DB1/ 84105570.6 

Via Electronic Mail to e-ORI@dol.gov

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Re: Conflicts of Interest Proposed Rule 

 Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment 

Advice (RIN 1210-AB32) 

Proposed Best Interest Contract Exemption (ZRIN: 1210-ZA25) 

Proposed Amendments to Various Exemptions (ZRIN: 1210-ZA25) 

Ladies and Gentlemen: 

PFS Investments Inc. (“PFSI”), a registered broker-dealer and an indirect wholly-owned 

subsidiary of Primerica, Inc. (“Primerica”), is pleased to submit this comment on the proposed 

Conflicts of Interest Rule (“Proposed Rule” or “Proposal”) that would more broadly define the 

term “fiduciary” under Internal Revenue Code (“IRC”) section 4975. We appreciate the 

opportunity to share our thoughts regarding this critical rule-making. We focus our comments 

on the Proposed Rule’s impact on the middle-income savers and investors who we have 

diligently and successfully served for over 30 years. 

PFSI respectfully submits that the Proposed Rule will cause significant harm to 

middle-income individuals and families by restricting their ability to save for retirement through 

Individual Retirement Accounts (“IRAs”). In the Proposed Rule, the U.S. Department of Labor 

(the “Department”) has greatly expanded the definition of fiduciary such that nearly every 

conversation a financial professional has with a potential retirement saver will be construed as 

fiduciary advice. Accordingly, transactions effected in connection with a financial professional’s 

assistance will be subject to reversal and penalties under the prohibited transaction rules unless it 

falls within a prohibited transaction exemption. We acknowledge the Department’s statement 

that it has sought to craft an exemption that allows the continuation of the very popular 

brokerage-based IRA, designated by the Department as the Best Interest Contract Exemption 

(“BIC Exemption”). Regrettably, we find the BIC Exemption to be unworkable. In short, the 

requirements of the BIC Exemption are so complex and burdensome that it is not 

administratively or operationally feasible. We believe the Proposed Rule will still require 

broker-dealers to fundamentally restructure their IRA businesses, resulting in higher minimum 

Karen L. Sukin 

EVP and Deputy General Counsel 

Primerica, Inc. 

General Counsel 

PFS Investments, Inc. 

Member FINRA 

1 Primerica Parkway 

Duluth, Georgia 30099-0001 

(470) 564-6580 Phone 

(470) 564- 7174 Fax 
DB1/ 84105570.6 Page 2 of 41 

account balances beyond the reach of millions of middle-income households, reduced access to 

financial professionals, reduced investor choices, and ultimately, lost opportunities to accumulate 

meaningful retirement savings on a tax-deferred basis for millions of hard-working Americans in 

the middle-income market. 

In Section I of this letter, we introduce Primerica as a company. We discuss how we help 

middle-income families save for retirement and the importance of our face-to-face services in 

encouraging these savings. In Section II, we address the over-breadth of the proposed fiduciary 

definition. In this discussion, we request the retention of key elements of the current definition, 

such as the requirement of “mutual understanding” by the client and the financial professional 

that the relationship is a fiduciary one. We further request that the definition include a 

meaningful “seller’s exception” for retail investors, and that the exception for investment 

education be broadened rather than narrowed. In Section III, we discuss our concern that the 

BIC Exemption is unworkable as written, and suggest specific changes that could potentially 

make the BIC Exemption operational. In Section IV, we briefly address the faulty legal basis of 

the Proposal. Finally, in Section V, we summarize our recommendations with respect to the 

Proposal. 

I. Who We Are and How We Help Middle-Income Families 

A. How Primerica Reaches Middle-Income Households

Primerica is a leading distributor of basic savings and investment products to 

middle-income households throughout the United States. Our typical clients are middle-income 

consumers, defined by us as households with an annual income of $30,000 to $100,000, a 

category that represents approximately 50% of all U.S. households. As is widely known, the 

smaller-sized transactions typical of middle-income consumers have induced most financial 

services companies to focus on more affluent consumers and abandon the middle-income 

market. Primerica’s business model, however, is designed to allow us to provide exceptional 

service to the middle-income market, and to do so in a sustainable manner. All PFSI 

representatives are independent contractors, hold the necessary Financial Industry Regulatory 

Authority (“FINRA”) and state registrations, and are compensated by commissions resulting 

from product sales. Our business model allows our representatives to concentrate on the smallersized transactions typical of middle-income consumers and provides clients access to personal 

services that would usually not be available to middle-income investors with smaller account 

balances.1

Primerica has limited its offering of investment products to those that are most 

appropriate for our middle-income clients. Through PFSI, our affiliated broker-dealer, we offer 

open-end mutual funds and variable annuities, all from well-known and respected companies, as 

well as many different savings vehicles, including taxable accounts, IRAs, and college savings 

plans. Our platform includes off-the-shelf products, with commissions on par with those paid to 

other product distributors. 

 1

 We will open an IRA account for an individual with as little as $250 to invest, or for $50 per month. 
DB1/ 84105570.6 Page 3 of 41 

Likewise, our investment education and philosophy is geared toward our middle-income 

clients, who oftentimes are new or less experienced investors. In that regard, we produce easy to 

understand educational pieces teaching fundamental investing concepts. In our educational 

outreach efforts, we often partner with our product providers.2

 Our primary investing principle, 

which is consistent throughout our educational pieces, is the long-term benefit of dollar-cost 

averaging through systematic investing into a diversified investment portfolio. To help our 

clients adopt this approach, our affiliated shareholder servicing entity, Primerica Shareholder 

Services (“PSS”), facilitates periodic investments (monthly or quarterly) into mutual fund 

accounts by processing electronic bank drafts against client checking accounts for five platform 

fund families.3

 In addition to the advantages of dollar-cost averaging and diversification, PFSI 

emphasizes the benefits of asset allocation, which spreads investment dollars across different 

asset classes in an effort to reduce risk and increase returns. By any measure, PSS has been 

highly successful in aiding Americans to save; it currently handles transactions for over 1.2 

million client accounts, and was recently awarded the 2014 DALBAR Service Award4

 for 

exemplary client service for the twelfth consecutive year.5

At Primerica, our representatives reflect and serve the communities in which they live. 

Accordingly, they are well-acquainted with the financial challenges facing the middle-income 

market. The diversity of our sales force reflects the make-up of the middle-income market and 

continues to be a primary strength of our company. There is no doubt that our representatives 

are a big reason for our success, as well as the success of many middle-income American 

families in starting to save for their retirement and future. 

B. Our Focus on Saving for Retirement 

Our investing products and principles fit hand-in-glove with the primary financial need of 

most middle-income Americans, which is the need to establish a long-term savings plan for 

retirement. In response to this need, Primerica and its representatives have made providing 

retirement savings education and information a priority. Over our history, we have produced and 

distributed hundreds of thousands of educational brochures that discuss saving for retirement.6 

 

2

 See, e.g., Legg Mason’s Discover the 3D’s of Investing, available at www.leggmason.com (click on US 

Investors/Products & Insight; then Literature; then ClearBridge Appreciation Fund). 

3

 The five fund families available on the PSS platform are American Century, Franklin Templeton, Invesco 

Funds, Legg Mason and Pioneer Investments. 

4

 DALBAR, Inc. is the financial community’s leading independent expert for evaluating, auditing and rating 

business practices, customer performance, product quality and service. 

5

 See www.dalbar.com/AwardsRankings/AwardHistory. As a service provider to the five mutual fund 

companies on our platform, PSS receives recordkeeping and shareholder servicing fees from those companies (or 

their affiliates). This is a common arrangement in the mutual fund industry. In essence, these five fund companies 

are paying PSS to perform services for shareholders that they, or their affiliates, would otherwise have to perform. 

6

 For example, some of the current retirement brochures are identified as follows: Investing at Retirement; 

Asset Management; IRAs; Power of Dollar-Cost Averaging; Invest for Success; and ABC’s – The Basics of 

Investing. 
DB1/ 84105570.6 Page 4 of 41 

We introduce clients to fundamental retirement savings concepts, such as the difference between 

expected retirement age and life expectancy, the “Rule of 72” which produces the years required 

to double one’s investment based on an assumed rate of return, and how inflation and rate of 

return affect a long-term savings plan. As a result of our efforts to educate American families 

about the need to save for retirement, and to provide beneficial, cost-effective retirement 

solutions, in just about any given year more than half of all accounts opened by PFSI are IRAs. 

C. The Real Issue for Middle-Income Americans Is the Lack of Retirement 

Savings, Not Conflicts

 Our experience in serving middle-income Americans has shown us that the real issue for 

this group of investors is not that their retirement accounts are negatively affected by conflicts, 

but rather that far too many of them have simply failed to take the steps necessary to accumulate 

meaningful retirement savings. This lack of retirement savings is borne out by the research. 

 The Survey of Consumer Finances (the “SCF”) is conducted by the Federal Reserve 

Board every three years and is a leading source of data on American’s wealth. It provides 

detailed information on the incidence of retirement plan ownership by American families, and 

categorizes the results by different criteria, one of which is family income. In its analysis of the 

results of the 2013 SCF, the Employee Benefit Research Institute (the “EBRI”) finds that 

participation in an employment-based retirement plan (either a defined benefit or defined 

contribution plan) is strongly linked to family income.7

 According to the EBRI’s report, in 2013 

the SCF shows that 67.1% of all families with an income of $100,000 or more had someone 

participating in a plan at a current job. But in middle-income America, with incomes below 

$100,000, participation is significantly lower; in 2013, just 53.5% of families with incomes 

ranging from $50,000 to $99,999 had a participant in a plan. In the $25,000 to $49,999 income 

range, participation is even lower; in 2013, the number of families with a participant in a plan at 

a current job was just 25.8%.8 What these results show is that for whatever reason, the middleincome market is currently participating far less in employer-sponsored retirement plans than the 

more affluent market.9 

 Also, the SCF takes a more inclusive look at retirement plan ownership by measuring the 

percentage of all families with a participant in an employer-based plan or an IRA or Keogh plan. 

A wide variance in participation remains. In 2013, for families with incomes of $100,000 or 

more, fully 93.0% had a participant in one of these plans. But for families with incomes of 

$50,000 to $99,999, participation drops to 81.8%, and for incomes of $25,000 to $49,999, 

 

7

 See Craig Copeland, Individual Account Retirement Plans: An Analysis of the 2013 Survey of Consumer 

Finances, EBRI Issue Brief, no. 406, November 2014, available at www.ebri.org. 

8

 Id. at 7 (Figure 2). 

9

 This negative trend is an ominous sign for retirement savings in the middle-income market, Oliver Wyman 

recently found that 84% of more than 4,300 retail investors surveyed only began saving for retirement via a 

workplace retirement plan. See Oliver Wyman, The Role of Financial Advisors in the US Retirement Market, Key 

Findings (July 6, 2015), at 5. 
DB1/ 84105570.6 Page 5 of 41 

participation drops to a lowly 58.9%.10 Lack of participation is particularly acute in the lower 

income range, where more than 4 out of 10 families have no retirement account or savings. 

 Finally, the EBRI report allows further insight by reviewing the SCF data on total 

average retirement portfolio account balance for families in any plan or IRA. The SCF 

categorizes all families into five net worth percentiles. Again, the average retirement account 

balances drop off considerably in the lower three net worth percentiles. These balances are 

$69,144 for the 50-74.9% percentile, $18,543 for 25-49.9%, and only $10,458 for families with a 

net worth in the bottom 25%.11 This data confirms that retirement savings is heavily skewed to 

higher net worth families, and that everybody else needs to save more. Those families with a net 

worth in the bottom 50%, which would be most middle-income families, are in real trouble. 

 The EBRI report confirms that, for middle-income Americans, the lack of retirement 

savings is a serious problem. The real issues that the Department and the Administration should 

be focused on are Americans’ lack of retirement savings and poor financial literacy. In fact, 

because the Proposal will make retirement information and advice harder to obtain for 

middle-income Americans, it will, unfortunately, make a bad situation worse. For us, the 

Proposal will make it more difficult for our representatives – who are on the frontlines and living 

in these most affected communities – to continue to effectively educate middle-income families 

on the benefit of retirement savings. 

D. Middle-Income Families Need Help to Understand the Need to Save for 

Retirement 

 In the New York Times bestselling book “Nudge,”12 behavioral economist Richard 

Thaler and law professor Cass Sunstein draw from behavioral science research to propose ways 

that sensible “choice architecture” (the context in which people make decisions) can successfully 

“nudge”13 people toward better decisions, without giving up their freedom of choice. One of the 

societal problems they examine is saving for retirement, and the choices that participants make, 

or fail to make, inside of employer based retirement plans. In so doing, the authors provide their 

insights into why saving for retirement is such a challenge for many people: 

 The standard economic theory of saving for retirement is both elegant and 

simple. People are assumed to calculate how much they are going to earn over 

the rest of their lifetime, figure out how much they will need when they retire, and 

then save up just enough to enjoy a comfortable retirement without sacrificing too 

much while they are still working. 

 

10 See Copeland, supra note 7, at 10 (Figure 5) 

11 Id. at 11 (Figure 6). 

12 Thaler, Richard H. and Sunstein, Cass R., “Nudge: Improving Decisions About Health, Wealth, and 

Happiness” (Penguin Books; Revised & Expanded edition, 2009 ) (All cites are to the paperback edition). 

13 The authors define a nudge as “any aspect of the choice architecture that alters people’s behavior in a 

predictable way without forbidding any options or significantly changing their economic incentives.” Id. at 6. 
DB1/ 84105570.6 Page 6 of 41 

 As a guideline for how to think sensibly about saving, this theory is 

excellent, but as an approach to how people actually behave, the theory runs into 

two serious problems. First, it assumes that people are capable of solving a 

complicated mathematical problem in order to figure out how much to save. 

Without good computer software, even a trained economist would find this 

problem daunting. The truth is that we know few economists (and no lawyers) 

who have made a serious attempt at doing it (even with software). 

 The second problem with the theory is that it assumes that people have 

enough willpower to implement the relevant plan. Under the standard theory, 

flashy sports cars or nice vacations never distract people from their project of 

saving for a condo in Florida. In short, the standard theory is about Econs 

[previously described as the “textbook picture of human beings offered by 

economists”, that “think like Albert Einstein, store as much memory as IBM’s Big 

Blue, and exercise the willpower of Mahatma Gandhi”14], not Humans [real 

people that “have trouble with long division if they don’t have a calculator, 

sometimes forget their spouse’s birthday, and have a hangover on New Year’s 

Day”15].16

 We agree with the authors’ opinion that the decision to save for retirement is one where 

most people need help to do the right thing. They explain that the act of saving for retirement 

tests one’s self-control, and that “self-control issues often arise when choices and their 

consequences are separated in time.”17 This seems particularly relevant, as when a 37-year-old 

parent opts to put off saving for retirement, a decision that will not have consequences for 20 or 

30 years, in order to buy a new car, a choice that generates immediate gratification. Finally, the 

authors posit that it is particularly hard for people to make good decisions when they have 

trouble translating the choices they face into terms that they can easily understand.18 

Thaler and Sunstein conclude that saving for retirement is, for most people, a hard 

choice, and that people need a “nudge,” or help, to do the right thing. We completely agree, 

especially for people in the middle-income market, where the decision to allocate a portion of 

limited resources to savings often means passing on some other purchase or activity. We believe 

that it is our representatives, empowered with our educational materials and ability to 

successfully service small balance accounts, who are this “nudge” or help for many American 

families. This Proposal may severely limit our ability to continue to provide this valuable 

personal service or function. 

 

14 Id. at 6. 

15 Id. at 6. 

16 Id. at 106. 

17 Id. at 75. 

18 Id. at 74. 
DB1/ 84105570.6 Page 7 of 41 

E. People that Use Financial Professionals Report Better Results in Retirement 

Savings

 In May of this year, the LIMRA Secure Retirement Institute published the results of its 

2014 Consumer Survey.19 The results show that “advisors” (defined as paid financial 

professionals, such as brokers, financial planners, or advisors) add significant value to the clients 

they serve by encouraging them “to save holistically”, including for retirement. For nearly every 

identified savings goal surveyed (except vacation), LIMRA found that “advisors’ clients are 

significantly more likely to save on a regular basis compared with people who don’t consult 

advisors.”20 Specifically with respect to retirement, LIMRA found that people who work with 

advisors (as broadly defined) are more than twice as likely (54% with advisors, as opposed to 

26% without) to save for retirement on a regular basis (outside of the workplace) than people 

who do not work with advisors.21 With respect to pre-retirees (ages 55 to 70), LIMRA found 

that those that use advisors are more likely to have performed key planning activities than preretirees who do not use advisors; these activities include: calculation of the amount of assets 

they will have available for retirement (58% with advisors, as opposed to 30% without), 

determination of their income in retirement (56% as opposed to 39%), determination of their 

retirement expenses (52% as opposed to 32%), estimation of how many years their assets will 

last in retirement (50% as opposed to 23%), and identification of the activities they plan to 

engage in and their likely costs (42% as opposed to 24%). Finally, in an earlier survey, LIMRA 

found that pre-retirees that use advisors consider themselves significantly better prepared for 

retirement than those who do not consult an advisor.22 

 Another recent study conducted by consulting firm Oliver Wyman, attached as 

Appendix 1, confirms that financial representatives add substantial value to their client’s 

financial, and retirement, well-being.23 The study focused on the role of financial representatives 

in the U.S. retirement system, and primarily drew upon proprietary surveys of more than 4,300 

retail investors (the “Retail Investor Retirement Survey”) and analysis of two datasets from IXI 

Services, a division of Equifax.24 Based on the Retail Investor Retirement Survey, the study 

found that on average, individuals that use a financial representative have more assets than 

 

19 See Matters of Fact: Consumers, Advisors and Retirement Decisions (and Results); LIMRA Secure 

Retirement Institute (May 2015), available at http://www.limra.com/. 

20 Id. at 6. The identified savings goals were as follows: retirement (outside of the workplace), education, 

specific one-time large purchase (other than home), home purchase, vacation or travel, unexpected expenses/rainy 

day fund, home improvement, medical costs, and taxes. 

21 Id. at 6. 

22 See Advisor Perspectives on Retirement Planning, LIMRA Secure Retirement Institute (2012). 

23 Oliver Wyman states that it “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 non-advised individuals.” Oliver Wyman, The Role of Financial Advisors in the US Retirement Market, at iii. 

24 See id. at iii-iv (About This Report). 
DB1/ 84105570.6 Page 8 of 41 

non-advised individuals across all the age and income levels examined. For example, 

concerning individuals with $100,000 or less in annual income (i.e., middle-income individuals), 

Oliver Wyman found that advised individuals have a minimum of 38% more assets than 

non-advised individuals.25 Moreover, with respect to individuals in or approaching retirement, 

the differences in assets are even more significant. On average, advised individuals ages 55 to 

64 had 51% more assets than non-advised individuals, and those 65 and older had 113% more 

assets (i.e., more than double) than the non-advised.26 These are meaningful differences in assets 

for middle-income individuals that use advisors, which should translate into significant 

improvements in their retirement living.27 

 Oliver Wyman’s analysis of the IXI dataset, representing approximately 20% of U.S. 

consumer-invested assets, substantiated its findings from the retirement survey. With respect to 

middle-income savers ($100,000 or less in annual income), Oliver Wyman found that on 

average, individuals who employ the services of an investment professional, like a broker, have 

had “at least 50% more” in total invested assets than others since at least 2006, the first year of 

the dataset.28 This advantage in total invested assets rose throughout the 2009 recession and its 

immediate aftermath, and remained at “more than 200% more” in total invested assets from 2011 

through 2013, the last year of the dataset. When looking only at IRA assets, Oliver Wyman 

found similar results. From 2006 to 2008, IRAs of advised individuals had, on average, 

approximately “40% more assets” than the IRAs of the non-advised.29 During the 2009 

recession and its immediate aftermath, this advantage rose sharply to “more than 50% more” in 

IRA assets for the advised for 2010 through 2013. Also, Oliver Wyman analyzed total IRA 

assets by age group in 2013, and found that for individuals with $100,000 or less in annual 

income, those with advisors had higher IRA assets in all age brackets, ranging from a low of 

39% more IRA assets in the 18-to-34 age bracket, to a high of 87% more IRA assets in the 

55-to-64 age bracket.30 Clearly, the sharp rise in the advantage of advised individuals in both 

total invested assets and IRA assets during the 2009 recession and its immediate aftermath is a 

testament to the benefit of receiving the assistance of a financial representative during a period of 

extreme market turmoil. 

 Finally, Oliver Wyman also found that advised individuals more often displayed 

investing practices “commonly associated with long term investing success,” which included 

having more diversified portfolios, staying invested in the market by holding significantly less 

cash, taking fewer premature cash distributions, and rebalancing their investments to a desired 

 

25 Id. at 16. 

26 Id. at 16. 

27 The study states that their findings hold true, even when excluding survey respondents who anticipate 

receiving retirement income from either an inheritance or trust fund. 

28 Oliver Wyman, The Role of Financial Advisors in the US Retirement Market, at 17. 

29 Id. at 17. 

30 Id. at 24. 
DB1/ 84105570.6 Page 9 of 41 

asset allocation more frequently.31 Again, we believe that the Proposal will harm middle-income 

savers by unnecessarily disrupting the relationship between the client and her chosen financial 

professional. 

II. The Proposed Rule Will Significantly Disrupt Retirement Savings for Middle-Income 

Americans 

Based on our vast experience with working with middle-income American families and 

the research cited above, we are deeply concerned that the Proposed Rule will have the 

unintended effect of depriving middle-income consumers of desperately-needed retirement 

guidance from SEC- and FINRA- regulated financial professionals. We anticipate the result will 

be an industry-wide movement to further abandon the middle-market and focus on affluent 

clients. The “haves” will be afforded personal services, while the “have-nots” will be left 

without personal assistance to fend for themselves online, or will be steered away from 

tax-advantaged IRAs entirely. 

We do not say this lightly. Since the Proposed Rule was first released, PFSI has spent 

significant effort parsing the rule and determining how the Proposal would impel us to modify 

our operations. Given the Department’s stated intent to preserve business models and provide 

flexible “principles-based” guidance, we were initially hopeful. However, we regrettably 

conclude that the BIC Exemption – the way that the Department seeks to preserve the 

commission-based brokerage model for retirement accounts – requires such significant people, 

process and technology changes, not to mention increased exposure to litigation risks, that in the 

end, it does not appear to be operationally practical or feasible to implement. The Proposal will 

harm the very consumers it was intended to protect. 

