which would yield $11,538 to $14,423 a year in retirement. This amount would 

be an important supplement to Social Security but is not a huge sum given such industrious saving for 30 

years.

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All the other figures in the tables show larger accumulations than MyRA, although there is 

greater risk associated with these alternative options. There are many numbers in the tables but to pick an 

example at the other end of the risk spectrum, consider someone placing 10 percent of income in an index 

stock fund for 30 years. This generates $406,047 at retirement that in turn would provide an annual 

income supplement of $16,242 to $20,302 per year. If a one percent fee is deducted, the accumulation 

and resulting retirement income are about 16 percent lower.

To give a sense of the risks involved consider first the 15 year saver. If the equity market were to 

be depressed and be 30 percent or more below its assumed trend growth rate, then the accumulation from 

the index stock fund would be below the amount from MyRA. For the 30 year saver, the equity market 

would have to be over 50 percent below its assumed trend growth rate before the safer option wins out. 

The S&P index fell by nearly 50 percent during the Great Recession, but recovered strongly afterwards.

Most retirement advisors recommend that young savers take more risk and then reduce risk as 

they near retirement. This approach makes sense, and individuals can decide how much risk they want to 

take. Relative to the alternatives described here, this might mean holding an all equity portfolio for

a period of years and then gradually increasing the share of bonds. Most advisory firms have target funds 

that automatically adjust the portfolio for the age of the investor.

Table 1. Saving achieved over 15 years for $50,000 per year income earner based on various investing options 

(real $)

Fund with 1 percent wrap fees

Type of 

investment MyRA Mixed Stock 

and Bond Fund

Index Stock 

Fund

Mixed Stock 

and Bond Fund

Index Stock 

Fund

Risk level Very Low Moderate High Moderate High

Percent of 

income saved 

each month

5% 42,345 50,970 59,773 47,133 55,172

10% 84,690 101,940 119,547 94,266 110,344

15% 127,035 152,911 179,320 141,400 165,515

Table 2. Saving achieved over 30 years for $50,000 per year income earner based on various investing 

options (real $)

Fund with 1 percent wrap fees

Type of 

investment MyRA Mixed Stock 

and Bond Fund

Index Stock 

Fund

Mixed Stock 

and Bond Fund

Index Stock 

Fund

Risk level Low Low to Moderate High Low to Moderate High

Percent of 

income saved 

each month

5% 96,154 142,765 203,024 120,565 169,870

10% 192,307 285,529 406,047 241,130 339,740

15% 288,461 428,294 609,071 361,696 509,610

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What Should Advisors be Doing?

We have established that investing is difficult, and most consumers lack the expertise to make sound 

investment choices on their own. Even semi-savvy savers who understand the principles of 

diversification, buy-and-hold, and de-risking may struggle to optimize. Therefore professional advisors 

can provide an important service to savers by helping them allocate their portfolios in the best possible 

way. At the same time receiving investment advice can be costly, not surprisingly if a professional has to 

spend several hours talking with a client and handling the portfolio and changes over time.

How valuable or costly is advice? The answer is hard to determine. Vanguard (2014) finds that 

net returns increase by approximately 3 percent when investors work with an advisor and follow 

Vanguard’s Alpha framework for wealth management. Earning an extra 3 percent on retirement funds is 

an enormous difference. The alternative view is that advisors actually yield lower returns on net. For 

example, Hackethal et al. (2012) find that professional advisors are actually associated with more risk, 

lower returns, and higher trading frequency. Foerster et al. (2014) suggest that advisors fail to “add value 

through their investment recommendations when judged relative to passive investment benchmarks.” 

Chalmers & Reuter (2013) find that clients of financial advisors have riskier portfolios than other 

individuals, and that their accounts tend to underperform. As is so often the case with economic 

evidence, the results are all over the place.

Positive contributions that advisors can make.

1. Advisors can provide information about how much should be saved to achieve a given retirement 

goal.

2. Advisors with good firms can help savers avoid obvious pitfalls, such as fraudulent investments

or panicking and taking money out during periods of market turmoil.

3. Advisors can help savers choose the right level of risk so that they can benefit from the higher 

returns available in equities with a properly diversified fund. They can discourage market timing 

efforts.

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4. Advisors can help broaden the choice savers have available, such as overseas investment funds 

that may add returns and reduce risks.

5. Advisors can assist savers as they retire and start to withdraw money.

6. Advisors can assist savers with minimizing their tax liability. Most Americans fail to optimize 

their own tax burden by overlooking potential deductions, choosing not to itemize, and making 

errors. 

Concerns about actions that may be harmful to consumers.

1. To the extent that advisors are compensated by the funds they choose, they will have an incentive 

to pick funds that increase their own rewards.

2. The nature and amount of fees received by advisors are often not transparent and may not be 

appreciated by the client.