If the Department’s Proposal is finalized as proposed, “Main Street” consumers – young 

families saving what they can each month – will be separated from their chosen financial 

professional and lose access to the commission-based brokerage model that has served them so 

well. They are likely to be limited to investing in taxable accounts, or be left with no in-person 

financial professional to encourage (or “nudge”) them to save at all. For those with more to 

invest, the choice likely will be limited to more costly advisory services.32

 For these reasons, we urge the Department to withdraw the Proposed Rule. We believe 

the Proposal is unnecessary and that the Department has failed to clearly establish how the 

Proposal addresses the real retirement savings issues confronting America: lack of financial 

literacy and will to save for retirement. If the Department nevertheless continues with this 

Proposal, we urge the Department to take its time to reconsider how the Proposal will affect the 

average saver. Substantial revisions are necessary to preserve choice and access to financial and 

 

31 Id. at 2. 

32 Garber, Steven, Burke, Jeremy, Hung, Angela, and Talley, Eric, 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, at 18 (“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 broker-dealers exit the IRA market or take steps to reduce their 

IRA-related advisory activities.”). 
DB1/ 84105570.6 Page 10 of 41 

investment services for middle-income Americans. To get these revisions right will require more 

time than the Department has proposed to provide for a final rule to become effective and 

applicable. Specifically, the Department should revise the proposed definition of fiduciary 

investment advice to: (1) retain key elements of the current five-factor fiduciary definition, 

including the mutual understanding element which is critical to allowing clients and their 

representatives to define their financial services relationship; (2) provide for a meaningful 

“seller’s exception” for retail investors; and (3) preserve investment education by broadening, 

not narrowing, the education exception. 

A. The Proposed Definition of Fiduciary Is Too Broad 

 The Proposed Rule greatly expands the scope of who is a fiduciary and when fiduciary 

status begins and ends. To do so, it eliminates the current “five-part test,” and instead introduces 

vague and novel terminology that could have the result of imposing fiduciary status on almost 

every conversation that a representative may have with a potential client. For example, the 

Proposal removes the fundamental requirement that advice be provided pursuant to a “mutual 

understanding”. The proposed removal of mutuality as a necessary condition to establish a 

fiduciary relationship is alarming. Without that element, under the Proposed Rule fiduciary 

status could ensue even when there is no agreement, indication, or intention by either party at the 

time that the representative will act as a fiduciary. There is risk that an “understanding” that is 

not “mutual” can be unilaterally asserted after the fact, leaving no way for a representative to 

prove the contrary. 

 The Proposal also eliminates the requirement that the advice be “individualized”. The 

Proposal instead requires only that the advice be “directed to” a client “for [the client’s] 

consideration”. Yet, “directed to” could encompass nearly any communication received by an 

investor, including forms of targeted and public advertising. The Department has offered no 

guidance in this regard. Further, “for consideration” could include information that is not relied 

upon in making an investment decision. The proposed definition also lacks specificity regarding 

when the fiduciary relationship begins and ends. As a result, the Proposal will likely have a 

chilling effect on valuable, non-fiduciary communications with clients. 

 It is well understood that fiduciary status brings with it significant duties and 

responsibilities as well as significant liability and risk, including harsh penalties for prohibited 

transactions. Moreover, though not currently subject to a fiduciary standard of care under the 

IRC, fiduciaries to IRAs are subject to high standards of care under securities and banking laws 

and regulations, as well as state laws. Breaches of these standards can result in regulatory 

penalties and state law claims. Firms and their representatives who become fiduciaries under the 

Proposed Rule and who seek to rely upon the proposed BIC Exemption would face even broader 

liability than the Department seems to appreciate. They would be required to adhere to the BIC 

Exemption’s contractual best interest standard of care, and the Department seeks to give 

investors a non-waivable right to bring class action claims in court based on breaches of this 

standard, as well as strict liability under the prohibited transaction rules. Of course, any firm that 

assumes fiduciary liability and risk will face increased compliance and other costs with respect to 

its fiduciary services. These costs will ultimately be reflected in how firms structure their 

business models to mitigate risks, and is likely to affect the types of clients the firm serves, and 
DB1/ 84105570.6 Page 11 of 41 

the firm’s compensation and fee arrangements. It is also likely that these costs will be passed on 

to consumers. 

 Because of these high duties and significant risks, we believe that fiduciary duties should 

not be imposed unless the representative and the investor specifically agree to a fiduciary 

relationship, and that a representative and an investor should also be able to agree to limit the 

scope of that relationship. 

RECOMMENDATION: The proposed definition of fiduciary investment advice should be 

narrowed to make it clear that fiduciary status is based upon a mutual understanding or 

agreement, and that advice is individualized and intended for the recipient’s material 

consideration. 

B. The Seller’s Exception Should Be Available to Retail Investors 

 

 We agree with the Department’s statements that the current financial marketplace is 

complex, and that retirement investors, particularly middle-income investors, need help 

navigating the many choices they must make to achieve better retirement outcomes. But we 

submit that the Proposal will have an effect that is the opposite of the Department’s stated 

intentions. The Department should not upend the right of middle-income Americans to choose 

the representative they desire to work with and the level of service they want. Absent a fiduciary 

definition that clearly allows clients and their representatives to choose whether or not to enter 

into a fiduciary relationship, the Proposed Rule should allow for a “seller’s exception” that 

extends to all Americans. A person should not be considered to be an investment advice 

fiduciary when the client understands, or reasonably should understand, that the person is acting 

as a sales representative and not as a fiduciary. In short, as under current law, retail investors 

should be trusted to understand the difference between sales activity and fiduciary investment 

advice. 

The distinction between sales pitches and fiduciary investment advice is long-standing, 

and has been recognized by both the Department and the courts.33 For example, in Farm King 

 

33 See Farm King Supply, Inc. v. Edward D. Jones & Co., 884 F.2d 288 (7th Cir. 1989); see also Leimkuehler 

v. Am. United Life Ins. Co., 713 F.3d 905, 911-12 (7th Cir. 2013) (confirming that, standing alone, selecting both 

funds and their share classes for a menu of investment options offered to 401(k) plan customers does not transform a 

provider of annuities into a functional fiduciary under ERISA); Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009) 

(citing Farm King and finding that “merely playing a role or furnishing professional advice” in the selection of 

funds is not enough to transform a company into a fiduciary), reh’g denied, 569 F.3d 708 (7th Cir. 2009), cert. 

denied, No. 09-447 (Jan. 19, 2010); Am. Fed’n of Unions, Local 102 v. Equitable Life Assurance Soc’y, 841 F.2d 

658 (5th Cir. 1988) (noting that simply urging the purchase of products does not make an insurance company an 

ERISA fiduciary with respect to those products); Golden Star, Inc. v. Mass Mut. Life Ins. Co., 3:11-cv-30235-PBS 

(D. Mass. May 20, 2014) (while service provider had reserved the right to delete or substitute the mutual funds 

offered to the plan without either providing any notice of changes or opportunity to reject them, or allowing the plan 

to engage a different service provider in the event of a rejection, it had never exercised that authority or acted in any 

way other than in a ministerial fashion with respect to the plan menu, so it was not a fiduciary on this basis); 

Santomenno v. John Hancock Life Ins. Co. (U.S.A.), 56 Employee Ben. Cas. 1131 (D.N.J. 2013) (holding that a plan 

service provider was not an ERISA fiduciary with respect to its fees because it “negotiated its service provider fees 

at arm’s length” and because the fees were fully disclosed; nor was the service provider a fiduciary with respect to 

its selection of a particular fund that paid revenue sharing as an investment option because the service provider did 

not have the ultimate authority over which investments were included in the plan); Zang v. Paychex, Inc., 728 F. 
DB1/ 84105570.6 Page 12 of 41 

Supply, Inc. v. Edward Jones, the Seventh Circuit considered a client’s “agreement” with a 

broker-dealer to listen to the broker-dealer’s “sales pitch” and, if the client liked the pitch, to 

purchase from among the suggested investments. The court observed that the broker-dealer 

offered the plan individualized solicitations “much the same way a car dealer solicits 

particularized interest in its inventory,” and concluded that there was no basis to conclude that 

the broker-dealer’s activities would have resulted in fiduciary status. This distinction makes 

sense, and should continue to apply under the Proposed Rule. Though the Department appears to 

have recognized the distinction in its proposed carve-out for sales to certain institutional 

investors, it seems that the Proposed Rule would not allow sales and marketing communications 

– even communications that a new or inexperienced investor would construe as sales pitches 

rather than impartial advice – to continue to be provided to middle-income investors on a 

non-fiduciary basis. We strongly urge the Department to fully recognize the broad application of 

the long-standing, common-sense distinction between sales activity and fiduciary investment 

advice by inserting a broadly applicable “seller’s exception” into the Proposal. 

 The exception should require that the seller provide, at the point of sale, a clear, plain 

English written disclosure which explains: (i) the services to be provided and the compensation 

to be received in exchange for those services; (ii) that the representative is selling or marketing 

products or services, and is not acting in a fiduciary capacity, or offering impartial advice; and 

(iii) any material conflicts the seller and its financial institution may have, including the receipt 

of higher compensation for selling certain products or services. The primary benefit of a seller’s 

exception is that it preserves freedom of choice for retirement investors. Instead of being forced 

into a situation where the options are only higher-cost fiduciary advice or do-it-yourself options, 

middle-income investors would be able to receive non-fiduciary information if they felt it useful 

for learning about available products and services. In spite of the Department’s focus on a few 

unscrupulous financial representatives, the truth is that millions of middle-income Americans 

like their current representatives, have benefited from their relationships with them, and want to 

keep these existing non-fiduciary brokerage relationships. 

 In addition, inserting a “seller’s exception” that removes sales activity from the definition 

of fiduciary would preserve the services provided by the traditional brokerage model that has 

evolved under the federal securities laws. As such, it would more closely align the rule with 

Congressional intent to preserve the traditional brokerage model, as expressed in Section 913 of 

the Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, H.R. 4173 (the “Dodd 

Frank Act”), where Congress considered, but rejected, repealing the broker-dealer exemption in 

 Supp. 2d 261, 270 (W.D.N.Y. 2010) (citing Hecker and holding that a plan service provider that offered a menu of 

investment options to a 401(k) plan was not a fiduciary, where the parties’ contract required the service provider to 

give the plan notice of, and an opportunity to reject, any changes to the menu); Columbia Air Services Inc. v. 

Fidelity Mgt. Trust Co., 2008 U.S. Dist. LEXIS 76999 (D. Mass. Sept. 30, 2008) (citing Hecker and following its 

analysis); Dupree v. The Prudential Ins. Co. of Am., WL 2263892 (S.D. Fla. 2007) (finding “it is well settled” that 

an insurer is not a plan fiduciary when it sells insurance products and services to a plan, even when it otherwise 

performs fiduciary functions for the same plan, and that insurers are free to contract with their plan customers on an 

arm’s-length basis that does not implicate ERISA’s fiduciary standards); Fechter v. Connecticut Gen. Life Ins. Co., 

800 F. Supp. 182 (E.D. Pa. 1992) (noting that courts refuse to impose fiduciary obligations on insurance companies 

who merely sell their products or services to pension plans, unless the insurer assumes decision-making control over 

the administration or disposition of plan assets, and that simply urging the purchase of its products does not make a 

company an ERISA fiduciary for those products). 
DB1/ 84105570.6 Page 13 of 41 

the Investment Advisers Act of 1940 (“Advisers Act”), as a way to impose a higher standard of 

care on broker-dealers. As the Honorable Barney Frank explained in his letter to the Chairman 

of the SEC, Congress intended that any new standard “recognize and appropriately adapt to the 

differences between broker-dealers and registered investment advisers.”34 Because the Proposal 

could broadly impose fiduciary status on broker-dealers and effectively bar them from receiving 

commissions with respect to retirement accounts, unless the Department inserts a broad-based 

“sellers exception”, the Proposed Rule does not appear to conform to Congressional intent. 

 It is well known that middle-income savers rely heavily on traditional brokerage 

relationships for help with investments and retirement savings. In its April 2011 study of the 

impact of the Department’s 2010 proposal on IRA consumers, Oliver Wyman found that 98% of 

IRA investors with less than $25,000 were in brokerage relationships, and that 7.2 million retail 

brokerage IRAs did not have sufficient assets to qualify for an advisory account at any firm in 

the study.35 It is highly likely that the vast majority of these 7.2 million accounts belonged to 

middle-income investors. We find nothing in the current Proposal to alleviate the disruption that 

Oliver Wyman predicted would befall these IRA investors if they are cut off from their existing 

brokerage relationships. As a result, though unintended, it is predictable that the disruption 

caused by implementation of the Proposal, which does not provide a workable mechanism by 

which traditional brokers can continue to provide services to IRAs, will fall primarily on 

middle-income Americans.36 

 

 

34 See Letter from the Honorable Barney Frank, Ranking Member of the U.S. House of Representatives 

Financial Services Committee, to SEC Chairman Mary L. Shapiro, dated May 31, 2011. 

35 Oliver Wyman, Assessment of the Impact of the Department of Labor’s Proposed “Fiduciary” Definition 

Rule on IRA Consumers (April 12, 2011), at 2, 16. 

36 We note that the SEC took a similar approach that acknowledged the investor’s ability to understand the 

differences between a brokerage account and an advisory account when it adopted Rule 202(a)(11)-1 under the 

Advisers Act. That rule, which was later vacated by the D.C. Circuit Court of Appeals on other grounds, allowed 

broker-dealers to make available fee-based brokerage accounts without subjecting them to the Advisers Act. See

Certain Broker-Dealers Deemed Not to Be Investment Advisers, Exchange Act Release No. 51523, Investment 

Advisers Act Release No. 2376 (Apr. 12, 2005), 70 Fed. Reg. 20424 (Apr. 19, 2005); see also Fin. Planning Ass’n 

v. SEC, 482 F.3d 481, 488, 493 (D.C. Cir. 2007) (holding that the SEC exceeded its authority in promulgating the 

final rule by relying on Section 202(a)(11)(F) of the Advisers Act (now 202(a)(11)(H)) to establish a new, broader 

exemption for broker-dealers). Among other things, broker-dealers relying on the rule were required to include the 

following prominent statement in advertisements and account agreements: “Your account is a brokerage account 

and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make 

sure you understand your rights and our obligations to you, including the extent of our obligations to disclose 

conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who 

compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by 

product and over time.” In a subsequent no-action letter, the SEC staff contemplated and provided a process for 

shifting from an advisory relationship to a brokerage relationship, stating that where a dually registered brokerdealer/investment adviser seeks to terminate an advisory relationship and assume a brokerage relationship, 

“[d]isclosure by a broker to a customer should be sufficient to enable the client to reasonably understand that the 

broker-dealer/investment adviser is removing itself from a position of trust and confidence with its client.” See

Securities Industry Ass’n, SEC Staff No-Action Letter (pub. avail. Dec. 16, 2005). 
DB1/ 84105570.6 Page 14 of 41 

RECOMMENDATION: The Department should provide a meaningful seller’s carve-out 

for retail investors that preserves their access to non-fiduciary investment assistance and 

the commission-based brokerage model. 

 

C. The Education Exception Is Too Narrow 

1. Identifying Investment Options 

 

 Given the breadth of the proposed fiduciary investment advice definition, the Proposal’s 

investment education carve-out would be one of the few avenues for conveying critical 

information about investing to middle-income investors without subjecting the provider of such 

valuable education and assistance to the fiduciary prohibited transaction rules. Though the 

Department explains that it has based the carve-out on its current guidance under Interpretive 

Bulletin 96-1, and has made certain clarifications to that guidance, the carve-out’s restriction on 

identifying specific investment options severely hampers its usefulness. 

 Our representatives help middle-income investors navigate the complex landscape of 

investment alternatives. They do this by providing education about saving and investing 

techniques that the client can implement without devoting significant time to complicated 

research. They educate middle-income families about the general financial and investment 

concepts cited in the carve-out, and empower them with investment tools that are generally 

consistent with the carve-out’s contemplated requirements. In our experience, this education 

leads to increased savings and investment decisions that are better-suited to meeting the goals of 

those investors. 

 The Department’s narrowed carve-out would prevent us from providing our clients with 

the investment education that would allow them to identify the investment options available that 

can be used to implement the carve-out’s general investment concepts, asset allocation models, 

and interactive investment materials. We are concerned that the end result will be missed 

investment opportunities, investment decisions that are not consistent with the education 

provided, and in the worst case, reduced retirement savings for middle-income Americans, who 

cannot afford and may not be eligible for full-service investment advisory programs. Thus, we 

ask the Department to permit financial professionals to continue to identify specific investment 

options, so long as the information is provided in a non-discriminatory and objective manner, 

and is accompanied with a robust disclosure about the availability of similar products on other 

platforms. 

RECOMMENDATION: The Department should provide an investment education 

exception that permits us to identify specific products so that we can provide useable and 

meaningful education and assistance. 

2. Education with Respect to Rollover and Distribution Decisions 

 The education carve-out also should clarify when and how information can be provided 

about rollovers and plan distributions, confirming that our representatives will not be deemed to 

be fiduciaries (under ERISA or Section 4975 of the IRC) solely as a result of providing 
DB1/ 84105570.6 Page 15 of 41 

information about factors the client should consider in making decisions about rollovers as 

discussed in FINRA Notice 13-45. 

 Under the Department’s broad construct of “fiduciary,” nearly all conversations about 

rollovers and distributions could be viewed as fiduciary investment advice, including discussions 

about rollovers from a plan to an IRA and between IRAs, as well as conversations with plan 

participants about the availability of rollover services or regarding help setting up an IRA. As a 

result, we are concerned that many representatives will be reluctant to discuss options and 

considerations with investors absent a clearer carve-out for education about rollovers and 

distributions. Studies show that if employees lose access to retirement assistance at employment 

termination, they often are likely to cash out some or all of their retirement savings. A 2014 

study by Quantria Strategies, LLC estimated that the loss of rollover assistance at job termination 

could lead to increased cash-outs of $20-32 billion annually.37

 Under the Proposal, fiduciary investment advice would include recommendations with 

respect to rollovers and plan distributions among the categories of covered recommendations, 

reversing the Department’s prior guidance in Advisory Opinion 2005-23A (the “Deseret Letter”) 

that such recommendations, absent other factors, would not be fiduciary investment advice. We 

believe the Deseret Letter is correct under the plain terms of ERISA and established principles of 

the law of trusts. As the Department knows, many firms have relied on the Department’s 

guidance in the Deseret Letter in structuring their services to investors who are eligible for a plan 

distribution. Investors themselves benefit significantly from these services. 

 For all of these reasons, the Department should not reverse the position set forth in the 

Deseret Letter. If the Department does not change the Proposal in this regard, then it must allow 

us to continue to provide meaningful educational assistance to families who are faced with 

important and complex decisions about what to do when they are separating from their employer 

or are otherwise eligible for a distribution. Specifically, the Department should provide clear 

guidance regarding the types of information that can be provided as investment education that 

does not implicate fiduciary status. We specifically ask the Department to confirm that financial 

professionals can provide rollover and distribution education in accordance with FINRA’s 

guidance distinguishing recommendations from investment education, and discuss the factors 

raised in FINRA Notice 13-45 without being deemed to be a fiduciary, so long as the financial 

professional clearly notifies the participant that the professional is not acting as a fiduciary, or a 

representative or agent, of the plan. 

RECOMMENDATION: The Department should clarify the investment education 

exception by specifically incorporating FINRA guidance distinguishing recommendations 

from investment education in the context of rollovers and distributions. 

III. The Exemptions Do Not Address the Actual Issues Facing Middle-Income Families 

with Respect to Their Retirement Savings 

 

37 Quantria Strategies, LLC, Access to Call Centers and Broker Dealers and Their Effects on Retirement 

Savings, April 9, 2014. 
DB1/ 84105570.6 Page 16 of 41 

As written, the Proposed Rule is a marked departure from existing law. With such a 

broad and ambiguous definition of fiduciary investment advice, and without meaningful 

carve-outs for sales and education activities directed to retail investors, financial institutions are 

likely to limit the options and assistance available to middle-market retirement savers. Further, 

without substantive coordination with the legal standards of other agencies, the Proposal risks 

cutting off opportunities for tax-deferred savings, effectively restricting a substantial portion of 

the population to saving in taxable accounts. This is particularly true with respect to smaller 

accounts, where the risk of triggering fiduciary status will outweigh the potential reward. Again, 

the result will be a two-tiered system of services: those available for the “haves” and self-help 

options for the “have-nots,” namely young families and lower-wealth individuals who most need 

guidance and encouragement to save.

A. The BIC Exemption Is Not Workable as Written 

 We draw this conclusion first and foremost because the Department’s expanded 

definition of “fiduciary” makes prohibited transaction relief necessary to continue to effectively 

serve IRAs, and because the relief the Department has drafted for commission-based brokerage 

services to IRAs – the BIC Exemption – is not workable. As a starting point, we agree with the 

Department that firms and their representatives should always act in their clients’ best interests. 

In fact, we believe that acting in the clients’ best interests is critical to our business’s long-term 

success. When our clients can see that they are on the path towards achieving their retirement 

and other goals, they are more likely to return to us and our representatives, and are more likely 

to refer their friends and family members to us. The growth and success of our investment 

business is closely tied to our clients’ growth and success, and our clients’ growth and success 

depends upon us acting in their best interests. 

 Though we agree with the best interest standard in principle, the BIC Exemption includes 

prescriptive conditions that fall short of the Department’s stated intent to adopt a flexible, 

principles-based approach.38 From start to finish, the BIC Exemption disrupts the personal 

relationships that we and our representatives have worked hard to develop with our clients, and it 

fails to offer certainty that the commission model can be preserved, even in a significantly 

altered, more costly, and less effective form. In operating our business, “certainty” with respect 

to regulatory compliance matters is critical, because a failure to satisfy the BIC Exemption may 

result in steep costs to correct prohibited transactions. It may also lead to consumer and class 

action lawsuits. This is the case even when there has been no client harm or loss. Critically, the 

technical implementation of the BIC Exemption promises to be a substantial burden, and likely 

will cause a significant disruption of services to our clients with few added benefits in the way of 

investor protections. 

 

38 Definition of “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice; Proposed Rule 

(Fiduciary Proposal), 80 Fed. Reg. 21,928, et seq., at 21,929 (proposed Apr. 20, 2015) (stating that the Department 

“sought to preserve beneficial business models for delivery of investment advice . . . that would broadly permit firms 

to continue common fee and compensation practices, as long as they are willing to adhere to basic standards aimed 

at ensuring that their advice is in the best interest of their customers.” (emphasis added)). 
DB1/ 84105570.6 Page 17 of 41 

 We are not alone in our observations. The feasibility of the BIC Exemption has been 

analyzed and will be commented on by others. The difficulty, cost, risk and uncertainty the BIC 

Exemption imposes likely will cause those firms serving middle-income clients to limit 

brokerage services and move accounts with higher account balances to advisory services. 

Millions of existing small-balance IRA owners are likely to lose access to the financial 

professional of their choice, or any financial professional at all. The majority of others will face 

higher costs as their accounts shift to advisory accounts, will experience lower savings rates as 

they increasingly cash out of 401(k)s due to lack of guidance, and will carry excess portfolio risk 

due to less diversification and less frequent re-balancing.39 According to one study, 

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.40 

The consequence will be negative to “Main Street” retirement savers, particularly to long-term 

buy-and-hold retirement investors and those with smaller accounts. 

 Our comments on the BIC Exemption follow below and are focused on identifying the 

specific conditions that prevent it from providing meaningful relief from prohibited transactions. 

In each section, we recommend changes to the BIC Exemption that cumulatively may improve 

its feasibility. 

 

1. Written Contract Will Preclude Reliance on BIC Exemption 

a) Timing Is Too Disruptive 

 The BIC Exemption requires that the financial institution, representative, or retirement 

investor execute a contract before the representative dispenses recommendations. Given the 

breadth of communications that the Proposed Rule covers as “fiduciary” advice, this requirement 

makes it imperative that the contract be signed at the very outset of a potential client relationship. 

Requiring a potential client to execute a formal agreement so early in a putative relationship will 

likely have a chilling effect on middle-income investors who are already understandably 

overwhelmed about saving for retirement. 

 In our experience, prospective clients want to get to know our representatives, probe their 

financial knowledge, discuss financial goals and generally learn about potential savings plans 

before deciding to invest. Forcing a prospective client to sign a contract before he or she gets to 

know our representative and our business will be off-putting and disconcerting. A premature 

agreement is more likely to make prospective clients anxious about the obligations that they 

taking on by executing the document, rather than give comfort to them about their rights and 

 

39 Oliver Wyman, The Role of Financial Advisors in the US Retirement Market, at 3. 

40 Quantria Strategies, LLC, Unintended Consequences: Potential of the DOL Regulations to Reduce 

Financial Advice and Erode Retirement Readiness (July 20, 2015), at 29. 
DB1/ 84105570.6 Page 18 of 41 

protections. Undoubtedly, some prospective clients will choose not to go forward at all. As we 

have discussed, this would have the effect of curtailing retirement savings. We request instead 

that the Department require the agreement to be signed at account opening, after a prospective 

client has decided to engage with the firm and the representative. We base the foregoing 

observations on our and our representatives’ decades of experience working with middle-income 

and new savers, through which we have developed an informed understanding of the types of 

demands on clients that are likely to cause them to retreat from retaining a firm’s services. 

 The process also inflicts significant added cost, as we undoubtedly will be executing 

contracts with persons who never become clients. These added costs are likely to result in 

increased costs for those who do become clients. 

RECOMMENDATION: The BIC Exemption contract should not be imposed until 

account opening. 

b) Requiring Representative to Sign Creates Uncertainty 

 The obligation to have both the financial institution and the representative execute the 

agreement is also troublesome. If a representative ceases working with us and some of his or her 

clients would like to continue as clients of another one of our representatives, the client would be 

required to execute a new agreement with the new representative before proceeding under the 

BIC Exemption. In the interim period, we would be unable to provide retirement investment 

services without risking the loss of the BIC Exemption’s protection. Likewise, the Proposal does 

not clarify whether, in situations where multiple representatives participate in client services, the 

client will need to sign an agreement with each representative. It seems that under the Proposal, 

if the contracted representative is not available, a recommendation or transaction cannot be 

made. The inconvenience would be hard to explain, would be frustrating to clients, and could 

prevent best execution. These ambiguities and similar other difficulties should be addressed and 

resolved. The Department should expressly permit satisfaction of the BIC Exemption contract 

requirement via an enforceable agreement between the firm and the investor only, which is 

distributed to the client without “wet signatures” of the firm, the representative or the client. 

RECOMMENDATION: The BIC Exemption contract should not require “wet signatures” 

or that individual representatives be parties to the contract. 

c) Contractual Assumption of Fiduciary Status 

 Under the proposed regulatory language of the BIC Exemption, the firm and the 

representative must affirmatively state in a contract that they are fiduciaries with respect to any 

investment recommendations made to the investor. Yet, it is not clear as drafted whether this 

requirement is intended to apply with respect to a single recommendation, to the account, or to 

the investor. Guidance here is needed; without it, we are left uncertain as to whether the 

requirement mandates an ongoing or long-term advisory relationship. Similarly, it is unclear 

whether contractual assumption of fiduciary status at point-of-sale effectively imposes an 

ongoing obligation to provide “best interest” advice, such as account re-balancing, or otherwise 

to monitor the account. Likewise, it is unclear how or whether the contract can specify the time 
DB1/ 84105570.6 Page 19 of 41 

at which the fiduciary relationship would terminate. While the Department may have intended 

flexibility, given the lack of clarity we must consider how the plaintiff’s bar and courts will 

interpret this duty. 

RECOMMENDATION: The BIC Exemption should expressly permit a firm and its 

representatives to contractually agree to be a fiduciary solely with respect to a transaction 

without an ongoing fiduciary obligation to monitor the account. 

2. Transition Rule for Existing Clients Is Too Restrictive 

 The BIC Exemption provides limited transition relief for existing clients for trail 

commissions and other compensation in connection with advice that occurred prior to the 

applicability date of the Proposed Rule. However, the conditions of the BIC Exemption must be 

satisfied before a firm or its representative makes a buy, hold or sale recommendation to an 

existing client. The effect is that all current IRA and plan clients would need to execute a 

contract for the exemption to be available to future transactions. For example, if an existing 

account holder were to contact their representative on a “bearish” day in the markets inclined to 

sell and minimize losses, the representative would have to decline to provide assistance until a 

contract is signed. Historically, financial representatives have played a critical role in this 

circumstance, serving to calm nervous investors and help them to avoid selling at market lows. 

Studies show that unsophisticated investors in particular benefit from this professional help.41 

 To prevent such “no-service” conversations, firms can be expected to pro-actively send 

their existing clients a letter just prior to the rule’s implementation stating that the Department’s 

rule prevents the firm and its agents from helping the client with his or her IRA unless and until a 

new contract is in place. Operationally, this would require us to mail or electronically distribute 

these new agreements to our more than 1.2 million existing IRA clients and then track and 

document the signed and returned agreements. Most importantly, most clients will not 

understand why we are asking them to sign a new contract agreement with us so they can 

continue to receive services that they already have chosen to receive and that we have already 

been providing. Moreover, we would need to develop systems to record whether the BIC 

Exemption contract was executed and returned, and systems to retain copies of the executed BIC 

Exemption contract to be able to prove compliance with the BIC Exemption. All of this will 

come at a cost in terms of both time and money, which likely would ultimately be passed on to 

clients. Countless conversations will be deflected and transactions derailed during the process. 

 While the transition rule allows for compensation received pursuant to an agreement or 

arrangement entered into prior to the applicability date of the Proposal, the Department should 

eliminate ambiguity by clarifying that pre-arranged transactions with respect to existing IRA 

accounts, such as established arrangements for regular deposits to IRA accounts, which are not 

dependent on new advice, are provided the transitional relief. Further, we request that rather 

than simply providing “transitional relief,” the Department grandfather existing clients in a 

meaningful way. Specifically, firms should be permitted to continue providing assistance under 

 

41 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”, at 23. 
DB1/ 84105570.6 Page 20 of 41 

current rules with respect to all retirement accounts opened prior to the implementation date of 

the final rule. 

RECOMMENDATION: Existing accounts and all prospective transactions within them 

should be grandfathered under the current definition of “fiduciary investment advice” 

rather than transitioned to the BIC Exemption. 

3. Impartial Conduct Standards and Warranties Create Untenable 

Uncertainty and Risk with Respect to Common Business Models 

 As a condition of the BIC Exemption, firms must contractually agree to provide 

investment advice that reflects the care, skill, prudence, and diligence under the circumstances 

then prevailing that a prudent person would exercise, based upon the investment objectives, risk 

tolerance, financial circumstances, and needs of the retirement investor, without regard to the 

financial or other interests of the adviser, financial institution or any of their affiliates or any 

other party (the “Impartial Conduct Standards”).42 In addition, firms must warrant that they have 

adopted “policies and procedures reasonably designed to mitigate the impact of material conflicts 

of interest . . . and ensure that individual Advisers adhere to the Impartial Conduct Standards.”43 

The Proposed Rule further requires the firm and the representative to agree and warrant that each 

will not recommend any assets for purchase if the total amount of compensation anticipated to be 

received by the representative, the financial institution, and their affiliates and any related 

entities in connection with the purchase, sale or holding of the asset will exceed “reasonable 

compensation in relation to the total services provided” to the retirement investor. 

 Among the serious concerns we have, the Impartial Conduct Standards and the “total 

compensation” condition impose strict liability dependent upon a subjective, 

facts-and-circumstances analysis. Though a firm might conclude that its practices satisfy the 

Impartial Conduct Standards, a litigant could claim the contrary after the fact. Thus, firms will 

not know with any degree of certainty whether its policies and compensation practices 

effectively satisfy the exemption, absent a final adjudication of the issue by a court or the 

Internal Revenue Service years later. 

 There is a significant difference between (i) requiring that the firm to contractually agree 

to provide its services in conformance with the Impartial Conduct Standards and (ii) requiring 

actual compliance with the subjective standard, as a condition of the BIC Exemption. With 

respect to the former, a breach would provide the client a contractual right to sue for damages 

based on the loss caused by the firm and its representative’s acts or omissions. The latter would 

expose the firm to strict liability for a prohibited transaction regardless of whether there was 

even a loss. For this reason, we request that the Department require that the firm contractually 

agree to provide its services pursuant to the Impartial Conduct Standards, but not require actual 

adherence to the Impartial Conduct Standards as the condition of the BIC Exemption. 

 

42 80 Fed. Reg. at 21,987. 

43 Id. at 21,970. 
DB1/ 84105570.6 Page 21 of 41 

 We note that similar risks are managed in the context of ERISA section 404, where 

remedies are generally balanced against the severity of the infraction; they are not managed 

under the strict liability prohibited transaction rules. This is because the penalties for engaging 

in a non-exempt prohibited transaction are severe, and may include undoing the transaction, 

forfeiture of all compensation, disgorgement of any profits and payment of excise taxes of 15% 

to 100% of the amount “involved” in the transaction. 

 Additionally, as discussed in Section V below, the Proposal creates a private right of 

action that likely goes beyond the authority of the Department. 

RECOMMENDATION: The Department should eliminate the warranty requirements 

from the BIC Exemption, and should not require actual adherence to the Impartial 

Conduct Standards as a condition of the BIC Exemption. 

4. Lack of Clarity of Terms Means High Risk of Prohibited Transactions 

a) Best Interests Standard’s “Without Regard” to Firm’s or 

Representative’s Interests 

 As cited above, the Impartial Conduct Standards require firms and their representatives to 

act “without regard to the financial or other interests of the Adviser, Financial Institution or any 

Affiliate, Related Entity, or other party.” In the preamble to the Proposal, the Department makes 

clear its view that this standard is based on ERISA’s duty of loyalty, which requires fiduciaries 

to act “solely in the interests” of the plan and its participants, and that the Department expects 

this standard to be interpreted in light of the judicial experience with ERISA’s fiduciary 

standards.44 This duty has been strictly interpreted to require fiduciaries to act with “complete 

and undivided loyalty to the beneficiaries of the trust”, and with an “eye single to the interests of 

the participants and beneficiaries.”45 Effectively, the Department has turned the ERISA 

prudence and loyalty standards into a prohibited transaction applicable to IRAs, and at the same 

time has made that standard enforceable by IRA owners in state court. We do not believe that 

Congress intended a breach of the duty of prudence to violate the prohibited transaction 

provisions of ERISA and the IRC. 

 

 Adding to this, the requirement that advice be given “without regard” to the financial 

interests of the representative may make the standard impossible to satisfy. The “without 

regard” language may have the effect of limiting the representative to recommending nothing but 

the lowest fee investment. Should the representative be so restricted, the representative will 

remain at litigation risk, as the lowest-fee option is not necessarily the choice that is best-suited 

to the investor. The “without regard to” language also extends to the “other interests” of “any 

other party”. Neither of these terms is explained and no limits are set. Once again, these 

 

44 29 U.S.C. § 1104(a)(1). 

45 See Donovan v. Bierwirth, 680 F.2d 263, 3 EBC 1417 (2d Cir. 1982); Freund v. Marshall & Ilsley Bank, 

485 F. Supp. 629, 1 EBC 1898 (W.D. Wis. 1979). 
DB1/ 84105570.6 Page 22 of 41 

ambiguities are primed to prevent a firm and its representatives from obtaining certainty that they 

can satisfy the conditions of the BIC Exemption. 

RECOMMENDATION: The “best interest” language should adhere to the FINRA 

formulation – the financial professional should provide recommendations that are in the 

“best interest of his client and put his client’s interest before his own;46 the “without 

regard” and other extraneous language should be deleted. 

b) Reasonable Compensation “In Relation to the Total Services”

 The Impartial Conduct Standards require that no recommendation be made if the “total 

amount of compensation anticipated to be received” by the representative, firm, its affiliates and 

related entities will “exceed reasonable compensation in relation to the total services they 

provide” to the investor. No guidance is provided as to how to make the comparison between 

compensation and “total services,” nor is there guidance to be drawn from other sources. Until 

now, neither ERISA nor any regulator has required that compensation be justified in relation to 

the specific services provided to a client or account. Because this new construct is unexplained 

and untested by the courts, and because failure to satisfy its precepts would mean that 

transactions would be reversed and that excise taxes could apply, it presents unmanageable risk. 

 Adding further confusion, a “reasonable compensation” requirement appears twice in 

different forms in the Proposed Rule. In addition to being included in the Impartial Conduct 

Standards, Section IV(b)(2) provides that any compensation received in connection with any 

buy, sale or hold recommendation be “reasonable in relation to the value of the specific services 

provided to the Retirement Investor in exchange for the payments and not in excess of the 

services’ fair market value.” The Department provides no guidance as to how to apply the 

requirement that compensation be no more than “fair market value” for the services. Some of 

the fees that we collect support our overhead and administrative costs of doing business and are 

not directly tied to a specific account or transaction. It is not clear whether this mandate would 

require us to trace every dollar earned with respect to these costs of doing business to a particular 

account, or to a transaction, in order to document reasonableness or fair market value. 

 It is also unclear whether the required market comparison means that the BIC Exemption 

cannot be satisfied by any means other than level fees. This uncertainty increases the risk that a 

court may interpret the “fair market value” standard to mean that a fee differential could not be 

justified for different assets classes that are similarly serviced. Similarly, it is unclear whether 

the language used to describe “reasonable compensation” requires a representative to 

recommend only those funds with the lowest revenue share or other third-party payments, on the 

grounds that a higher-fee fund would provide unreasonable benefit to the firm or representative. 

As noted above, this interpretation would make the Proposal impossible to satisfy, as the 

lowest-cost investment is not always in the client’s best interest. 

 

46 See, e.g., FINRA Regulatory Notice 12-25, Q1 at 3 (May 2012) (citing FINRA rules that adhere to this 

formulation). 
DB1/ 84105570.6 Page 23 of 41 

 By requiring compliance with this standard as a condition of the prohibited transaction 

exemption, the Department may have undermined its effort to preserve existing business models. 

To achieve its stated objective, the Department should revise the BIC Exemption to include a 

single condition regarding reasonable compensation, and to use the same, well-understood 

standard that applies under IRC section 4975(c)(2). Specifically, no more than reasonable 

compensation may be paid for the services provided to the investor. 

RECOMMENDATION: Reasonable compensation should be defined in standard terms; 

the “total compensation” and “reasonable in relation to value” language should be deleted. 

c) “Neutral Factors” to Justify Differential Compensation 

 Layering on to its vague “reasonable compensation” language, the BIC Exemption 

requires firms and representatives to warrant that their compensation practices will not “tend to 

encourage” violations of a best interest standard. Again, in spite of the Department’s stated 

intention to preserve current business models, the BIC’s cumulative effect may be to force firms 

to eliminate any differential compensation or third-party compensation arrangements. 

The Department suggests five examples that it claims provide support for variable 

compensation structures. However, none is practicable to implement. Two of the examples are 

level-fee structures, and one requires independent computer models. Notably, despite querying 

others in the industry, we are aware of no company that offers a 408(g) computer model advice 

arrangement. We believe that is because 408(g) arrangements are impractical, which in turn 

reflects that it is error for the Department to base the rule in part upon projections about 

computer-based tools that do not currently exist and have not been shown to be feasible. The 

fourth option is a compensation system based on “neutral factors,” such as the time and effort 

involved in selling a product, and the fifth suggests arrangements designed to “align the 

interests” of the representative with the interests of the investor. Though the fourth and fifth 

options ostensibly permit variable compensation, it is unclear how either could be implemented 

in a way that would give the firm any certainty that its practices comply with the exemption. 

Specifically, it is unclear how fee differences could be supported by “neutral factors” or under 

what circumstances the representative’s interests could align with those of his or her client. With 

respect to the former, a firm has no ability to control what the Department, or state courts, may 

consider to be a “neutral factor”, particularly when prices are set by third-party manufacturers 

based upon market factors. We find it unlikely that a firm would offer an advice arrangement in 

reliance on the exemption, such as a commission schedule that differs between mutual funds and 

annuities, in the absence of certainty that its variable pricing meets the neutrality requirement. 

With respect to the second, no guidance is provided as to how a firm is to align the 

representative’s interests with those of the investor where fee differences exist. It is also unclear, 

from a compliance perspective, how either of these standards could be administered and 

supervised in practice. Without this certainty, the liability risks and the prohibited transaction 

penalties for failure to comply are too great for a firm to proceed under the BIC Exemption. 

 We request that the Department provide clarification and guidance, including a 

meaningful example, regarding how and under what circumstances a firm and its representatives 

can receive variable compensation under the BIC Exemption. We request that the Department 
DB1/ 84105570.6 Page 24 of 41 

clarify that variable commission-based fee arrangements are permitted, so long as the firm 

discloses the compensation to be received and any material conflicts of interest, and receives no 

more than reasonable compensation. 

 

 Adopting alternate methods of compensation, such as those included in the Department’s 

five examples, would require a complete structural overhaul of the forms in which retirement 

assets are commonly distributed to consumers. At least with respect to mutual funds and 

variable annuities, most broker-dealers do not themselves set the price of the third-party products 

they sell, nor do they have the negotiating power to require the providers to uniformly price their 

products. In any event, we question whether an effort to level fees would pass anti-trust scrutiny. 

Regardless, the Department’s five suggestions would ultimately lead to inferior models of 

delivering investment advice, particularly to middle-income investors who have smaller accounts 

and trade infrequently.47

RECOMMENDATION: The Proposed Rule should be revised to expressly allow for 

differential compensation among products and asset classes; the “tend to encourage” 

language should be deleted. 

5. Disclosure Obligations 

In addition to the contract requirements, the BIC Exemption imposes no less than three 

new onerous investor and public disclosure obligations. These disclosure requirements will not 

only burden the industry with added costs and compliance risks, but will also overwhelm and 

confuse clients with yet more documents and information to review and digest, while providing 

few benefits over the disclosures already required to be provided under the federal securities 

laws, state insurance regulations, and other applicable rules. 

a) Point-of-Sale Disclosures Are Potentially Harmful to Client 

Decisions 

First, prior to an investor’s purchase of a recommended asset, the representative must 

provide the investor a detailed chart setting out the “total cost” of the proposed investment over 

periods of one, five and ten years in actual dollar amounts. The “total cost” for each 

recommended asset must include its acquisition cost such as loads, commissions, mark-ups and 

account opening fees, ongoing fees and expenses such as mutual fund expenses, and disposition 

costs such as surrender charges and back-end loads. All of this will require forward-looking 

assumptions about holding periods and the investment’s performance. While we understand that 

 

47 See, e.g., Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and 

Broker-Dealers, at 152 (Jan. 2011), available at https://www.sec.gov/news/studies/2011/913studyfinal.pdf (stating 

that investors may face increased costs if the broker-dealer exclusion were eliminated, such as where commissionbased accounts would incur lower costs compared to fee-based account due to infrequent trading); NASD Notice to 

Members 03-68, Fee-Based Compensation (Nov. 2003) (reminding members that fee-based accounts must be 

appropriate for customers, considering among other things the cost of the account compared to alternative fee 

structures available, such as commission-based accounts); Report of the Committee on Compensation Practices 

(Apr. 10, 1995), available at https://www.sec.gov/news/studies/bkrcomp.txt (noting commenters’ views that feebased accounts can pose higher costs for small and low-activity accounts). 
DB1/ 84105570.6 Page 25 of 41 

the Department intends for this disclosure to clarify costs for the client prior to his or her 

investment, it will instead inject unnecessary complexity and slow transactions. Further, 

effective investment conversations often result in multiple proposals reflecting the iterative 

nature of good dialogue. A broker-dealer will need to provide a new chart with respect to each 

potential asset a client may want to consider. Much of this “total cost” data is actually held by 

their third-party product providers, and there may be a cost to the broker-dealer associated with 

developing each chart. Given that each client is likely to consider multiple investments, 

compilation of this information multiple times with respect to each ultimate transaction will be 

expensive and will also delay transactions. The resultant increase in transaction costs per investor 

will generally be passed on to clients, and may ultimately have the effect of shutting out small 

transactions from access to IRAs. 

As importantly, we also are concerned that the upfront disclosure is likely to overwhelm 

the investor by focusing too much attention on costs and expense. In almost every case, stocks 

that are highly correlated to the market’s movements will look less expensive than a more stable 

asset such as a bond fund. The primary focus of an investment decision should instead be on the 

particular asset’s risk and return (net of expenses) profile and likelihood to achieve the 

investment goal. Moreover, the “total cost” information is likely to be overwhelming in respect 

of the summary prospectus, insurance disclosure, and other documents already required to be 

furnished to investors, all of which display fee and expense information. The new upfront 

disclosure is at odd with these, particularly where other regulators, for good reason, do not allow 

forward-looking estimates of performance. 

Finally, as with other BIC requirements, we are concerned because the disclosure 

requirement is rife with ambiguities. For example, no guidance is provided as to what a firm is 

to do when the precise investment amount is not known, such as in the course of a rollover. 

Similarly, because the information required to be disclosed is held by third parties that may 

change pricing at any time, and because these disclosures must be produced in real time at any 

time a representative proposes an investment to a client, this disclosure will be impossible to 

perfect, and the Proposal builds in no margin for error or correction regime (other than a 

prohibited transaction). 