3. It may be difficult or impossible for small savers to obtain the level of advice they need in an 

economical way. While there is a reasonable concern about excessive fees that have been 

charged by some advisors, it also likely that helping small savers has long been a losing 

proposition financially for advisors. In some cases investment advice is offered essentially as a 

loss-leader for other services being provided, such as insurance. Furthermore, the share of lowincome households who use a financial planner is already significantly lower than the share of 

high-income households who do. According to GAO (2011), nearly 40 percent of top-incomequartile households use a professional advisor for saving and investment decisions, compared to 

only 10 percent of bottom-income-quartile households. Most small-scale savers are already 

forgoing professional advice.

Implications for the DoL’s proposed conflicted interest rule

There is not an effective infrastructure for advising small savers on the right strategy for them to replace 

the defined benefit plans that are rapidly disappearing. In the days of defined benefit plans, the 

investment advice was built into the plan and workers did not need to use advisors, but now they do. 

15
Many people would like to go back to the old days of company pension plans but that is not going to 

happen.

The lowest percentiles of the income distribution are probably not in the market for investment 

advice and will continue to rely on Social Security, Medicare and part-time work for support as they age. 

Preserving Social Security with adequate benefit levels for low-income households is a top priority.

Households at the next level up would like to save modestly to supplement to Social Security and 

other income but their options for advice are limited. It is difficult for the private sector to provide 

tailored advice to individual households at moderate income levels and make a return that is adequate for 

the resources needed. The Administration has argued that online advice may be the way to go for these 

savers, and for some fraction of this group that may be a good alternative. Relying on online sites to 

solve the problem seems farfetched, however. Maybe at some time in the future that will be a viable 

option but at present there are many people, especially in the older generation, who lack sufficient 

knowledge and experience to rely on web solutions. The web offers dangers as well as solutions, given 

the potential for sub-optimal or fraudulent advice. Another suggestion by the Administration is that small 

savers use MyRA as a guide to their decisions and this option is low cost and safe, but the returns are very 

low and will not provide much of a cushion in retirement unless low income households set aside a much 

larger share of their income than has been the case historically.

We are conducting a social experiment in which we expect more and more people to figure out 

how finance their own pensions when there is no indication that they have the requisite knowledge nor is 

there a known viable business model to provide the kind of advice they need. We applaud the DoL’s 

efforts to ensure that advisors act in the best interests of their clients, but we also urge the DoL to avoid 

shutting low- and moderate-income savers out of the advice marketplace. This is currently a problem and 

we judge that the retirement predicament facing many Americans could worsen if these groups remain 

unable to reliably access good information and advice. 

Upper income households are also in need of good advice and benefit from clear and transparent 

standards for investment advisors. For this group, greater disclosure can be very helpful, letting clients 

16
know how their advisors are being compensated and how their compensation may be impacted by 

different investment choices being recommended.

We believe that it is appropriate for the Administration to look at investment advisors and to see 

if there are behaviors that are harmful to consumers that require regulatory action. We also believe that 

new rules should be simple and workable and should make sure there is full disclosure that is 

understandable.

Implications for small-scale savers. The proposed rule will bring with it increased compliance 

costs. These costs, combined with a reluctance to assume more risk and a fear of litigation, may make 

some advisors less likely to offer retirement advice to households with modest savings. These households 

are the ones most in need of direction and education, but because their accounts will not turn profits for 

advisors, they may be abandoned. According to the Employee Benefits Security Administration (EBSA), 

the proposed rule will save families with IRAs more than $40 billion over the next decade. However, this 

benefit must be weighed against the attendant costs of implementing the rule. It is possible that the rule 

will leave low- and medium-income households without professional guidance, further widening the 

retirement savings gap. The Department of Labor should consider ways to minimize or manage these 

costs. Options include incentivizing advisors to continue guiding small-scale savers, perhaps through the 

tax code, and promoting increased financial literacy training for households with modest savings.

Clarifications about education versus advice. The proposed rule distinguished education from 

advisement. An advisor can share general information on best practices in retirement planning, including 

making age-appropriate asset allocations and determining the ideal age at which to retire, without 

triggering fiduciary responsibility. This is certainly a useful distinction. However, some advisors could 

frame this general information in a way that encourages clients to make decisions that are not in their own 

best interest. We encourage the Department of Labor to think carefully about the line between education 

and advice, and how to discourage advisors from sharing information in a way that leads to future 

conflicts of interest. One option may be standardizing the general information that may be provided 

without triggering fiduciary responsibility.

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Implications for risk management. Under the proposed rule advisors may be reluctant to assume 

additional risk and worry about litigation. In addition to pushing small-scale savers out of the market, we 

also worry that the rule may encourage excessive risk aversion in some advisors. General wisdom 

suggests that young savers should have relatively high-risk portfolios, de-risking as they age, and ending 

with a relatively low-risk portfolio at the end of the accumulation period. The proposed rule could cause 

advisors to discourage clients from taking on risk, even when the risk is generally appropriate and the 

investor has healthy expectations. Extreme risk aversion could decrease both market returns for investors 

and the “value-add” of professional advisors. We ask that the Department of Labor think carefully about 

how it can discourage conflicted advice without encouraging overzealous risk reductions.

The proposed rule is an important effort to increase consumer protection and retirement security. 

However, in its current form, it may open the door to some undesirable or problematic outcomes. With 

some thoughtful revisions, we believe the rule can provide a net benefit to the country.

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