RECOMMENDATION: The required point-of-sale disclosure should be a concise and 

easy-to-read document that presents in a standardized, rather than individualized, format 

solely that information required in a summary prospectus expressed as percentages and 

should include a mechanism to correct inadvertent or de minimis errors without penalty. 

b) Annual Disclosures Will Not Aid Investors 

Second, a new annual disclosure must be made to investors, within 45 days after the end 

of each year. The annual disclosure must include a list identifying each asset purchased or sold 

during the applicable year and the price at which it was purchased or sold. It must also include a 

statement of the total dollar amount of all fees and expenses paid by the investor or the IRA, 

directly and indirectly, with respect to each asset, as well as a statement of the total dollar 

amount of all compensation received by the representative and the firm, directly or indirectly, 

from any party as a result of each asset. The Department provides no guidance as to what is 
DB1/ 84105570.6 Page 26 of 41 

meant by “directly or indirectly,” nor does it explain the need for the very short time of 45 days 

allowed for firms to compile the required information. 

Our concerns about this annual disclosure requirement are numerous. First, the account 

transaction list duplicates information that is already reported to clients by the account custodian 

under SEC and FINRA rules, and the Department did not align the timing of this disclosure with 

the timing of SEC- and FINRA- mandated disclosures. Second, other information now required 

to be disclosed annually, such as fees and expenses attributable to each transaction, is duplicative 

of information the client has received at point-of-sale. And like the point-of-sale disclosure, such 

information should be standardized and permitted to be provided by way of percentage costs 

rather than individualized total dollar costs. Third, some information required to be reported by 

the firm is in fact held by the product manufacturer. Distributor broker-dealers simply do not 

have the required data. For example, most broker-dealers will not know the total dollar amount 

that an IRA paid to a third-party annuity company over the applicable period. Finally, while the 

fees and expenses are relevant to an investor, the share of those fees that the firm or the 

representative is being paid is not. 

Like the upfront disclosure, the proposed annual disclosure is more likely to overwhelm 

than aid our clients. We do not believe the information would provide significant meaningful 

information to investors beyond what is currently provided on trade confirmations, account 

statements, and other disclosures. Because these information reports have not previously been 

required by any regulator, aggregating the data and presenting the reports will require an 

expensive systems build-out to be able to track each individual representative’s compensation 

with respect to each particular client’s accounts. Further, much of the required information will 

be costly to acquire, as it is held by third-party intermediaries. The exemption provides no 

guidance or safe harbor to apply in a situation where required information cannot be obtained in 

a timely manner from the relevant intermediary, even though a failure to make a timely 

disclosure would technically cause the firm to fail to qualify for the BIC Exemption. As a result, 

like the upfront disclosure, the excessive costs and risks of compliance likely will drive firms 

upscale. 

RECOMMENDATION: The annual disclosure is duplicative of the point-of-sale 

disclosure and other disclosures made by product manufacturers and custodians under 

SEC and FINRA rules. It should be removed as a condition of the exemption. 

c) Web Page Disclosures Will Cause Firms to Avoid Reliance on BIC 

Exemption 

Finally, the Proposed Rule requires a financial institution availing itself of the BIC 

Exemption to maintain a web page in machine-readable format showing all “direct and indirect” 

compensation payable to the representative, firm, or other affiliate, with respect to each asset that 

an investor is able to purchase, hold or sell through the representative and that has been 

purchased, held or sold in the last year, along with the source of the compensation and how it 

varies within and among assets. This requirement seems to include every insurance company 

separate account, every mutual fund by share class, and every annuity contract. It would require, 

according to the preamble (though unclear from the proposed regulation itself), a quarterly 
DB1/ 84105570.6 Page 27 of 41 

review of product and fee changes. Moreover, the website would make publically available 

personal information about representatives’ compensation, which could conflict with state law 

privacy obligations. It likewise would make publicly available privately held competitive 

information, the disclosure of which would conflict with contractual obligations to third parties. 

This massive web-based disclosure undertaking would be very difficult and costly for us 

to develop, implement and administer. It is highly unlikely that we could build out the 

technology in the eight months the Department has allowed for implementation. Nor do we 

believe that it will provide any value to members of the public, beyond providing an avenue for 

plaintiff’s lawyers to make uninformed comparisons of fee practices between companies. We 

also have concerns that this information would be used to make unwarranted critiques of 

individual representatives, which likely would be based solely upon portfolio returns without 

regard to all of the factors that appropriately go into selection of a portfolio, or that investors are 

free to decline to follow with regard to their representative’s recommendations. Moreover, we 

are deeply concerned that data mining companies will be able to extract proprietary information 

about our strategies that could unjustifiably hamper our competitive position in the market for 

financial services. 

Again, notwithstanding the impracticality and cost, failure to satisfy any aspect of this 

website disclosure requirement, like each of the other BIC Exemption requirements, would 

trigger a wave of prohibited transactions. The resultant risk of strict liability penalties and 

participant lawsuits likely will cause firms to restructure the modes in which they sell IRAs and 

qualified plans to the public so as not to be subject to the need to satisfy the BIC Exemption. 

RECOMMENDATION: Because the web page disclosure on its own will preclude the use 

of the BIC Exemption, it should be removed as a condition of the exemption. To the extent 

a firm is willing to attempt to comply with the BIC Exemption despite this requirement, the 

Department must allow more than eight months for development and implementation of a 

system to satisfy this disclosure requirement, and must include a mechanism to correct 

inadvertent or de minimis errors without penalty.

6. Department’s Data Request and Recordkeeping Obligations 

Adding to the burden, the BIC Exemption requires firms to store and maintain, for six 

years, a host of information that is subject to the request of the Department. This information 

includes: the identity and quantity of each asset purchased, sold or held; the aggregate dollar 

amount invested or received and the cost to the investor for each asset bought or sold; the cost 

incurred by the investor with respect to each asset; all revenue received by the firm and its 

affiliates with respect to each asset; the identity of each revenue source and the reason for 

payment; and at the investor or account level, the identity of the representative along with the 

quarterly value of the portfolio and inflow and outflows of cash with respect to the portfolio. 

The firm is further required to maintain records demonstrating that the conditions of the BIC 

Exemption have been satisfied. Each firm must be prepared to make this information available 

to the Department within six months from the date of a request. Further, the firm must make its 

records unconditionally available to investors and other members of the public for examination. 
DB1/ 84105570.6 Page 28 of 41 

Finally, the Department makes these detailed recordkeeping requirements a condition of 

satisfying the BIC Exemption, without any relief for inadvertent errors. 

We do not understand the need to provide this data to the Department with regard to IRA 

accounts over which it has no enforcement authority. By extending a form of audit authority to 

members of the public, the Department has effectively delegated enforcement to the plaintiff’s 

bar. The Department fails to address the very serious privacy and security risks that acquisition, 

maintenance and distribution of such detailed personal financial information entails. Moreover, 

we do not have a system today that is capable of collecting, organizing or maintaining this 

massive volume of information. Nor should we be expected to have such a system, as this 

volume of information has never before been required, nor are we in possession of all of the 

required data. We expect that building such a system would take far more time – several years – 

and would be at a far greater cost than projected by the Department. We do not see any benefit 

to consumers from this requirement. 

RECOMMENDATION: Records should not be required to be publicly disclosed, and 

these onerous recordkeeping requirements should not be a condition of relief with regard 

to the BIC Exemption. 

7. Class Action Waiver 

 The BIC Exemption prohibits the contract from containing a provision whereby the 

investor “waives or qualifies its right to bring or participate in a class action or other 

representative action in court” against the representative or its firm. 

The requirement to contractually warrant compliance with the Impartial Conduct 

Standards, the publication of the broker-dealers compensation grids in machine-readable format 

on a public website, and the prohibition against a class action waiver, taken together, seem 

designed to invite class action enforcement, in the form of breach of contract claims, against 

broker-dealers that have taken advantage of the BIC Exemption to maintain differential 

compensation they believe is justified based on neutral factors. Unfortunately, we believe that 

trial lawyers will simply mine the website to identify differential compensation structures, and 

then file class action “strike suits” alleging breach of the warranty that compensation practices do 

not “tend to encourage individual Advisers to make recommendations that are not in the Best 

Interest of the Retirement Investor.” Even if a firms has reasonable arguments to substantiate its 

differential compensation, due to the enormous costs of protracted litigation, the pressure to 

settle these cases, rather than to incur the cost to fight and prevail, will be enormous. We believe 

that this reason alone is sufficient to deter most firms from attempting to operate the under BIC 

Exemption. 

Although we focus in the body of this letter on the practical ramifications of the Proposal 

on our industry and our clients, rather than on the scope of the Department’s authority and 

conflicting law, we note that the Department lacks the authority to ban class action waivers in 

connection with arbitration agreements. This point is further addressed in the legal 

memorandum prepared by Gibson, Dunn and Crutcher that is attached as Appendix 6. 
DB1/ 84105570.6 Page 29 of 41 

RECOMMENDATION: The Department should not, and lacks authority to, ban waivers 

in connection with arbitration agreements. 

8. Applicability Date Is Far Too Short 

As drafted, the Proposal allows firms eight months from the final rule date to 

implementation to make the operational, supervisory, technological and structural changes it 

requires. This period is far too short. As discussed below, implementation of the rule and the 

BIC Exemption would be extremely time-consuming and costly. Eight months is simply not 

enough time to accomplish the wholesale restructuring of our business models that the Proposed 

Rule would require. 

RECOMMENDATION: The applicability date should be lengthened to three years from 

eight months. 

B. Costs of Compliance with the BIC Exemption Make Serving Small Accounts 

Impracticable

The Rule’s many requirements would command substantial time and resources to 

develop and implement. For example, the BIC Exemption would require firms to build and test a 

public website that needs to be updated and tested quarterly. Moreover, contracts would have to 

be prepared for new and existing clients, new systems would have to be developed and integrated 

(in some cases with third parties) to create and manage new disclosures, and compliance policies 

and procedures would need to be updated. At our firm alone, over 80,000 U.S. representatives 

would need to be trained to comply with the Proposal. We expect the increased costs associated 

with compliance with the BIC Exemption to have a direct impact on our ability to provide IRAs 

for the smaller investments that are typical of many of our clients. 

To assist in our understanding of the operational impact and cost of complying with the 

Proposed Rule and its exemptions, Primerica participated in an industry working group of over 

forty financial institutions impacted by the Proposal. The group, which was organized by 

Deloitte & Touche LLP (“Deloitte”), produced the report attached here as Appendix 2. The 

working group firms were asked to analyze the systems and process changes they would make to 

comply with the Proposal, and also to assess the resources required to make these changes. 

Without a doubt, there was agreement that firms would need to make “substantial investments 

and transformations to business, compliance and operational frameworks.” 48 The firms also 

recognized that the Proposed Rule would require a considerable overhaul to existing systems 

impacting controls, supervision, surveillance, data collection and data management. As the 

Proposal affects only retirement accounts, firms would need to bifurcate their field and back 

office systems and processes, as well as supervisory and marketing materials, to accommodate 

differing regulatory requirements for retirement and non-retirement accounts. In many cases, the 

group recognized that technology solutions to capture some of the required data do not currently 

 

48 Deloitte & Touche LLP, Report on the Anticipated Operational Impacts to Broker-Dealers of the 

Department of Labor’s Proposed Conflicts of Interest Rule Package (July 17, 2015), at 14, available at

http://www.sifma.org/workarea/downloadasset.aspx?id=8589955444. 
DB1/ 84105570.6 Page 30 of 41 

exist, and would require effort and time to develop. Likewise, technology to document, 

substantiate, retain and maintain a fiduciary standard and reliance on the exemption would have 

to be developed, as it does not currently exist. 

Below is an exhibit from the Deloitte report illustrating the operational impact of areas 

where build-out of systems, processes, controls and oversight are required to meet the BIC 

Exemption disclosure requirements.49

Potential Impacts (May Not Be All-Inclusive) 

System Build 

to Collect 

Conversion to 

Dollar Amount 

Implementation 

of Process 

Implementation 

of Controls 

Implementation 

of Oversight 

Potential Required Data Points 

Disclosures Initial Transaction Disclosure 

Acquisition Costs of Transaction X X X 

Ongoing Costs of Product X X X X X 

Disposition Costs for 1-, 5- and 10-year Periods X X X X X 

Reasonable Assumptions about Investment 

Performance X X X X X 

Annual Disclosure 

List of Assets Bought and Sold During the Year 

(Along with Sales Price) X X X X X 

Total Dollar Amount of Direct Fees Paid by the 

Investor with Respect to Assets Bought, Sold and 

Held 

X X X X X 

Total Dollar Amount of Indirect Fees Paid by the 

Investor with Respect to Assets Bought, Sold and 

Held 

X X X X X 

Total Dollar Amount of Expenses Paid by the 

Investor with Respect to Assets Bought, Sold and 

Held 

X X X X X 

Total Dollar Amount of Direct Compensation 

Received by the Investment Professional with 

Respect to Assets Bought, Sold and Held 

X X X X X 

Total Dollar Amount of Indirect Compensation 

Received by the Investment Professional with 

Respect to Assets Bought, Sold and Held 

X X X X X 

Total Dollar Amount of Direct Compensation 

Received by the Financial Services Firm with 

Respect to Assets Bought, Sold and Held 

X X X X X 

Total Dollar Amount of Indirect Compensation 

Received by the Financial Services Firm with 

Respect to Assets Bought, Sold and Held 

X X X X X 

Webpage 

Direct Compensation Payable to the Investment 

Professional for Assets Bought, Sold and Held by an 

Investor in the Last 365 Days 

X X X X 

Indirect Compensation Payable to the Investment 

Professional for Assets Bought, Sold and Held by an 

Investor in the Last 365 Days 

X X X X 

Direct Compensation payable to the Financial 

Services Firm for Assets Bought, Sold and Held by 

an Investor in the Last 365 Days 

X X X X 

Indirect Compensation Payable to the Financial 

Services Firm for Assets Bought, Sold and Held by 

an Investor in the Last 365 Days 

X X X X 

Direct Compensation Payable to Any Affiliates for 

Assets Bought, sold and Held by an Investor in the 

Last 365 Days 

X X X X 

Indirect Compensation Payable to Any Affiliates for 

Assets Bought, Sold and Held by an Investor in the 

Last 365 Days 

X X X X 

Variations in Compensation Within and Among 

Assets X X X X 

Recordkeeping 

Intention to Rely on Exemption X X X X 

Inflows X X X X 

Outflows X X X X 

Holdings X X X X 

Returns X X X X 

Substantiation that Conditions of the Exemption Were Met X X X X 

 

49 Deloitte, Figure 2.4, at 19. 
DB1/ 84105570.6 Page 31 of 41 

Without a clear understanding of the operational, systems and technological changes that 

the rule would require, the Department estimated that start-up compliance costs for a large 

broker-dealer would be a mere $5 million. This estimate is off the mark. Deloitte surveyed a 

diverse mix of firms and grouped them based on net capital. Deloitte reports the firm’s 

estimated start-up and ongoing maintenance costs of compliance with the rule as follows:50 

Firm Size

Number of 

Firms in 

Industry per 

DoL 

Mean 

Start-Up 

Costs Per 

Firm 

Mean Ongoing 

Costs Per Firm 

Large 42 $34,257,289 $8,757,222 

Clearing $24,217,800 $5,265,000 

Self-Clearing $37,125,714 $9,755,000 

Medium 137 $18,862,337 $4,032,935 

Clearing $33,516,685 $4,254,676 

Self-Clearing $15,198,750 $3,977,500 

Small 2,440 $ 5,563,804 $4,255,210 

Introducing $ 7,220,706 $6,132,815 

Self-Clearing $ 2,250,000 $ 500,000 

Using the Department’s own estimate of the number of large, medium and small firms, 

the start-up costs for large firms across the industry will be $1.4 billion. The start-up costs for 

medium and small firms will be $2.5 billion and $13 billion, respectively, for a total of 

approximately $17 billion. Ongoing compliance costs for the industry as a whole are projected 

to be approximately $11 billion annually. The Department has vastly understated the cost of 

compliance. 

Moreover, the sums reported above are direct costs of the proposal. Attached as 

Appendix 3 is a report by Compass Lexecon regarding the costs benefit analysis performed by 

the Department. Compass Lexecon determined that the Department’s economic analysis of the 

Proposed Rule “grossly overstates the benefits it purports to measure”.51 It further concluded 

that the Department failed to properly analyze the unintended consequences of the Proposal that 

can serve to substantially increase costs, thus rendering the Department’s conclusions as to the 

costs of the Proposal to be fatally flawed. The authors state: 

With respect to the potential costs, the DOL’s analysis relies upon a 

number of vague and unsupported assumptions which call into question its 

reliability. For example, the DOL only offers a dollar cost estimate relating to the 

most obvious categories of direct costs. The DOL routinely speculates that its 

 

50 Deloitte, Figure 1.10 at 15. 

51 Compass Lexecon, An Evaluation of the Department’ Impact Analysis of Proposed Rules Relating to 

Investment Advisor Fiduciary Status (July 20, 2015), at ¶ 2. 
DB1/ 84105570.6 Page 32 of 41 

estimate is likely overstated but ignores or dismisses additional costs associated 

with many possible unintended consequences of the proposed amendments. 

Examples of unintended consequences include the possibility of higher investor 

paid fees and lower overall savings by IRA investors. 52

Importantly, the authors note that the Department failed to acknowledge that the costs imposed 

on advisers and advisory firms operating in the industry will likely be passed on to investors in 

the form of higher fees. For example, the authors state that these higher costs can lead firms to 

exit certain segments of the industry, leading to weakening competition that could otherwise 

drive down fees. As there likely will be less competition for IRA investors with account 

balances below $25,000, fees to these customers may increase.53 

 Likewise, the Department too readily dismisses the potential for reduced savings in 

tax-preferred IRAs. Compass Lexecon concludes: 

Though lengthy, the DOL’s “Regulatory Impact Analysis” provides no 

reliable estimates of the costs and benefits of the proposed amendments, and as a 

consequence, does not justify the costs likely to be incurred by market 

participants (including IRA investors). Among other limitations in the DOL’s 

benefits analysis, it improperly applies the results of the academic literature upon 

which it relies and, as a consequence, likely grossly overstates the benefits of the 

proposed amendments. The DOL’s cost estimate is reminiscent of the old joke 

about the drunkard who looks for his lost keys under the streetlamp because that’s 

where the light is. The DOL only attempts to quantify the most obvious and 

direct costs of the proposed amendments, while dismissing or overlooking a wide 

range of potential unintended consequences that could dramatically increase the 

costs. The history of regulation provides strong reason to be skeptical of the 

DOL’s assumption that the proposed amendments would have no costly 

unintended consequences.54

 Equally troubling is a report prepared by NERA Economic Consulting (“NERA”), 

attached as Appendix 3, which draws a direct link between the excessive costs of compliance 

with the Proposal and the ability of firms to make IRAs available to small-dollar investors. 

NERA reviewed account level data of over 69,000 IRA accounts from six firms, ranging from 

2012 through the first quarter of 2015. From this data, they determined that 40.49% of the 

accounts could not be maintained under the Proposed Rule. As a result, NERA stated that, based 

upon a “conservative estimate” of the minimum balance for advisory accounts being $25,000: 

If we were to take at face value the DOL’s methodology in the 2011 cost-benefit 

analysis discussed above, the new fiduciary standard would cause a loss of 

 

52 Compass Lexecon, Comment to the Department of Labor on a Proposed Rule Regarding the Fiduciary 

Status Under ERISA (July 20, 2015), at ¶ 5. 

53 Id. at ¶ 32. 

54 Id. at ¶ 49. 
DB1/ 84105570.6 Page 33 of 41 

access to professional advice for 40.49% of retirement account holders. This 

would result in an aggregate cost of $114 billion x 40.49% or about $46 

billion per year.

55

(Emphasis added.) 

 NERA additionally identifies the costs of investors losing access to advice, largely as set 

forth in a 2011 study by the SEC staff (the “SEC 913 study”). In particular, NERA notes that 

brokers are expected to convert existing accounts from commission-based accounts to fee-based 

accounts in order to respond to the new requirements placed on commission-based accounts. 

The likely impact would be higher costs to investors who buy and hold. Likewise, 

broker-dealers may unbundle their services and provide them separately through affiliates or 

third parties, generating additional administrative costs. The primary concern, as expressed by 

the SEC 913 study, is that the cost and availability to retail investors of accounts, products, 

services and relationships with broker-dealers “could inadvertently be eliminated or impeded.”

56 

This high cost of compliance will have far broader consequences, by affecting the 

decisions firms make in responding to the Proposal. As a simple example, if a firm is 

anticipating the cost per retirement account to increase by a significant dollar amount, it is within 

reason that the firm will set account minimums to preclude accounts that would no longer be 

profitable or direct low-dollar investments to taxable accounts. Equally likely, firms will pass 

these very real costs on to clients. In some cases, firms may choose to exit the retirement 

market. In each case, the increased cost can be expected to be felt most severely by 

middle-income consumers where margins are lowest. 

C. Self-Help Online Investment Options Will Not Offset the Harm of the Proposed 

Rule to Middle-Market Investors

Many of the middle-income families we serve are prompted to save because we 

encourage or “nudge” them. As noted, we believe that our representatives are an integral part of 

clients achieving their retirement objectives, through face-to-face education and assistance and 

access to an appropriate range of reasonably-priced products with transparent fee structures. 

Without this sort of personal interaction, many of our clients are likely to forgo saving at all. If 

cut off from responsible, well-equipped financial professionals, even those who have the 

confidence to go it alone would be left vulnerable to the temptations inherent to human nature: 

chasing returns and attempting to time the market, and moving resources to inappropriate, lowrisk, low-yield assets (i.e., savings accounts) even with many years to go until retirement. 

Nonetheless, this benefit – and the potential loss to middle-income savers from lack of personal 

assistance – is ignored by the Department in its analysis of the costs and benefits of its Proposed 

Rule. 

 

55 NERA, Comment on the Department of Labor Proposal and Regulatory Impact Analysis (July 20, 2015), at 

17. 

56 Id. at 28. 
DB1/ 84105570.6 Page 34 of 41 

In fact, the Department at times has responded to the Proposed Rule’s potential to 

decrease access to help for lower-wealth households by suggesting that self-help online 

investment tools may even be preferable.57 However, these self-help alternatives are not the 

solution. Studies consistently confirm that the percent of workers and retirees comfortable 

obtaining assistance from financial professionals online is quite low. In its 2012 study, the EBRI 

put this figure at just 10 percent.58 In a similar 2015 study, the EBRI reported that the majority 

of workers (74%) are not interested in obtaining investment education online.59 Likewise, a 

recent Gallup Poll found that less than one in three is very comfortable using online technology 

for investing.60 Even younger generations with greater familiarity with technology strongly 

prefer personal interactions when it comes to retirement investing. According to a recent survey 

performed by Greenwald and Associates (“Greenwald”), more than twice as many younger 

workers want traditional, in-person education.61 Greenwald likewise asserted that in-person 

education boosts savings.62 Further, a self-help or robo-solution will not provide post-transaction 

assistance in the same way that an individual financial professional can. 

 Equally troubling, nearly 20% of U.S. adults, or nearly 60 million Americans, remain 

without access to online investment options, as internet adoption has leveled off in recent years.63 

These are predominantly lower-wealth families, minorities and English-as-a-second-language 

individuals, yielding some disturbing differences among internet users that should be concerning 

to policymakers. Internet usage by Hispanic and African-American households still lags behind 

 

57 InvestmentNews; DOL Secretary Perez touts Wealthfront as a paragon of low-cost, fiduciary advice, 

June 22, 2015. (“When he appeared at a June 17 congressional hearing, Mr. Perez mentioned Wealthfront, an online 

investment adviser, at least three times. A day later, he tweeted a photo of himself and Wealthfront Chief Executive 

Adam Nash at the Wealthfront office.”) 

58 EBRI 2012 Retirement Confidence Survey, available at http://www.ebri.org/pdf/surveys/rcs/ 

2012/EBRI_IB_03-2012_No369_RCS.pdf (“[J]ust 10 percent of [workers and retirees] say they are comfortable 

obtaining advice from financial professionals online.”), at 1 (last bullet point). 

59 EBRI 2015 Retirement Confidence Survey, available at http://www.ebri.com/pdf/surveys/rcs/ 

2015/EBRI_IB_413_Apr15_RCS-2015.pdf (“While just 4 percent of workers report being very interested in 

obtaining investment education and advice online, 22 percent say they are somewhat interested. Nevertheless, the 

majority of workers are not too (26 percent) or not at all (48 percent) interested.”), at 24. 

60 Gallup Poll, “U.S. Investors Opt for Human Over Online Financial Advice: Just one in three are very 

comfortable using online technology for investing,” available at http://www.gallup.com/poll/174851/investors-opthuman-online-financial-advice.aspx. 

61 Matthew Greenwald Survey, “Younger Workers Want In-person Education,” available at

http://www.benefitnews.com/news/retirement/younger-workers-want-in-person-education-2746146-1.html 

(“Despite their familiarity with technology, the Generation X and Generation Y populations prefer traditional means 

when it comes to retirement education.”). 

62 Id. 

63 “The 60 million Americans who don’t use the Internet, in six charts,” available at

https://www.washingtonpost.com/blogs/the-switch/wp/2013/08/19/the-60-million-americans-who-dont-use-theinternet-in-six-charts/. 
DB1/ 84105570.6 Page 35 of 41 

white and Asian households.64 There is also a notable geographic gap among rural versus urban 

households, and there are more non-users in the Southeast. Expectedly, household wealth is 

directly linked to usage. Up to 40% of Americans do not have broadband at home,65 presumably 

where self-help investing is most likely to occur. 

 

 This potential financial advice wealth-gap has not gone unnoticed. During the recent 

House Education and Workforce Committee hearing entitled “Restricting Access to Financial 

Advice: Evaluating the Costs and Consequences for Working Families and Retirees,” Rep. 

Federica Wilson (D-Fla.) expressed her concern, stating: “Technology is very intimidating to 

many people in our communities. For people who don’t have access to technology, it is 

intimidating. So let’s . . . make sure that we don’t eliminate them from the equation because we 

thrust them into a pit that they don’t quite understand.” 66

 Also notable is that many of the current online investment providers either require 

investment minimums that are not attainable for many first-time savers, or offer only 

discretionary services, or both. Of similar concern are the minimalistic gating questions posed 

by the online providers. The providers’ technology takes responses to these questions to 

compute specific investments for the clients. For example, Wealthfront asks five questions: 

(1) “What is your current age?”; (2) “What is your annual after-tax income?”; (3) “What is the 

total value of your cash and liquid investments?”; (4) “When deciding how to invest your money, 

which do you care about – maximizing gains, minimizing losses, or both equally?”; and (5) “The 

global stock market is often volatile. If your entire investment portfolio lost 10% of its value in a 

month during a market decline, what would you do – sell all of your investments, sell some, keep 

all, or buy more?” Absent from these are questions regarding short-term liquidity needs, 

life-cycle events, employment, short- and long-term goals, need for qualified retirement savings 

vs. taxable investments, and a host of others personal to each family. First, in our experience, 

our clients – often first-time savers – would be stymied by some of these questions. Second, we 

are puzzled why the Department seems to believe computer-generated decisions calculated from 

such a generic questionnaire to be de facto in a consumer’s “best interests”. 

Even more alarming, families seeking self-help advice are susceptible to being 

misdirected to “bad advice”. A simple search for investment help online can easily lead to 

internet message board commenters and affinity fraudsters enticing middle-income Americans to 

cash out their savings and invest in speculative, undiversified ventures without raising the issues 

of tax penalties and lost tax-advantages, and recklessly suggesting returns that would persuade an 

overwhelmed investor to disregard tax considerations in any event. Many American families are 

 

64 Pew 2012 Research Report “Digital Differences,” available at

http://www.pewinternet.org/2012/04/13/digital-differences (“ 20% of U.S. Adults Do Not Use the Internet... Senior 

citizens, Spanish-speaking adults, the disabled, the less educated, and lower earners are among the least likely to go 

online. 40% of Americans do not have broadband access at home.”). 

65 Id.

66 House Education and Workforce Committee hearing entitled “Restricting Access to Financial Advice: 

Evaluating the Costs and Consequences for Working Families and Retirees” (June 17, 2015), Final Transcript, Panel 

1 at 42. 
DB1/ 84105570.6 Page 36 of 41 

rightly overwhelmed by the mass of “investment information” on the internet, and many are 

paralyzed to act on their own. 

We fervently believe that while technological models are well-designed to augment the 

sales process (calculators, Monte Carlo simulators, etc.) and to suit the needs of some, it is 

imprudent to believe that they will provide the “band-aid” required to stop the leakage caused by 

a Proposed Rule that has the effect of cutting off personal service to small accounts. 

D. The Proposed Rule Will Effectively Result in a Tax on the Middle Class 

 As indicated by NERA, a likely outcome of the Proposed Rule is that nearly half of 

middle-income consumers – those with amounts to invest below advisory account minimums – 

will be left with limited options to save in an IRA.67 For many families this may result in 

decisions to spend rather than save. As noted above, for those who choose saving, only a tenth 

can be expected to use online investment options. The others may forgo the tax benefits 

available to IRAs and instead invest through taxable accounts in order to continue their 

relationship with their chosen financial professional. Obviously, this would be to their detriment, 

and contrary to Congressional intent of encouraging retirement savings. 

 In order to understand the effect of such leakage away from IRAs and into taxable 

savings vehicles, Compass Lexecon was asked to measure the impact on accounts with balances 

below $25,000, a conservative minimum account balance for advisory accounts. The Compass 

Lexecon report is attached as Appendix 5. As explained in detail in their letter, Compass 

Lexecon quantified the loss to investors who would have opened IRAs but, as a consequence of 

the Proposal, instead open taxable savings accounts. In the analysis, Compass Lexecon looked at 

median taxpayers ranging in age from 30 to 45 years when they make their initial investment and 

modeled representative annual or biannual contributions until retirement. This age range and the 

contribution amounts are based upon EBRI reports of average annual IRA contributions and 

fairly represent the demographic age at which our clients commonly begin their IRAs with us. 

Compass Lexecon concluded that the loss associated with moving from an IRA to a taxable 

savings account is large. In the median case of a 30-year-old investor who starts an IRA and 

contributes annually, Compass Lexecon determined: 

“The median outcome of our model for this investor involves an effective average 

tax rate on savings (relative to a totally untaxed account) of 23.8 percent for a 

Roth IRA and 15.0 percent for a traditional IRA, whereas the effective average 

tax rate on savings for the same investor making the same investment, but in a 

taxable savings account, is 38.7 percent. In other words, the taxpayer in this case 

would see his effective tax rate rise by 62.6 percent relative to a Roth IRA, and 

158.0 percent relative to a traditional IRA if the DOL’s proposed amendments 

caused him to open a taxable savings account.”68

 

67 NERA, Comment on the Department of Labor Proposal and Regulatory Impact Analysis, at 28. 

68 Compass Lexecon, Tax Consequences to Investors Resulting from Proposed Rules Relating to Investment 

Adviser Fiduciary Status (July 20, 2015), at ¶ 5. 
DB1/ 84105570.6 Page 37 of 41 

 The Compass Lexecon report goes on further to conclude that while the Proposal’s 

impact varies across investors who start saving at different ages: 

“The median effective tax increase due to the DOL’s proposed amendments 

varies across investors who start saving at different ages, but in any case, the tax 

increases remain very substantial, with the median never below 32.9 percent. 

Therefore, to the extent that the DOL’s proposed amendments lead a substantial 

number of investors to open taxable savings accounts instead of IRAs, the 

amendments would in essence constitute a sizable tax increase on many 

Americans’ retirement savings.”69

Compass Lexecon put this anticipated higher effective tax rate in perspective by estimating the 

number of years of retirement that an investor can fund at a desired level of annual retirement 

income. They estimated that the tax impact would reduce the number of years funded at 

retirement by about 2.7 years or 4.3 years, relative to a Roth IRA or a traditional IRA, 

respectively. This can be a meaningful difference for our clients. Additionally, Compass 

Lexecon roughly calculated that over the potentially 7.0 million existing households with IRAs 

under $25,000, the effective tax increase could result in a total reduction in retirement savings of 

between $147 billion and $372 billion. 70

 Compass Lexecon acknowledges that while account values diminish substantially for 

investors who either wait until later ages to begin an account or who do not contribute every 

year, IRAs still have substantial tax benefits in all cases, not surprisingly. 

E. Fiduciary Definition Is Not Uniform Across Regulators 

 We are also concerned that the Department’s lack of substantive coordination with the 

regulators that have overseen the financial industry for decades (and, in some cases, a century or 

more) will result in fiduciary standards that are far from uniform, and that will only increase 

investor complexity and hamper efficient and successful financial planning and implementation 

of investment objectives. The input of these regulators (including the SEC, FINRA, and the 

federal banking regulators, among others) would help the Department gain a fuller understanding 

of the financial services industry, its products, the conflicts firms and financial professionals 

face, and how these conflicts may be best addressed to protect investors, while minimizing 

complications and inefficiency. Over many more than forty years, these regulators (checked by 

federal court litigations) have developed clear fiduciary standards that are rooted in common law 

principles, but also are adapted to particular financial services’ business models. The extensive 

learning of these regulators, as well as the SEC’s current initiative to adopt uniform standards 

under Section 913 of the Dodd Frank Act, should inform and guide the Department’s approaches 

to fiduciary standards in the Proposal. This is critical to minimize complexity and inefficiencies 

and to help ensure that investors can meet their retirement goals. We also note that the 

 

69 Id. at ¶ 6. 

70 Id. at ¶ 8. 
DB1/ 84105570.6 Page 38 of 41 

Department is required to consider the cost of cumulative regulation when issuing its own 

regulations to ensure that they impose the least burden on society, consistent with the 

regulation’s objectives.71

F. The Proposed Amendments to PTE 84-24 Will Have the Effect of Denying 

Important Annuity Products to Consumers 

The Department’s public statements regarding the Proposed Rule seem unduly focused 

upon whether variable annuities are appropriate for retirement investors.72 Specifically, the 

Department has suggested that variable annuity fees are too high relative to mutual fund fees. 

The Department’s statements ignore that variable annuities typically come with benefits in 

addition to investment returns, and so it is not appropriate to compare them to mutual funds. For 

example, variable annuities may have both living and enhanced death benefits. These lifetime 

benefits are often critical to protecting the best interests of retirement investors. 

The Department has proposed certain changes to the current class exemption covering 

sales of insurance products – Prohibited Transaction Exemption 84-24 (“PTE 84-24”). 

Specifically, the Department’s Proposal excludes sales of variable annuities to IRA clients from 

coverage, and substantially limits relief for traditional forms of compensation from sales of 

variable annuities heavily relied upon by the industry, which could effectively restrict the sale of 

fixed and variable annuities entirely. In addition, the Department’s proposed amendments do not 

provide grandfather protection for existing contracts that currently rely on PTE 84-24. 

We understand that the Department has proposed that sales of variable annuities to IRA 

clients would be covered under the BIC Exemption, as opposed to PTE 84-24. As proposed, the 

BIC Exemption does not provide a practical pathway for firms to offer variable annuities if they 

also offer any other products, such as mutual funds, under the Impartial Conduct Standards, 

which may be read to prohibit non-level compensation. As discussed, the Impartial Conduct 

Standards seems to require level fees across product lines with the exception that variations may 

be justified based on “neutral factors.” As the Department is aware, variable annuities, like most 

products, are priced based on market factors. Are market factors “neutral”? The risk is too 

great. The unintended consequence may be the elimination of these investment options for 

retirement investors. 

We see no reason for the Department to modify current relief under PTE 84-24. We urge 

the Department not to amend or partially revoke PTE 84-24. The Department should further 

study the use of annuities and their benefits to particular investors, and should properly measure 

the costs and benefits of disallowing traditional forms of compensation associated with annuities 

before amending the definition of “commissions” and effectively banning the sale of variable 

annuities to IRAs. Moreover, because the Department has also proposed to require firms and 

financial professionals to act in their clients’ best interests, it would seem unnecessary to exclude 

sales of variable annuities from relief under PTE 84-24. Finally, our concerns about how it is 

 

71 See also Exec. Order No. 13563, Improving Regulation and Regulatory Review (2011). 

72 See House Education and Workforce Committee hearing transcript, supra at note 66, at 8.
DB1/ 84105570.6 Page 39 of 41 

generally not feasible to satisfy the BIC Exemption’s conditions, particularly the Impartial 

Conduct Standards, would apply equally to sales of annuities. 

RECOMMENDATION: PTE 84-24 should not be amended or revised. 

IV. Legal Basis for the Proposed Rule and Exemptions 

While we appreciate the Department’s interest in protecting consumers’ retirement 

savings and its role with respect to ERISA plans, we respectfully submit that the Proposed Rule 

and accompanying exemptions exceed the Department’s regulatory authority. 

We retained the law firm of Gibson Dunn & Crutcher LLP to address the legal basis for 

the Department’s Proposed Rule. Attached as Appendix 6 is a comment letter setting forth a 

legal analysis of the Proposed Rule (“Gibson Dunn Comment”). In summary, the Department’s 

Proposal will not withstand legal scrutiny for several reasons. First, the Department’s definition 

of “fiduciary” is vastly overbroad and impermissible, and conflicts with the plain statutory text, 

the common law of trusts, and the language of the Advisers Act that Congress drew upon in 

codifying ERISA’s definition of investment fiduciary. Second, the Department exceeds its 

authority in regulating the activity of broker-dealers with respect to IRAs. The Proposed Rule 

and BIC Exemption also exceed the Department’s regulatory authority by attempting to create an 

enforcement scheme over IRAs. For these and other reasons, the Proposed Rule is improper and 

should be withdrawn. 

V. Recommendations 

The Department has stated its intention to preserve the existing revenue streams 

associated with commission-based accounts predominately used by IRA investors. Our 

comments are intended to help the Department understand that the Proposal fails because of its 

overly broad expansion of the definition of fiduciary, and the enormous complexity and burden 

of the BIC Exemption that was intended to preserve commission-based brokerage services. If 

the Proposal is finalized in its current form, companies like ours will have no choice but to 

restructure their businesses so as to avoid a need to rely on the BIC Exemption. This will likely 

result in an increased focus on serving affluent clients at the expense of middle –income savers. 

To the extent firms do provide services that fall under the BIC Exemption, they are likely to 

establish parameters for non-taxableaccounts, which will have the effect of cutting off small 

investors from valuable retirement services and passing on the higher costs of compliance to 

consumers. 

 We therefore urge the Department to withdraw the Proposed Rule. If the Department 

nonetheless continues to believe that an expanded definition of “fiduciary” is necessary, we think 

it is critical that the Proposal be substantially revised. Specifically, and to summarize our 

recommendations above, an operational Proposal would allow for the following: 

 A definition of “fiduciary investment advice” that is narrowed to make it clear that 

fiduciary status is based upon a mutual understanding or agreement that advice is 

individualized to the advice recipient, and is intended for the recipient’s material 
DB1/ 84105570.6 Page 40 of 41 

consideration. 

 A meaningful seller’s carve-out for retail investors that preserves their access to 

non-fiduciary investment assistance and the commission-based brokerage model. 

 An investment education carve-out that: 

o Permits specific products to be identified so that useable and meaningful 

education and assistance can be provided to retail investors. 

o Incorporates FINRA guidance distinguishing recommendations from investment 

education within the context of rollovers and distributions. 

 A workable exemption that preserves investor access to traditional commission-based 

brokerage services by: 

o Not requiring a contract until an account opening. 

o Not requiring “wet signatures” or that individual representatives be parties to the 

contract. 

o Expressly permitting a firm and its representatives to contractually agree to be a 

fiduciary, solely with respect to a transaction, without an ongoing fiduciary 

obligation to the client or the account. 

o Grandfathering existing accounts and all prospective transactions within them 

under the current definition of “fiduciary investment advice” rather than 

transitioning them to the exemption. 

o Eliminating the warranty requirements, and not requiring actual adherence to the 

Impartial Conduct Standards as a condition of the exemption. 

o Providing for a “best interest” standard that adheres to the FINRA formulation: 

the financial professional should provide recommendations that are in the “best 

interests” of the client and put the client’s interest before his or her own. 

o Defining reasonable compensation in standard terms; the “total compensation” 

and “reasonable in relation to value” language should be deleted. 

o Expressly permitting differential compensation among products and asset classes. 

o Requiring a concise and easy-to-read, point-of-sale disclosure that presents, in a 

standardized rather than individualized format, solely the information required in 

a summary prospectus. 

o Eliminating the annual, website, and data record keeping requirements. 

o Permitting parties to waive class actions in connection with arbitration 

agreements. 

 PTE 84-24 should not be amended or revised. 

 An extension of the applicability date to three years after the publication of a final rule. 

 If combined with a narrower definition of “fiduciary investment advice,” a seller’s 

exception to the fiduciary advice definition that applies to retail investors (provided that adequate 

disclosures about the nature of the communications and products are made) and a broader 

exception to the fiduciary advice definition for investor education (including rollover education, 

provided the conditions of FINRA Notice 13-45 are met), a new best interest contract exemption 

DB1/ 84105570.6 Page 1 

APPENDICES 

1. Oliver Wyman, The Role of Financial Advisors in the US Retirement 

Market (July 10, 2015) 

2. Deloitte & Touche LLP, Report on the Anticipated Operational Impacts 

to Broker-Dealers of the Department of Labor’s Proposed Conflicts of 

Interest Rule (July 17, 2015) 

3. Compass Lexecon, An Evaluation of the Department’ Impact Analysis 

of Proposed Rules Relating to Financial Representative Fiduciary 

Status (July 20, 2015) 

4. NERA Economic Consulting, Comment on the Department of Labor 

Proposal and Regulatory Impact Analysis (July 17, 2015) 

5. Compass Lexecon, Tax Consequences to Investors Resulting from 

Proposed Rules Relating to Financial Representative Fiduciary Status 

(July 20, 2015) 

6. Comment Letter of Gibson Dunn & Crutcher LLP (July 20, 2015) 

7. Comment Letter of Daniel Campagna 

8. Comment Letter Joan Jones-White 

9. Comment Letter Sarah Manley 

10. Comment Letter Alex Franki 

11. Comment Letter Thomas R. Pool 

12. Comment Letter of Rita Huckle 

13. Comment Letter of Shelly Rosen 

14. Comment Letter of Jodie Orel
APPENDIX 1
 

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

Report qualifications/assumptions and limiting conditions 

Oliver Wyman shall not have any liability to any third party in respect of this report or 

any actions taken or decisions made as a consequence of the results, advice or 

recommendations set forth herein. 

This report does not represent investment advice or provide an opinion regarding the 

fairness of any transaction to any and all parties. This report does not represent legal 

advice, which can only be provided by legal counsel and for which you should seek 

advice of counsel. The opinions expressed herein are valid only for the purpose stated 

herein and as of the date hereof. Information furnished by others, upon which all or 

portions of this report are based, is believed to be reliable but has not been verified. No 

warranty is given as to the accuracy of such information. Public information and 

industry and statistical data are from sources Oliver Wyman deems to be reliable; 

however, Oliver Wyman makes no representation as to the accuracy or completeness 

of such information and has accepted the information without further verification. No 

responsibility is taken for changes in market conditions or laws or regulations and no 

obligation is assumed to revise this report to reflect changes, events or conditions, 

which occur subsequent to the date hereof. 
Oliver Wyman, Inc. 

 

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APPENDIX 3
COMMENT LETTER TO THE DEPARTMENT OF LABOR 

An Evaluation of the Department’s Impact Analysis of Proposed Rules 

Relating to Financial Representative Fiduciary Status 

COMPASS LEXECON 

JULY 20, 2015
Table of Contents 

I. BACKGROUND AND SUMMARY OF OPINIONS.......................................................... 1 

II. THE DOL’S ANALYSIS OF PURPORTED BENEFITS IS OVERSTATED AND 

UNRELIABLE ..................................................................................................................... 4 

A. THE DOL MISAPPLIES FINDINGS FROM THE ACADEMIC LITERATURE ........... 5 

B. THE DOL IGNORES OTHER FINDINGS FROM THE ACADEMIC LITERATURE 10 

C. THE DOL ASSUMES BENEFITS IT PURPORTS TO ESTIMATE.............................. 11 

D. TAKE-AWAY ON THE DOL’S PURPORTED BENEFIT ANALYSIS ....................... 13 

III. THE DOL’S ANALYSIS OF PURPORTED COSTS IS LIKELY UNDERSTATED AND 

UNRELIABLE ................................................................................................................... 13 

A. THE DOL TOO READILY DISMISSES COSTS LIKELY TO BE INCURRED BY 

MARKET PARTICIPANTS, INCLUDING THE DOL ITSELF .................................... 14 

B. THE DOL IMPROPERLY DISMISSES COSTS RELATED TO OTHER 

UNINTENDED CONSEQUENCES ................................................................................ 15 

C. THE DOL’S COST ANALYSIS IS FLAWED IN OTHER WAYS THAT RENDER IT 

UNRELIABLE. ................................................................................................................ 21

IV. CONCLUSION ................................................................................................................... 23 
1 

I. BACKGROUND AND SUMMARY OF OPINIONS 

1. On April 21, 2015, the Department of Labor (“DOL”) released a “Regulatory Impact 

Analysis” in support of certain proposed amendments to the rules that identify when a financial 

representative is deemed to be a fiduciary, as defined in the proposed regulations.1 The DOL 

claimed that its proposed amendments “would deliver to IRA investors gains of between $40 

billion and $44 billion over 10 years,” and that these gains “would far exceed the proposal’s 

compliance costs, which are estimated to be between $2.4 billion and $5.7 billion over 10 

years.”2

2. Compass Lexecon was asked by counsel for Primerica, Inc. (“Primerica”) to review the 

DOL’s Regulatory Impact Analysis and to comment on whether it provides a satisfactory and 

reasonable economic assessment of the likely costs and benefits associated with the proposed 

amendments.3

 We conclude that it does not. Specifically, we find that the DOL’s analysis 

grossly overstates the benefits it purports to measure. Moreover, the DOL’s analysis likely 

understates the costs of the proposed regulation by failing to properly analyze potential 

unintended consequences. Thus, as a matter of economics, the DOL’s Regulatory Impact 

                                                            

1. Department of Labor (2015) “Fiduciary Investment Advice: Regulatory Impact Analysis,” April 

14, 2015 (“DOL Impact Analysis”). 

2. DOL Impact Analysis, at 8. The DOL states: “The Department expects the proposal to deliver 

large gains for retirement investors. Because of data limitations of the academic literature and available evidence, 

only some of these gains can be quantified. Focusing only on how load shares paid to brokers affect the size of 

loads IRA investors holding load funds pay and the returns they achieve, the Department estimates the proposal 

would deliver to IRA investors gains of between $40 billion and $44 billion over 10 years and between $88 and 

$100 billion over 20 years.” The DOL goes on to state, “The Department nonetheless believes that these gains alone 

would far exceed the proposal’s compliance costs, which are estimated to be between $2.4 and $5.7 billion over t10 

years, mostly reflecting the cost incurred by new fiduciary advisers to satisfy relevant PTE conditions.” Given the 

DOL’s focus on the $40 to $44 billion range, this comment letter also focuses its discussion relating to benefits on 

the DOL’s analysis of the potential benefits it expects to achieve within IRA investment in front load mutual funds. 

However, we note that our concern about the reliability of the DOL’s analysis showing $40 to $44 billion also apply 

to the DOL’s presented in Table 3.4.4-1 and Table 3.4.4-2. 

3. A description of Compass Lexecon is contained in the Appendix. 
2 

Analysis does not constitute a reliable cost-benefit analysis. Moreover, the DOL’s conclusion 

that the benefits of the proposed amendments exceed the costs is not supported by reliable 

economic analysis. 

3. With respect to the purported benefits, the DOL’s analysis relies upon a misapplication of 

findings from the academic literature and a number of vague and unsupported assumptions 

which call into question its reliability. For example, the DOL estimates a purported dollar 

benefit estimate relating to IRA investor holdings in front-load mutual funds. This estimate 

relies critically on a result from a 2013 academic study that explored investment and 

performance in mutual funds with front-end loads conducted by Christoffersen, Evans and Musto 

(“CEM”).4

 CEM document an empirical relation between fund flows and performance of frontload mutual funds sold by unaffiliated brokers and the amount of excess load shared with 

unaffiliated brokers. However, the DOL misapplies CEM’s findings by incorrectly attributing 

fund underperformance to the total level of the of load fee shared with unaffiliated brokers as 

opposed to the excess load fee shared. Moreover, the DOL goes on to also attribute 

underperformance to funds sold by captive brokers, even though CEM did not find that these 

funds underperformed. 

4. With respect to the potential costs, the DOL’s analysis relies upon a number of vague and 

unsupported assumptions that call into question its reliability. For example, the DOL only offers 

a dollar cost estimate relating to the most obvious categories of direct costs. The DOL routinely 

speculates that its estimate is likely overstated but ignores or dismisses additional costs 

associated with many possible unintended consequences of the proposed amendments. 

                                                            

4. Susan E. K. Christoffersen, Richard Evans, and David K. Musto (2013) “What Do Consumers’ 

Fund Flows Maximize? Evidence from Their Brokers’ Incentives,” Journal of Finance 58(1):201-227. 
3 

Examples of unintended consequences include the possibility of higher investor paid fees and 

lower overall savings by IRA investors. 

5. Overall, the DOL’s Impact Analysis does not provide the public with a reliable estimate 

of the net benefit (if any) of the proposed regulatory amendments. The DOL’s misapplication of 

CEM’s results leads it to overstate, likely by a large amount, the benefit (if any) of the proposed 

amendments. Moreover, whereas the DOL admits that the $40 billion to $44 billion may not be 

realized, it provides no reliable economic analysis to demonstrate how the proposed amendments 

would eliminate or mitigate the underperformance it claims exists. The DOL’s reliance on vague 

and unsupported assumptions and its failure to consider appropriately costs associated with 

unintended consequences likely lead to an understatement of the true costs of the proposed 

amendments. 

6. A broad consensus exists among economists, including those with a variety of different 

perspectives on the proper role for government regulation, that accurate cost-benefit analysis is 

crucial to effective policymaking and promotes democratic ends. For example, Professor Cass 

Sunstein, who until recently served as administrator of the Office of Information and Regulatory 

Affairs, wrote: 

Cost-benefit requirements are of course most easily justified on economic grounds, as a 

way of promoting economic efficiency and thus eliminating unnecessary and wasteful 

public and private expenditures. But cost-benefit requirements also have strong 

democratic justifications. Indeed, they can be understood as a way of diminishing 

interest-group pressures on regulation and also as a method for ensuring that the 

consequences of regulation are not shrouded in mystery but are instead made available 

for public inspection and review. Some of the strongest arguments for cost benefit 

requirements are not so much economic as democratic in character. 5

                                                            

5. Cass R. Sunstein (1996) “The Cost-Benefit State,” University of Chicago Law School CoaseSandor Working Paper Series in Law & Economics, at 4. See also Kenneth J. Arrow, et al. (1996) “Benefit-Cost 

Analysis in Environmental, Health, and Safety Regulation: A Statement of Principles,” American Enterprise 

Institute, The Annapolis Center, and Resources for the Future, at 3 (“Benefit-cost analysis should play an important 

role in informing the decisionmaking process, even when the information on benefits, costs, or both is highly 
4 

7. A failure to accurately measure costs and benefits has the potential to cause waste, to 

result in misdirected resources, and to harm the basic functions of government in society. 

Historically, the importance of accurate cost-benefit analysis has been most noted with respect to 

environmental, health, and safety regulations, but there is today growing recognition that the 

same principles apply to financial regulations. For example, Eric Posner, the Kirkland and Ellis 

Distinguished Service Professor of Law and the Arthur and Esther Kane Research Chair at the 

University of Chicago Law School concludes:

The importance of developing methods for benefit-cost analysis for financial 

regulation can scarcely be overstated. In recent years, courts have awakened to 

the fact that many such regulations lack a sound economic basis and have started 

blocking them.6

II. THE DOL’S ANALYSIS OF PURPORTED BENEFITS IS OVERSTATED AND 

UNRELIABLE 

8. The DOL’s $40 billion to $44 billion estimate of purported benefits is overstated and 

fatally flawed for at least three reasons: 

 The DOL misapplies findings from the academic literature in its estimate of the amount 

of underperformance potentially associated with conflicted advice. 

o First, the DOL incorrectly asserts that the level of underperformance associated with 

purportedly conflicted advice in front-load mutual funds is proportional to the total

                                                                                                                                                                                               

uncertain ... The estimation of benefits and costs of a proposed regulation can provide illuminating evidence for a 

decision, even if precision cannot be achieved because of limitations on time, resources, or the availability of 

information.”) See also W. Kip Viscusi (1996) “Economic Foundations of the Current Regulatory Reform Efforts,” 

Journal of Economic Perspectives 10(3):119-34, at 120 (“Unless mechanisms exist for placing bounds on our risk 

reduction efforts, we can end up pursuing policies of diminishing marginal impact and diverting resources from 

more productive uses.”) 

6. See, e.g., Eric Posner and E. Glen Weyl (2013) “Benefit-Cost Analysis for Financial Regulation,” 

American Economic Review 103(3): 393-397, at 397 
5 

load that goes to the broker when the literature cited demonstrates that 

underperformance (if any) is only related to the excess load that goes to the broker. 

o Second, the DOL incorrectly asserts that front-load mutual funds sold by captive 

brokers underperform as a result of conflicted advice when the literature cited does 

not find evidence of underperformance. 

 The DOL ignores findings from the academic literature suggesting that underperformance 

may be limited to certain investment categories (e.g., U.S. equity, bonds, foreign equities, 

etc.) of mutual funds and need not be present in all mutual funds. 

 The DOL assumes that the proposed regulatory amendments will mitigate or eliminate 

underperformance without providing any reliable economic analysis demonstrating that 

such an outcome is likely. 

A. THE DOL MISAPPLIES FINDINGS FROM THE ACADEMIC LITERATURE 

9. The DOL performs a simulation of expected IRA-related savings amounts over the 10 

year investment horizon beginning in 2017 and ending in 2026 to calculate the purported $40 

billion to $44 billion in expected gains.7

 Specifically, the simulation compares aggregate IRArelated savings in front-load mutual funds under a “Baseline Scenario” without the proposed 

regulatory amendments to various “Alternative Scenarios” which make different assumptions as 

                                                            

7. DOL Impact Analysis, at 113. The DOL also extended the analysis to 20 years, out to 2036. The 

same concerns we raise below apply equally to this longer-duration estimate. The DOL also claims that there may 

be other benefits beyond those quantified, including “improvements in the performance of IRA investments other 

than mutual funds and potential reductions in excessive trading and associated transaction costs and timing errors 

(such as might be associated with return chasing).” Id., at 235. However, the DOL has provided no support for any 

of these claims, nor any quantification of the claimed benefits. As discussed below, one likely result of the proposed 

amendments would be to push some IRA investors into less tax-advantaged savings accounts. IRAs, unlike taxable 

savings accounts, impose a substantial penalty for early withdrawal, and as a consequence, investors in taxable 

savings accounts may have weaker incentives to resist early withdrawal. Therefore, there are plausible reasons why 

the proposed amendments could have the opposite effect as claimed by the DOL, namely, to incentivize early 

withdrawal of retirement savings, and the loss of subsequent compounding of returns. 
6 

to the benefits of the regulatory amendments. The $40 billion to $44 billion in expected savings 

is calculated as the difference in the predicted total IRA related savings in front-load mutual 

funds between two of the Alternative Scenarios and the Baseline Scenario. 

10. The difference in IRA-related savings in front-load mutual funds results from the DOL’s 

assumption that investors will earn higher investment returns in the Alternative Scenarios than in 

the Baseline Scenario. For example, the DOL assumes that, if the proposed amendments are 

finalized, IRA investors’ front-load mutual fund holdings will experience investment returns 

between 5.17 percent and 5.91 percent per annum under the Alternative Scenarios. However, 

absent the regulatory amendments, the DOL assumes that IRA investors’ holdings will only 

grow at rates between 5.07 percent and 5.46 percent per annum.8

 

11. The DOL rationalizes this difference in returns by appealing to the results from a 

regression analysis published in a 2013 academic paper by CEM. Specifically, the DOL asserts: 

An estimate from CEM suggests that for every 100 basis points of the load that go 

toward an unaffiliated broker’s load share, an IRA investor can expect to 

experience a decrease in performance of 49.7 basis points. For every 100 basis 

points of the load that go toward a captive broker’s load-share, an IRA investor 

can expect to experience a decrease in performance of 14.5 basis points.9

 

12. Next, the DOL weights the 49.7 basis points and 14.5 basis points estimates by what it 

claims are the market shares of overall investment in front-load mutual funds sourced from 

unaffiliated and captive brokers. The DOL concludes that each 100 basis points in the amount 

of load received by a broker is associated with a weighted average reduction of 44.94 basis point 

                                                            

8. DOL Impact Analysis, at 105 & 113. The DOL analyzes three Alternative Scenarios. As part of 

its third scenario, the DOL speculates that, as consequence of the proposed amendments, “loads paid by investors 

immediately fall to zero.” Id., at 104. However, the DOL immediately discounts the likelihood of this outcome, and 

the results of this scenario are not a part of the DOL’s conclusion that the benefits of the proposed amendments are 

$40 billion to $44 billion. 

9. DOL Impact Analysis, at 114. 
7 

in IRA returns.10 The DOL then uses this 44.94 basis point estimate as an input in its calculation 

of the increase in the return performance the DOL assumes will result from the proposed 

amendments. Thus, the reliability of the 44.94 basis point estimate and the implementation of 

that estimate in the DOL’s benefit calculation is a critical component of the DOL’s analysis. 

13. The DOL applies the 44.94 basis point estimate to its estimate of the total load that goes 

toward the broker’s share to determine the amount of underperformance to be used in its 

simulation study.11 Specifically, the DOL assumes that front-load mutual funds will experience 

44.94 basis points in improved performance as a result of the proposed regulatory amendments 

for every 100 basis points of total load that goes toward the broker. For example, in 2017, the 

DOL estimates that the average total load that goes toward the broker is 134 basis points. In the 

Baseline Scenario, the DOL assumes that new investment in 2017 into front-load mutual funds 

will result in underperformance of 60.22 basis points – 134 basis points times 44.94 basis points 

divided by 100 equals 60.22 basis points. The DOL assumes that new investments made under 

the Alternative Scenarios will not experience this 60.22 basis point in underperformance because 

of the proposed regulatory amendments. The DOL attributes the difference to a purported 

benefit. 

14. However, a review of CEM reveals that CEM’s point estimates of 49.7 and 15.4 basis 

points are associated with the excess load that goes toward a broker’s load share and not the total 

load that goes toward the broker’s load share.12 Excess load is defined by CEM as the load 

                                                            

10. DOL Impact Analysis, at 114. 

11. The DOL’s estimates of the total load that goes toward the brokers share are provided in DOL 

Impact Analysis, at Table 3.4.1-1 in columns (B) and (C). 

12. See, for example, Christoffersen, Evans, and Musto (2013) op. cit., at 226 (Table V, entitled 

“Future Returns and Excess Load Paid to Broker”). See also, for example CEM at 225 quoted herein for exposition: 

“Do the funds that pay brokers more subsequently perform better or worse? To address this question we run 

multiple regressions with the excess load paid to the broker and excess revenue sharing explaining performance over 

the next 12 months.” 
8 

received by the broker, net of a baseline load amount for funds in the same category (e.g., 

“Equity,” or “Fixed Income”), and with similar attributes (e.g., size of total load, mutual fund 

family size, or fund size).13 CEM’s focus on excess load reflects a hypothesis that a poorerperforming fund may be able to compete by offering brokers additional load payments relative to 

otherwise similar funds, not any claim that all load payments to brokers reflect lower returns.14 

15. Thus, the DOL misapplies its 44.94 basis point estimate derived from CEM to its 

estimate of the total load that goes toward the broker’s share as opposed to an estimate of the 

excess load that goes toward the broker’s share as originally estimated by CEM. This 

misapplication of CEM results in an overstatement of the purported benefits actually estimated. 

To see why, consider the following example. Suppose a certain mutual fund in 2017 charges 164 

basis points in a front-end load and that the fund shares 134 basis points with a broker as 

estimated by the DOL.15 CEM’s regression analysis applies only to the amount of excess in load 

fees shared with the broker relative to similar mutual funds. For example, if other funds similar 

to the fund in question levy an average of 150 basis points in front-end load fees and pay 122 

basis points to unaffiliated brokers, then the excess load shared for the fund in question (relative 

to other funds) is only 12 basis points (134 basis points minus 122 basis points equals 12 basis 

points of excess load shared).16 Using a proper estimate of excess load shared compared to the 

total load shared results a reduction in the estimate amount of underperformance from the 60.22 

                                                            

13. Christoffersen, Evans, and Musto (2013), op. cit., at 216-218. 

14. Indeed, CEM state “Flows and returns vary over time and across funds for many reasons, and 

these reasons could also be important for broker payments. For example, flows, payments, and returns could all be 

higher for equity funds.” Christoffersen, Evans, and Musto (2013), op. cit., at 216. 

15. This example is modeled after the DOL’s prediction that the baseline average load paid by IRA holders 

will be 164 basis points and the baseline average load share paid to brokers will be 134 basis points in 2017. See 

DOL Impact Analysis at 113. 

16. For ease of exposition, we refer to the load predicted using CEM’s regression model as the 

average load paid by similar funds. Technically speaking, the proper implementation would be to use CEM’s 

regression model to fit a predicted load and then to derive the excess load by subtracting the predicted load from the 

actual load. 
9 

basis points assumed by the DOL to only 5.39 basis points—12 basis points times 44.94 divided 

by 100 equals 5.39. That is, the DOL’s misapplication overestimates the amount of 

underperformance—and hence, the gains from the proposed amendments—by more than a factor 

of 11 in this example. 

16. Because the DOL applies the 44.94 basis point figure to the total load that goes toward 

the broker, the DOL’s estimate of the improvement in return performance assumed to follow the 

implementation of the proposed amendments is dramatically overstated. Moreover, the 

overstatement in the improvement in return performance is roughly proportional to the estimated 

dollar amount of purported benefits because the vast majority of the estimated benefits are 

derived from the assumed improvement in performance. 

17. While the actual overstatement of the gains from the proposed amendments would vary 

from the example above depending on the amount by which a fund’s total broker load payments 

constitute an excess load shared, it is guaranteed that the overstatement is large. This is because 

an individual fund’s excess loads are defined relative to the total loads of other funds. Thus, 

only some funds can even have excess loads, and therefore, only some funds can suffer reduced 

performance as a result of the alleged conflicts of interest. However, the DOL implicitly 

assumes that all front-loads experience excess loads when, as a matter of statistics, as many as 

half of the funds analyzed by CEM may be expected to lack the requisite excess load. 

18. Separately, the DOL also misapplies the findings of CEM in attributing a 14.5 basis point 

reduction in investment performance to mutual funds that are sold by captive brokers. (As noted 

above, the 14.5 basis point figure is used by the DOL as part of the calculation in deriving the 

critical 44.94 basis point assumption.) While it is true that the point estimate related to captive 

brokers in CEM’s regression is 14.5 basis points, this point estimate is not statistically different 
10 

from zero – a finding commented on directly by CEM but ignored by the DOL.17 That is, 

CEM’s results indicate that they did not find reliable statistical evidence of underperformance 

within captive broker front-load funds. The DOL ignores this finding and instead simply 

assumes that this underperformance exists. 

19. Moreover, other evidence in CEM further demonstrates the unreliability of the DOL’s 

application of the 14.5 basis points. In particular, CEM demonstrate that funds sold by captive 

brokers do not exhibit increased inflows as a result of load sharing arrangements—suggesting the 

conflicted advice does not play a role in investments recommended by captive brokers. In fact, 

CEM report that excess load payments to captive brokers reduce fund inflows.18 The fact that 

CEM do not find evidence that excess load contribute to captive broker fund inflows is entirely 

inconsistent with the DOL’s assumption that load-sharing agreements in captive brokered funds 

incentivize captive brokers to steer customers toward these funds. 

B. THE DOL IGNORES OTHER FINDINGS FROM THE ACADEMIC 

LITERATURE 

20. The DOL asserts that other literature is consistent with the CEM results in “direction and 

magnitude” 19 but this assertion is misleading. For instance, another article cited by the DOL,20

by Bergstresser, Chalmers, and Tufano (2009) (“BCT”), concludes that while broad U.S. equity 

and bond funds underperform relative to direct-marketed U.S. equity and bond funds over a 

particular period of time, there is only mixed evidence of underperformance in foreign equity 

                                                            

17. Christoffersen, Evans, and Musto (2013) op. cit., at 228 (“the coefficient on captive brokerage is 

not statistically significantly different from zero”). 

18. Christoffersen, Evans, and Musto (2013), op. cit., at 220 (Table III). 

19. DOL Impact Analysis, at 118. 

20. DOL Impact Analysis, at 95. 
11 

funds and no evidence of underperformance in money market funds.21 If the results of BCT 

apply to front-load mutual funds, then a potentially large subset of front-load funds examined by 

the DOL may not experience the underperformance assumed by the DOL. If so, then once again 

the DOL has overestimated the prevalence of underperformance even with unaffiliated brokered 

funds and by doing so, the DOL potentially further overstates the benefits of the proposed 

amendments. 

C. THE DOL ASSUMES BENEFITS IT PURPORTS TO ESTIMATE 

21. Notwithstanding the considerations described above, which all render the DOL benefit 

analysis unreliable and overstated, the critical question on the table is not analyzed by the DOL. 

Namely, would the proposed amendments mitigate or eliminate the underperformance, if any, 

experienced within front-load mutual funds that share excess loads with brokers? This question 

is central to the issue at hand given that the vast majority of the purported gains quantified by the 

DOL relating to front load mutual funds, even in the second scenario, result from an assumption 

by the DOL that the amendment will increase returns in front-load mutual funds.22 

22. As noted above, the benefit estimated by the DOL derives from their assumption that the 

proposed regulatory amendments will mitigate or eliminate underperformance in front-load 

mutual funds. Importantly, the DOL fails to provide any analysis to demonstrate how the 

amendments in question will achieve this outcome. Instead, the DOL only suggests that mutual 

                                                            

21. Bergstresser, Chalmers, and Tufano (2009) “Assessing the Costs and Benefits of Brokers in the 

Mutual Fund Industry,” Review of Financial Studies 4129–4156, at 4138-9 (Table 3) and the discussion at 4140-1. 

22. DOL Impact Analysis, at 105 (“Under the second reform scenario, the effect on investment 

performance constitutes approximately 90 percent of the estimated gain.”) In addition, under certain Alternative 

Scenarios, the DOL also assumes that IRA investors will experience the additional benefit of paying lower total 

loads due to the proposed amendments (DOL Impact Analysis, at 105). This claim is entirely unsupported by any 

reliable analysis. Notwithstanding the lack of support, the DOL assumes includes this secondary benefit in its 

estimate of $40 billion to $44 billion. 
12 

funds will in some way be more strongly incentivized to “invest in performance” if advisers’ 

conflicts of interest are ameliorated.23 It is unclear what the DOL means by investing in 

performance, but in any case, the DOL’s impact statement includes no analysis or any reference 

to other literature demonstrating that funds do not currently attempt to maximize performance, 

that they could make additional investments that would increase performance materially, or 

where the money for this additional investment would come from. 

23. Moreover, it is unclear whether the DOL believes that this increase in performance would 

be pervasive throughout the industry, suggesting that even firms that do not underperform today 

will improve in performance, or whether the increase would be limited to only those funds that 

currently underperform. In the case of the former, this assumption borders on irrational. If it is 

the latter, the DOL analysis fails to identify a reasonable mechanism by which current 

underperforming funds will be disciplined to improve performance. While one potential form of 

discipline could come from a shift in financial advisers’ tendencies to recommend 

underperforming funds, this disciplining mechanism can only work if (1) IRA investors consult 

with financial representatives, (2) these representatives advise them to reallocate their 

investments, and (3) the investors follow that advice. However, the DOL has provided no study 

documenting the frequency with which investors consult with financial professionals or the 

frequency with which those professionals provide guidance that is followed. 

24. Moreover, and perhaps most importantly, none of the literature cited by the DOL claims 

that the proposed amendments or any similar policy would lead to higher investment returns. 

Simply stated, the literature cited by the DOL does not support its speculative conclusions. 

                                                            

23. DOL Impact Analysis, at 115. 
13 

D. TAKE-AWAY ON THE DOL’S PURPORTED BENEFIT ANALYSIS 

25. Overall, the DOL’s purported benefit analysis suffers several flaws: it misapplies 

findings from the academic literature used to substantiate its claims; it ignores findings in the 

literature indicating underperformance may not be as widespread as suggested by the DOL; and 

it assumes the benefits it purports to estimate. Each of these flaws is critical and leads to the 

conclusion that the DOL’s benefit analysis is unreliable and overstates the benefits purported to 

be measured. Perhaps telling of overstatement, the DOL also repeatedly speculates that a 

substantial portion of these gains, such as 75 percent or 50 percent, will be realized.24 To date, 

the DOL has not provided any analysis to rule out the possibility that none of the gains it 

envisions will actually be realized.25

III. THE DOL’S ANALYSIS OF PURPORTED COSTS IS LIKELY 

UNDERSTATED AND UNRELIABLE 

26. The DOL’s $2.4 billion to $5.7 billion estimate of purported compliance costs is most 

likely understated and fatally flawed for at least three reasons: 

 The DOL only estimates the most direct and obvious costs, while improperly dismissing 

other costs likely to be incurred by market participants, including the government. 

 The DOL improperly dismisses costs likely to be incurred due to unintended 

consequences. 

 The DOL routinely relies on assertions about potential cost levels when reliable data 

analysis is required. 

                                                            

24. DOL Impact Analysis, at 8, 101-2, 106, & 216. 

25. As noted previously, our concerns about the reliability of the DOL’s analysis showing $40 to $44 

billion also apply to the DOL’s presented in Table 3.4.4-1 and Table 3.4.4-2. 
14 

A. THE DOL TOO READILY DISMISSES COSTS LIKELY TO BE INCURRED 

BY MARKET PARTICIPANTS, INCLUDING THE DOL ITSELF 

27. The DOL estimates costs of the proposed amendments in four specific categories: “Firm 

Costs,” “E&O Insurance,” “Switching/Training Costs,” and “Additional PTE/Exception 

Costs.”26 According to the DOL, the total cost of compliance with the proposed amendments 

over 10 years in these four categories is expected to be between $2.4 billion and $5.7 billion, a 

range which reflects two different scenarios regarding “Firm Costs” and two different assumed 

discount rates over the 10 year period.27 However, the DOL dismisses or completely ignores the 

likelihood of unintended consequences from the proposed amendments that are likely to be 

incurred by market participants that could substantially increase costs. 

28. In describing its cost estimates, the DOL repeatedly suggests that the estimates are likely 

to overstate the actual costs of the proposed amendments, but only rarely mentions any reasons 

why its estimates might understate the actual costs of the proposed amendments.28 Importantly, 

                                                            

26. DOL Impact Analysis, at 178. 

27. DOL Impact Analysis, at 178. 

28. See, e.g., DOL Impact Analysis, at 157-8 (“The Department believes the higher end of the 

estimated cost range represents an over-estimate, because it implicitly assumes that existing business models will 

change only as necessary to come into compliance, and will retain their existing market shares, when in fact new, 

more cost-effective business models are already gaining market share, and the new proposal is likely to encourage 

such market improvements ... The lower end of the estimated range incorporates lower available bases, but should 

not be interpreted as a lower bound because it likewise neglects such ongoing market improvements and the new 

proposal’s positive effects thereon”); DOL Impact Analysis, at 164 (“Scenario A likely overstates the costs of the 

proposed regulations and exemptions by a substantial margin. Scenario B is a more reasonable estimate, but 

probably also overstates the costs because of the flexible standards-based approach of the Department’s new 

proposal, which would enable firms to comply in the most cost-effective way in light of their current practices and 

systems”); DOL Impact Analysis, at 166 (“As discussed above even these estimates are believed to be 

overestimates, possibly by a large margin”); DOL Impact Analysis, at 165 (“[U]sing the IAA ration could lead to an 

over-estimate of small firms costs, particularly for start-up costs”); DOL Impact Analysis, at 167 (“Subsequent year 

costs could be even lower as firms already conduct training of their staff”); DOL Impact Analysis, at 174 (“[S]ome 

of these costs would be offset by firms and individuals that would no longer be required to register as BDs or their 

representatives”); DOL Impact Analysis, at 215 (“Much of the estimated compliance cost is associated with 

satisfaction of PTE conditions. The number of advisers who will take advantage of the relevant PTEs is uncertain, 

however. Some advisers may find it more advantageous to simply avoid PTs. The Department has aimed to err on 

the side of overestimating the compliance costs”). 
15 

the DOL repeatedly dismisses other potential categories of costs likely to be incurred by firms 

and employees in the industry, including those associated with call centers,29 creating or 

updating contracts,30 and search and training for advisers left unemployed.31 The DOL also 

dismisses any costs imposed on financial product providers32 and costs paid by the government 

to implement and enforce the proposed regulations.33

B. THE DOL IMPROPERLY DISMISSES COSTS RELATED TO OTHER 

UNINTENDED CONSEQUENCES 

29. In contrast with the DOL’s assumption of no costs for the proposed amendments beyond 

those that are immediate and obvious, the academic literature on regulation demonstrates that 

well-meaning regulations very frequently have important unintended consequences that lead to 

additional costs (and/or reduced benefits) relative to what was expected.34 Unintended 

consequences are even more likely—and potentially more costly—in the case of financial 

regulation because financial markets serve as an important conduit for the efficient allocation of 

resources throughout the economy, and therefore touch many other markets. As one study noted, 

“The history of U.S. financial regulation, in many respects, is a history of unanticipated 

                                                            

29. DOL Impact Analysis, at 175. 

30. DOL Impact Analysis, at 176. 

31. DOL Impact Analysis, at 176, 227 

32. DOL Impact Analysis, at 176-7. 

33. DOL Impact Analysis, at 215. 

34. Some famous examples of unintended consequences leading to additional costs in the literature 

include: Richard A. Posner (1974) “The Social Costs of Monopoly and Regulation,” Journal of Political Economy

83(4):807-27; Sam Peltzman (1975) “The Effects of Automobile Safety Regulation,” Journal of Political Economy

83(4):677-726; Robert W. Crandall and John D. Graham (1989) “The Effect of Fuel Economy Standards on 

Automobile Safety,” Journal of Law & Economics 32(1):97-118; and John DiNardo and Thomas Lemieux (2001) 

“Alcohol, Marjiuana, and American Youth: The Unintended Consequences of Government Regulation,” Journal of 

Health Economics 20(6):991-1010. 
16 

consequences.”35 In this case, the proposed amendments would impact the provisioning of IRAs, 

which the DOL projects would involve approximately $9 trillion in individual savings.36

30. An important category of potential unintended consequences for any regulation that 

imposes costs on firms (as the DOL admits the proposed amendments do) is higher prices 

charged to consumers by these firms and the reduced purchasing. Basic economics indicates that 

any regulation that increases an industry’s costs of serving consumers will lead to higher prices 

and lower output.37 

31. All else equal, economic theory predicts that fees charged to investors will rise when 

additional costs are imposed on firms in the industry for at least two reasons. First, the costs 

imposed on advisers and advisory firms operating in the industry will be passed on (at least in 

part) to investors in the form of higher fees.38 Moreover, higher costs can cause firms to exit the 

industry or to exit certain segments of the industry, leading to a weakening of the competition 

that otherwise would drive down fees. As a result, investors facing higher fees would, in turn, 

likely invest less, or alternatively select other forms of investment that do not have these higher 

costs and potentially are less tax advantaged. 

32. For example, we understand that participants in this rulemaking have indicated that the 

proposed regulatory amendments will cause certain firms within the industry to significantly 

curtail their efforts to attract IRA investors with balances below $25,000. If so, then there would 

be less competition in the industry for investors that wish to start a new IRA or roll-over another 

retirement account with a balance below $25,000. In this instance, fees to these customers may 

                                                            

35. Charles K. Whitehead (2012) “The Goldilocks Approach: Financial Risk and Staged Regulation,” 

Cornell Law Review 97:1267-1308, at 1268. 

36. DOL Impact Analysis, at 115 (citing Cerulli Associates, “Retirement Markets 2014.”) 

37. Hal R. Varian (2014) Intermediate Microeconomics, 9th ed., W. W. Norton & Co., at 438-9. 

38. Jeremy I. Bulow and Paul Pfleiderer (1983) “A Note on the Effect of Cost Changes on Prices,” 

Journal of Political Economy 91(1):182-5. 
17 

increase. Moreover, the reduction in client service could result in a reduction in the amount of 

money that today’s consumers save in tax deferred IRA accounts. As noted in a separate 

Compass Lexecon comment, investors that are forced to abandon IRAs as saving vehicles may 

face an effective tax increase of 32.9 percent or more.39 But more generally, given the size of 

total IRA investments in the U.S., even a small reduction in the total amount of IRA investment 

as a consequence of higher fees has the potential to generate costs to investors that would dwarf 

the DOL’s estimates of the benefits of the proposed amendments.40

33. The DOL only briefly addresses these potentially enormous costs associated with lost 

savings. First, the DOL speculates that new, competitive advisory businesses may enter the 

industry due to the proposed amendments, thus eliminating any lost savings.41 However, this 

claim is inconsistent with commonly accepted economic theory, which teaches that increased 

costs can create barriers to entry that reduce, not increase, entry by potential competitors.42 In 

this context, the proposed amendments would, as the DOL admits, impose additional costs on 

firms. Larger firms may be able to achieve profitability even with these new costs because of 

their scale of operations. However, smaller firms may be more likely to struggle, and hence, 

more likely to exit the industry. At the same time, new entrants are typically smaller firms, and 

the increased costs imposed by the proposed amendments similarly affect their incentives to 

                                                            

39. Compass Lexecon (2015) “Comment to the Department of Labor on a Proposed Rule Regarding 

Investment Adviser Fiduciary Status: Tax Consequences to IRA Investors,” July 20, 2015 at 2. 

40. Even assets that remained in 401(k)s or other company plans as a consequence of higher IRA 

adviser fees could reflect losses due to the proposed amendments, since academic literature indicates these accounts 

are often highly undiversified, whereas IRAs allow a broader range of investments, leading to greater diversification 

benefits. Schlomo Benartzi (2001) “Excessive Extrapolation and the Allocation of 401(k) Accounts to Company 

Stock,” Journal of Finance 56(5):1747-64. 

41. DOL Impact Analysis, at 222 & 228. 

42. Dennis W. Carlton and Jeffrey M. Perloff (2005) Modern Industrial Organization, 4th ed., Pearson 

Addison-Wesley, at 79-80. 
18 

enter the industry. These effects reduce competition, to the detriment of the IRA investors the 

DOL seeks to protect.43

34. The DOL also suggests that any reduction in investment due to the costs imposed by the 

proposed amendments might be offset by increased investment due to greater investor trust in 

fiduciary advisers.44 This claim seems to reflect a notion that, while the proposed regulations 

will reduce the supply of advice, they will also increase the demand for advice from investors 

who recognize the better value provided by unconflicted advisers. Such a notion is at least 

ironic, given that the entire rationale for the proposed amendments is that investors are currently 

subject to “abuse” by apparently being too reliant on conflicted advice.45 That is, the DOL 

argues the regulation is needed because investors are too reliant on their financial advisers, but at 

the same time, the regulation would increase that reliance, driving investors to demand even 

more advice. 

35. Moreover, the DOL claims that “retail investors generally and IRA owners in particular 

... cannot effectively assess the quality of the investment advice they receive or even the 

investment results they achieve ... Individuals over the age of 55 often ‘lack even a rudimentary 

understanding of stock and bond prices, risk diversification, portfolio choice, and investment 

fees.’”46 However, the DOL fails to explain why the same unsophisticated investors the DOL 

                                                            

43. The DOL describes at length its view that so-called “robo-advisers” will, over time, gain market 

share from traditional advisory firms. The DOL notes that robo-advisers have lower costs and, at least to date, offer 

largely unconflicted advice. DOL Impact Analysis, at 230-1. The DOL speculates that, absent the proposed 

amendments, robo-advisers may become conflicted through competition with traditional advisory firms, which it 

claims provide more conflicted advice. Id., at 232. The DOL does not explain why the growth of these allegedly 

unconflicted robo-advisers does not demonstrate that market forces in the current regulatory environment serve to 

ameliorate conflicts of interest. Nor does the DOL explain its view that increased competition between firms in the 

future will reduce market efficiency, when the standard presumption in economics is that increased competition 

increases efficiency. 

44. DOL Impact Analysis, at 222 & 228. 

45. DOL Impact Analysis, at 59. 

46. DOL Impact Analysis, at 59-60. 
19 

describes would nevertheless understand the implications of a complex new regulation regarding 

fiduciary status, and as a consequence, seek to invest more with their advisers. 

36. More generally, the DOL fails to fully consider outcomes that have occurred to date from 

regulation with similar aims to the proposed amendments, such as the Retail Distribution Review 

(“RDR”), which was implemented in 2013 in the United Kingdom.47 While there are a number 

of differences between RDR and the proposed amendments, the available evidence to date 

appears to indicate higher investment fees as a consequence of RDR and mixed results regarding 

the number of advisers and regarding investors’ access to advice.48 

37. In addition to the potential consequences associated with increased consumer fees and the 

potential for reduced savings in tax-preferred IRAs, the DOL also does not consider at all a wide 

range of other potential costs. For instance, the DOL has not fully assessed the likely changes in 

the structure of payments to advisers, claiming only that an arbitrary number may switch to 

asset-based fee structures.49 In some instances, a move to asset-based fee structures could lead 

require investors to pay the same or more in fees as the amount of money they purported save 

from avoiding underperformance. 

38. Moreover, the proposed regulatory amendments may change the type of advice offered 

by advisers. For example, risk-averse financial advisers may attempt to avoid any potential 

liability now imposed under the fiduciary regime by only recommending lower cost and less 

risky securities to investors. After all, financial advisers and their employers may bear more 

                                                            

47. http://www.fca.org.uk/firms/being-regulated/retail-investments/faqs [accessed July 16, 2015] 

48. A study commissioned by the Financial Conduct Authority, the regulatory body that developed 

RDR and enforces it, stated “The evidence currently available implies adviser charges have increased post-RDR, at 

least for some consumers,” and “Some firms are segmenting their client books and focusing on wealthier 

customers,” although the study found that this segmenting effect appears to have been relatively small to date. 

Europe Economics (2014) “Retail Distribution Review Post Implementation Review,” December 16, 2014, at 64 & 

66. Similarly, see (stating that “Although the number of advisers has fallen, revenue from regulated businesses for 

financial advice firms has remained steady, at around £3.8 billion per annum, for the period from 2011 through to 

2013.”) Association of Professional Financial Advisers (2014) “The Advice Market Post RDR Review,” June, at 4. 

49. DOL Impact Analysis, at 173-4. 
20 

downside risk as a result of litigation (justified or unjustified) under the proposed regulatory 

change. This shift in the type of investment advice may further reduce investors’ overall savings 

by lowering the returns earned on dollars saved because less risky securities tend to provide 

lower overall returns relative to more risky securities. For example, bonds provide lower 

expected returns than do equity. 

39. Economic theory predicts that financial product providers who currently rely on loadsharing and other arrangements with advisers may also be affected. While the DOL speculates 

that these firms will “invest” to generate higher returns, these providers may not be able to 

generate higher returns and may be forced to spend additional funds in marketing to maintain 

their profitability. These other means may be equally or more costly than the current 

arrangements with advisers, and may raise other consumer protection issues.50 In any case, those 

costs would likely be passed on, at least in part, to investors through higher fees. 

40. Similarly, financial product providers that currently rely on load-sharing and other 

arrangements to sell their products may not be able to reach economies of scale using alternative 

distribution mechanisms, and as a consequence, may exit the market. If mutual funds or other 

financial product providers exit the market, IRA investors may not have as many choices, which 

could lead to suboptimal investment allocations. 

41. Finally, academic literature on regulation also indicates that consumer-protection 

measures like the proposed amendments may lull consumers into a false sense of security by the 

                                                            

50. Available evidence indicates that mutual fund advertising is effective in driving fund flows, but 

does not signal superior fund performance. Prem C. Jain and Joanna Shuang Wu (2000) “Truth in Mutual Fund 

Advertising: Evidence on Future Performance and Fund Flows,” Journal of Finance 60(2):937-58. Hence, whatever 

gains investors experienced as a consequence of mitigating adviser conflicts of interest could be lost through the 

effects of increased advertising. 
21 

notion that government regulators are watching over them.51 As a consequence, they face 

incentives to be less careful, thus offsetting in full or in part whatever benefits the regulators may 

provide. In the context of the proposed amendments, investors may feel they do not need to be 

as careful with their retirement savings because the government is forcing their advisers to be 

more careful. 

42. We do not hold a view that all of these costs are necessarily likely outcomes of the 

proposed amendments. Our discussion is only meant to highlight that regulations like the 

proposed amendments often create additional costs due to unintended consequences, and the 

DOL’s estimates of costs have not substantively addressed the potential for such additional costs. 

C. THE DOL’S COST ANALYSIS IS FLAWED IN OTHER WAYS THAT 

RENDER IT UNRELIABLE. 

43. Even putting aside the failure to appropriately consider potential increased costs due to 

unintended consequences of the proposed amendments, the DOL’s analysis of costs also suffers 

from other limitations that further render it unreliable. First, the DOL repeatedly relies upon 

unsupported assumptions. For instance, in analyzing the impact of the proposed amendments on 

advisers’ insurance premiums, the DOL assumed a 10 percent increase due to advisers’ new 

fiduciary status.52 No basis is provided for this critical assumption, even while available 

evidence indicates that fiduciary status in other contexts has had large effects on the likelihood of 

                                                            

51. See, similarly, W. Kip Viscusi (1984) “The Lulling Effect: The Impact of Child-Resistant 

Packaging on Aspirin and Analgesic Ingestions,” American Economic Review 74(2):324-7. 

52. DOL Impact Analysis, at 171. 
22 

litigation,53 and litigation risk in the financial sector has been shown to have material impacts on 

insurance premiums.54

44. The DOL also assumes without basis that rising insurance premiums are the only relevant 

litigation costs generated by the proposed amendments. The DOL ignores the full cost of 

litigation necessary to enforce regulations, including attorneys’ fees (both plaintiffs’ and 

defendants’), court costs, and opportunity costs for legal resources which otherwise could be 

employed in other types of cases. 

45. While it may be appropriate to rely on assumptions in an economic analysis in certain 

cases, those assumptions must have at least some justification or basis in order for the analysis to 

be reliable. As a group of prominent economists stated in evincing principles of cost-benefit 

analysis, “Quantification of benefits and costs is useful, even where there are large uncertainties 

... If the decision maker wishes to introduce a ‘margin of safety’ into his decision, he should do 

so explicitly. Assumptions should be stated clearly rather than hidden within the analysis.”55

46. Separately, the DOL’s cost analysis also fails to consider the consequences of the 

proposed amendments for population subgroups. A careful cost-benefit analysis should analyze 

not only the total costs of the regulation at issue, but also who ultimately pays those costs, and 

whether such outcomes are equitable. As a prominent group of economists establishing 

principles for cost-benefit analysis of regulations stated, “A good benefit-cost analysis will 

identify important distributional consequences of a policy.”56

                                                            

53. See, e.g., Erik J. Olson (2012) “Shareholder Class Litigation Arising from Mergers and 

Acquisitions,” Association for Corporate Counsel (“Corporate directors are fiduciaries entrusted with the power and 

responsibility to supervise a corporation’s business affairs and obligated to act in the best interests of the corporation 

and its shareholders ... With rare exceptions, shareholder plaintiffs base their claims on alleged violations of these 

fiduciary duties.”) 

54. John E. Core (2000) “The Directors’ and Officers’ Insurance Premium: An Outside Assessment of 

the Quality of Corporate Governance,” Journal of Law, Economics, & Organization 16(2):449-77. 

55. Arrow, et al. (1996) op. cit., at 8. 

56. Arrow, et al. (1996), op. cit., at 6. 
23 

47. For instance, the DOL estimates direct costs to advisery firms and certain employees who 

may require additional licensure. But the DOL never considers the ultimate incidence of these 

costs and their implications for different groups of stakeholders or for social equity. As noted 

above, costs ostensibly imposed on firms will typically be passed on (at least in part) to 

consumers. Given the DOL’s concerns regarding protection of vulnerable groups of investors, 

the consequences of such an outcome for specific groups of investors would seem highly 

important. It is very commonly the case that costs imposed by the government on one group are 

ultimately borne by other industry participants, and economists have developed standard 

approaches to estimating this “incidence” of government policy.57 However, the DOL fails to 

apply these approaches. 

IV. CONCLUSION 

48. Though lengthy, the DOL’s “Regulatory Impact Analysis” provides no reliable estimates 

of the costs and benefits of the proposed amendments, and as a consequence, does not justify the 

costs likely to be incurred by market participants (including IRA investors). Among other 

limitations in the DOL’s benefits analysis, it improperly applies the results of the academic 

literature upon which it relies and, as a consequence, likely grossly overstates the benefits of the 

proposed amendments. The DOL’s cost estimate is reminiscent of the old joke about the 

drunkard who looks for his lost keys under the streetlamp because that’s where the light is. The 

DOL only attempts to quantify the most obvious and direct costs of the proposed amendments, 

while dismissing or overlooking a wide range of potential unintended consequences that could 

dramatically increase the costs. The history of regulation provides strong reason to be skeptical 

                                                            

57. See, e.g., Don Fullerton and Gilbert E. Metcalf (2002) “Tax Incidence,” in Handbook of Public 

Economics 4:1787-1872. 
24 

of the DOL’s assumption that the proposed amendments would have no costly unintended 

consequences. 

 
25 

APPENDIX 

Compass Lexecon is an economic consulting firm that specializes in the application of 

economics to a variety of legal and regulatory issues. Compass Lexecon has a professional 

staff of more than 325 individuals and fourteen offices throughout the United States, Europe 

and South America. Compass Lexecon also maintains affiliations with leading academics 

including several Nobel Prize winners in Economics. 

Lexecon, Compass Lexecon’s predecessor firm, was founded in 1977 by, among others, 

then Professor (now Judge) Richard A. Posner of the Seventh Circuit Court of Appeals. 

Compass Lexecon was formed in January 2008 through the combination of Lexecon with 

Competition Policy Associates, another premier economic consulting firm. Compass 

Lexecon is a wholly owned subsidiary of FTI Consulting, Inc., a global business advisory 

firm. Professor Daniel R. Fischel currently serves as Compass Lexecon’s Chairman and 

President. 

Compass Lexecon’s practice areas include antitrust, securities and financial markets, 

intellectual property, accounting, valuation and financial analysis, pension economics and 

policy, corporate governance, bankruptcy and financial distress, derivatives and structured 

finance, class certifications and employment matters, damages calculations, business 

consulting, regulatory investigations and public policy. 
26 

Compass Lexecon’s clients include the United States Department of Justice and other 

agencies of the federal government, state and local governments, regulatory bodies, major 

corporations, investor groups, and leading law firms across the globe. 

For more information about Compass Lexecon, see its website at: 

www.compasslexecon.com 
APPENDIX 4
i 

Comment on the Department of Labor Proposal and Regulatory Impact 

Analysis 

July 17, 2015 

EXECUTIVE SUMMARY

NERA Economic Consulting has been retained by SIFMA to review and comment on the 

U.S. Department of Labor’s (“DOL”) proposed conflict of interest rule and definition of the term 

“fiduciary” under ERISA (the “proposal”), and associated Regulatory Impact Analysis (“RIA”). 

The estimates in the above documents form the basis of the Department of Labor’s argument that 

the proposed conflict of interest rule would provide a net “benefit” to the public. 

To study these costs associated with the DOL proposal, NERA also collected accountlevel data from a number of financial institutions in order to construct a representative sample of 

retirement accounts. Our dataset includes tens of thousands of IRA accounts, observed over a 

period from 2012 through the first quarter of 2015. 

Briefly, our findings are as follows: 

• The DOL proposal may effectively make the commission-based brokerage model 

unworkable for investment accounts covered by ERISA due to the operational 

complexity and costs of compliance that would be required under the Best Interest 

Contract Exemption. Using our account-level data, we find that: 

o Some commission-based accounts would become significantly more expensive 

when converted to a fee-based account under the DOL proposal. 

o Investors can and do select the fee model (commission vs. fee) that best suits their 

own needs and trading behavior. 

o A large number of accounts do not meet the minimum account balance to qualify 

for an advisory account. 
ii 

o There is no evidence that commission-based accounts underperform fee-based 

accounts. 

• In 2011, the DOL estimated that consumers who invest without professional advice make 

investment errors that collectively cost them $114 billion per year. Applying the DOL’s 

own logic to the present proposal, combined with the likelihood that a large number of 

investors will lose access to advice, will result in aggregate costs that may exceed the 

DOL’s own estimates of the benefits of the proposal. 

• The RIA produces many different numbers representing different underlying 

assumptions, resulting in industry cost estimates that vary wildly from about $2 bil./year 

to $50 bil./year. The range of numbers is so wide it suggests no scientific confidence in 

their own methodology. 

• The academic research cited in the RIA is misapplied. 

o While the academic literature focuses on mutual funds, it is applied more widely 

to other assets such as variable annuities in order to come up with the asset base 

of $1.7 trillion in retirement assets. 

o The most frequently cited paper in the RIA takes results from a statistical analysis 

on certain types of funds and misapplies those results to all funds. This likely 

exaggerates the importance of the findings cited by the DOL. 

o The academic literature cited in the RIA does not compare the costs and benefits 

of fiduciary accounts with those of brokerage accounts. Therefore, any findings 

based on this research are inappropriate as a basis for the DOL proposal.

• Overall the DOL’s misapplied use of the academic literature and erroneous conclusions 

on investor behaviors render their regulatory impact analysis unreliable and incomplete. 
1 

Contents 

I. Costs of Impeding the Commission-Based Investment Model............................................2

A. Summary of Data .................................................................................................................2

B. Some Accounts Would Become More Expensive under the DOL Proposal .......................5

C. Account-Level Data Suggests that Investors Select the Fee Model that Best Suits 

Their Own Needs and Trading Behavior .............................................................................6

D. Some Account Balances Are Too Small for RIA Accounts ................................................9

E. Commission-Based Accounts Do Not Underperform .......................................................10

II. Cost of Losing Access to Advice .......................................................................................11

A. Estimates of Number of Investors Who Will Lose Access to Advice ...............................12

B. Implications of Losing Access to Advice: Individual Investors Make Systematic 

Errors When Investing on Their Own ................................................................................13

1. The disposition effect and mental heuristics ................................................................13

2. Mental heuristics disproportionately affect people with fewer savings .......................14

3. Individual investors churn............................................................................................16

C. Benefits of Financial Advisors...........................................................................................17

1. Portfolio allocations that are more diversified and closer to model portfolios ............17

2. Advisors help investors stop making investing mistakes ............................................19

3. Tax minimization .........................................................................................................19

4. Increased savings .........................................................................................................20

5. Economies of scale with respect to the cost of information ........................................21

D. The Cost of Losing Access to Professional Investment Advice ........................................22

1. Review of the SEC (2011) assessment: costs of imposing a fiduciary standard on 

brokers..........................................................................................................................22

2. The DOL (2011) Federal Register Study .....................................................................25

III. The Cost of Conflicted Investment Advice .......................................................................28

A. Estimates of the Benefits of the Proposal Vary Wildly in the RIA ...................................29

B. The RIA Misapplies the Academic Literature ...................................................................31

1. The cited literature focuses on mutual funds, yet the DOL applies the results more 

widely ...........................................................................................................................31

2. The research cited in the RIA takes results associated with higher-than-average 

load funds and misapplies them to all funds. ...............................................................32

3. The academic literature cited in the RIA does not compare the costs and benefits 

of fiduciary accounts with those of brokerage accounts ..............................................33

Appendix: The Cost of Complying with the DOL proposal .........................................................39

 
2 

I. COSTS OF IMPEDING THE COMMISSION-BASED INVESTMENT MODEL

The Department of Labor’s (“DOL”) proposed conflict of interest rule and definition of 

the term “fiduciary” under ERISA (the “proposal”), and associated Regulatory Impact Analysis 

(“RIA”)1,2 have led many to conclude that the proposal would effectively make the commissionbased brokerage model unworkable for investment accounts covered by ERISA and similar 

sections of the IRS code due to the operational complexity and costs of compliance that would be 

required under the Best Interest Contract exemption. In this section, we use account-level data to 

pursue the question of how this result would affect existing holders of commission-based 

accounts. 

There are at least two immediate consequences to the proposed rule change. The first is 

that some commission-based accounts would become more expensive, in the sense that average 

fees would increase, particularly for investors who trade infrequently. Second, advisory or “feebased” accounts currently have minimum balance requirements. These account balance 

requirements are in place to ensure that the firm serving the client can at least break even on the 

operating costs associated with administering advisory accounts. Using account-level data, we 

can estimate the percentage of consumers currently in commission-based accounts who would 

not meet the minimum account balance requirements and therefore lose access to professional 

investment advice under the DOL proposal. 

We begin with a discussion and summary of the account-level data that NERA has collected 

for this study. 

A. Summary of Data 

The RIA itself recognizes (p. 101) “the absence of comprehensive data” with which to 

conduct a complete analysis of the proposal. To address that void, we collected account-level 

 

1

29 CFR 2509 and 2510, DOL, Definition of the Term “Fiduciary”; Conflict of Interest Rule-- Retirement Investment Advice; 

Proposed Rule in Federal Register Volume 80, Number 75 (Monday, April 20, 2015), Pages 21927-21960. 

2

“Fiduciary Investment Advice Regulatory Impact Analysis”, Department of Labor, Available on-line at 

www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf. 
3 

data from a number of financial institutions in order to construct a representative sample of 

retirement accounts. Our dataset includes over 63,000 IRA accounts, with data ranging from 

2012 through the first quarter of 2015. The investors in our dataset are distributed across a wide 

range of age groups, with the bulk of IRAs held by investors aged 50 or older, as shown in 

Exhibit 1. 

The data we collected from the participating firms contains various types of account-level data 

fields, including: balances, fees, activity, and positions. In order to conduct an analysis, we 

merged the data from the various firms into one combined dataset. 

Fees 

Based on data received from participating firms, we classify IRAs into two broad feetype categories: fee-based and commission-based accounts. Fee-based accounts are charged a 

fixed fee as a percentage of assets whereas commission-based accounts are charged fees based 

on trading and other activity. As shown in Exhibit 2, approximately 70.6 percent of our accounts 

are commission-based; the rest are fee-based. 

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

<22 22-29 30-39 40-49 50-59 60-69 70+

Age

Exhibit 1. Distribution of IRAs by Age
4 

Fees include all proceeds paid by the account-holder directly to the firm, such as 

management fees and trading commissions.3

 They exclude, however, fees paid to third-parties

such as mutual fund managers. 

The median account balance in our sample is $57,072, with the 25th and 75th percentiles 

falling at $17,511 and $166,794 respectively.4 These summary statistics are shown in Table 1 

below. 

 

 

3

 Fees exclude revenue that the firm may receive indirectly from the account-holder, such as markup/markdown 

revenue or 12b-1 fees. Recognizing that such indirect revenues are not included in our fee data, we construct 

returns which are net of all fees, both direct and indirect. These net returns are presented in section I.E. 

4

 In our analyses, we exclude accounts with balances below $1,000. 

29.36%

70.64%

Exhibit 2. IRA Account Structure

Fee Based

Commission Based
5 

Table 1. Account Balances 

Account 

Balance ($) 

Mean 174,034

Median 57,072

25th Percentile 17,511

75th Percentile 166,794

B. Some Accounts Would Become More Expensive under the DOL Proposal 

Our account-level dataset allows us to identify a large number of accounts as having a fee 

structure which is either fee-based, or commission-based. In Exhibit 3, we present the difference 

between median fee-based and commission-based account fees, as a percentage of account 

balance, for various levels of account balance. The chart shows that this difference is always 

greater than zero; in other words, holders of fee-based accounts pay higher fees, in percentage 

terms, for all levels of account balance. 

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

Median Fee Difference (%)

Account Balance ($)

Exhibit 3: Fee-Based Accounts Are More Expensive Than CommissionBased Accounts
6 

The differences tend to be in the range of about 57 basis points (bps) for relatively small 

accounts (those with balances below $25,000) up to about 1 percent for accounts with balances 

from $100,000 to $250,000. This suggests that investors would pay more if moved to fee-based 

accounts. Indeed, the magnitude of the increased cost is on par with the 1 percent “cost of 

conflicted advice” claimed in the White House/CEA memo that preceded the DOL proposal. 

The numerical results are reported in Table 2, below. 

Table 2. Fees by Balance and Account Type 

Median 

Balance Range 

Fee 

Based 

Commission 

Based Difference

$1,000-25,000 1.24% 0.67% 0.57%

$25,000-50,000 1.16% 0.36% 0.80%

$50,000-100,000 1.20% 0.27% 0.93%

$100,000-250,000 1.25% 0.24% 1.01%

$250,000-1,000,000 1.09% 0.22% 0.86%

Greater than $1,000,000 0.99% 0.12% 0.87%

C. Account-Level Data Suggests that Investors Select the Fee Model that Best 

Suits Their Own Needs and Trading Behavior 

In the data, one of the most striking behavioral distinctions between fee-based and 

commission-based accounts is that the former tend to trade more frequently. We also calculated 

investors’ aggregate trading activity by looking at both the number and dollar amount of 

purchases and sales in each account.5 We measure trading activity in two ways: number of 

trades and account turnover. Number of trades counts each discrete purchase and sale during the 

time period. Account turnover takes the minimum of the total dollar amount purchased and the 

total dollar amount sold as a percentage of the average dollar balance during the year. Summary 

statistics of trading activity are presented below in Table 3. 

 

 

5

 Where we could not break out dividends from new investments, trades may include dividend reinvestments. 
7 

Table 3. Trading Activity 

Number of 

Trades 

Account 

Turnover 

Mean 54 34.11%

Median 16 14.79%

25th Percentile 4 4.84%

75th Percentile 56 39.31%

Exhibit 4 below shows the number of trades, or transaction frequency, of fee-based and 

commission-based accounts in 2014 for various account balance levels. 

In 2014, the median trade frequency in commission-based accounts was just 6 trades. By 

comparison, in fee-based accounts the median trade frequency was 57 trades, with larger 

accounts generally trading more frequently than smaller ones. 

Thus, the data are consistent with the idea that investors who expect to trade often 

rationally choose fee-based accounts whereas those that do not trade often are likely to choose 

commission-based accounts. 

0

10

20

30

40

50

60

70

80

90

Number of Trades

Account Balance ($)

Exhibit 4: Median Number of Trades

Fee Based Commission Based
8 

Additionally, it is worth noting that the data does not seem to show “churning,” the 

needless buying and selling of securities. We see the median commission-based account had 

traded 6 times in 2014. Such trading is more consistent with a buy-and-hold strategy than 

churning. 

The interpretation of the account-level data as being consistent with investors who trade 

infrequently self-selecting into commission-based accounts is further supported by account 

turnover. The median dollar-value of transactions, as a fraction of account balance, is show in 

Exhibit 5 below, for various levels of account balance. 

The median commission-based account across all balances only turns over 8.9 percent of 

its assets annually. For fee-based accounts the median turnover is 22.1 percent. 

0%

5%

10%

15%

20%

25%

30%

35%

Median Turnover (%)

Account Balance ($)

Exhibit 5: Account Turnover

Fee Based Commission Based
9 

D. Some Account Balances Are Too Small for RIA Accounts 

As mentioned above, a primary concern with the DOL proposal is that it would make 

commission-based accounts unworkable. If this turns out to be the case, investors will have to 

move to fee-based accounts or lose access to professional investment advice entirely. 

Using our account-level data, we can estimate the number of investors who currently have 

commission-based accounts with balances below the minimum required account balance for 

advisory accounts.6

The results are shown in Exhibit 6. Using the conservative minimum account balance of 

$25,000, over 40% of commission-based accounts in our dataset would not be able to open feebased accounts. Using a $50,000 threshold, over 57% of accounts would not meet minimum 

balance requirements for a fee-based account. If the effective threshold is $75,000, two-thirds of 

account holders would be left without any professional investment advice. 

 

6

 An important limitation in our data is that we have collected account-level data, which may not coincide with 

household-level data. We may therefore be understating the ability of some households to combine separate IRA 

accounts held within the same household to achieve the minimum balance requirement. This limitation also 

likely explains the existence of fee-based accounts smaller than $10,000 in our dataset. 

40.49%

16.58%

9.59%

33.34%

Exhibit 6: Commission-Based Accounts by Account Balance

Less than $25,000

$25,000-$50,000

$50,000-$75,000

Greater than $75,000
10 

 

E. Commission-Based Accounts Do Not Underperform 

We calculate returns on a quarterly basis by calculating the change in account balance, 

adjusting for net flows during the quarter.7 Since fees are deducted from account balances, either 

directly or indirectly, returns calculated based on account balances are net of fees. 

 We find that the median annualized return across all accounts in our sample, over the 

period from June 30, 2012 to March 31, 2015, is 10.3 percent. 

In terms of differential fee structures, if investors in commission-based account are 

subject to the “cost of conflicted advice”, then we would expect to see an underperformance in 

terms of the returns they earn. Indeed, this is explicitly the argument made in the DOL proposal. 

 Over the time periods for which we have data, commission-based and fee-based accounts 

exhibit similar performance, when calculated net of fees. The median differences in returns are 

shown, quarter by quarter, in Table 4. As the data show, the difference in return is sometimes 

positive and sometimes negative but small in magnitude. Moreover, the difference in returns is 

not statistically significant. 

Table 4. Fee-Based Returns Less Commission-Based Returns 

Date Range 

Difference in Median 

Quarterly Return 

06/30/12-09/30/12 -0.14% 

09/30/12-12/31/12 0.63%

12/31/12-03/31/13 -1.96% 

03/31/13-06/30/13 -0.91% 

06/30/13-09/30/13 0.62%

09/30/13-12/31/13 -0.08%

12/31/13-03/31/14 -0.44% 

03/31/14-06/30/14 -0.18% 

06/30/14-09/30/14 -1.04% 

09/30/14-12/31/14 0.04%

12/31/14-03/31/15 0.33%

Average -0.28% 

 

7

 Net flows include cash and other transfers to and from the account that are not investment-related (i.e.: 

withdrawals and contributions). Net flows were constructed to exclude fees, dividends, and interest, to the 

extent it was possible to identify these payments in the underlying transaction data. To eliminate the potential 

impact of outliers on our findings, we removed the top and bottom 1 percent of returns from our calculations 

(where such outliers may reflect the timing of transactions in our data, and not be reflective of actual returns). 
11 

Overall, from June 30, 2012 to March 31, 2015, the average difference (where again the 

difference is the fee-based return minus the commission-based return) is -0.28 percent. Thus, 

there is no support in this data for the contention that commission-based accounts underperform.8

 

An alternative interpretation of the finding that returns are roughly equal across the two fee 

structures is that investors self-select into account types that are appropriate for them and that 

this leads to equilibrium. 

II. COST OF LOSING ACCESS TO ADVICE

In order to conduct a proper cost-benefit analysis, it is important to consider all of the 

costs associated the proposed rule. Indeed, the DOL Regulatory Impact Analysis itself states 

(p.99-100) that: 

“A full accounting of a rule’s social welfare effects would encompass all of the rule’s 

direct and indirect effects as would be manifest in general market equilibrium. Likewise, that 

full accounting would consider pure social welfare costs – that is, reductions in economic 

efficiency – which are not the same as simple compliance costs.” 

The RIA goes on to recognize that (p. 100): “The quantitative focus of this analysis, 

however, is on the proposal’s most direct, and directly targeted, effects: gains to retirement 

investors, and compliance costs to advisers and others.” 

But the DOL fails to measure one important cost—the cost of the loss of advice to 

investors. In this section we partly address this shortcoming by explicitly considering the costs 

that would be incurred by those consumers who completely lose access to professional 

investment advice as a result of the DOL proposal. 

In prior studies, the DOL itself acknowledged this cost. An October 2011 DOL costbenefit analysis published in the Federal Register on the “final rule” relating to the provision of 

investment advice under ERISA included estimates of the costs to consumers of not having 

access to advice.9

 In that document, the DOL estimated that participant-directed retirement 

 

8

 The sign of the difference might be read to mean that commission-based accounts outperform fee-based accounts 

in our dataset, but in fact the difference is not statistically different than zero in any of the quarters in our sample 

period. 

9

 29 CFR 2550, DOL, Investment Advice – Participants and Beneficiaries, Final Rule, October 2011. 
12 

savings account holders make investment mistakes in the absence of professional advice valued 

at an aggregate of “more than $114 billion in 2010” (p.66151). 

Moreover, the 2011 DOL cost-benefit analysis estimated the effects of a change in public 

policy on investors’ access to professional investment advice. In particular, the DOL estimated 

that the enactment of the Pension Protection Act of 2006 (P.L. 109-280, the “PPA”) increased 

access to advice, and hence reduced aggregate investing errors by $7 billion to $18 billion per 

year. These are extremely large numbers, and hence clearly indicate the DOL’s own estimation 

of the importance to investors of access to professional advice. 

A. Estimates of Number of Investors Who Will Lose Access to Advice 

As discussed in section I.A above, our account-level data allows us to identify a large 

number of accounts as having a fee structure which is either fee-based, or commission-based, by 

account balance. For example, we noted above that 40.49 percent of the accounts that are 

currently commission-based have balances below $25,000 in our sample. 

If the DOL proposal were to make commission-based accounts unworkable for brokerdealers, these accounts could no longer be maintained. Moreover, many commission-based 

accounts have small balances and so would be below the minimum account balance for advisory 

accounts. These investors will be left on their own with no access to professional investment 

advice. 

If we were to take at face value the DOL’s methodology in the 2011 cost-benefit analysis 

discussed above, and assume a minimum-balance threshold of $25,000, the new fiduciary 

standard would cause a loss of access to professional advice for 40.49 percent of commissionbased retirement account holders. It would take a relatively small number of such accounts to 

lose advice for this to result in an aggregate cost that exceeds the $17 billion in purported 

benefits claimed in the White House/CEA memo. 

Moreover, this is based on a conservative estimate of the minimum balance, at only 

$25,000. Even at this level, the aggregate cost could easily be on par with the DOL’s own 

estimates of the “cost of conflicted advice”. 

Hence, using the DOL’s own approach, the costs of the proposal likely exceed its benefits 

once we account for other costs such as the cost of compliance. 
13 

B. Implications of Losing Access to Advice: Individual Investors Make 

Systematic Errors When Investing on Their Own 

In this section we first review the extensive academic and professional literature on the 

value to investors of having access to professional investment advice. The discussion begins 

with a survey of the potential pitfalls faced by many individuals who invest on their own. We 

then discuss the established literature that documents ways in which the use of professional 

advisors tends to lead to fewer such investment errors. 

Additionally, it is worth noting that below, in section III.D, we discuss an earlier 2011 

cost-benefit analysis on the Pension Protection Act of 2006 in which the DOL itself recognized 

the implications of investors losing access to professional investment advice. The conclusions of 

that DOL study are similar to the academic findings discussed in this section. 

1. The disposition effect and mental heuristics 

Ever since the seminal work of Kahneman and Tversky (1979, 1992), it has been widely 

accepted that individual investors are prone to making systematic mistakes in the way they 

evaluate and treat investment decisions in the presence of uncertainty.10 Indeed, Kahneman was 

awarded the Nobel Prize in Economics for this work in 2002. This research agenda was typically 

accompanied by experimental data, but not backed up with actual accounts and transactions of 

individual investors. 

In the 1990’s, however, Odean (1998) built upon the earlier literature by analyzing the 

trading records of ten thousand accounts at a large nationwide discount brokerage firm. The 

dataset he collected covered the period 1987 through 1993.11 The data includes an account 

identifier, trade dates, the security traded, a buy-sell indicator, the quantity traded, the 

commission paid and the principle amount. The study compared the selling price for each stock 

sold to its average price to determine whether that stock is sold for a gain or loss. One of the 

primary findings of the paper was that investors demonstrate a strong preference for realizing 

winners rather than losers. This phenomenon is now widely known as the “disposition effect” for 

individual investors. 

 

10 Kahneman, D and A. Tversky (1979), “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47 (2): 263 and 

Tversky, A and D. Kahneman (1992), “Advances in prospect theory: cumulative representation of uncertainty,” Journal of Risk 

and Uncertainty 5 (4): 297–323. 

11 Odean, T. (1998), “Are Investors Reluctant to Realize Their Losses?” Journal of Finance, 53, 1775-1798. 
14 

Since Odean (1998), the disposition effect has been confirmed by numerous studies. 

Goetzmann and Massa (2004) construct a variable based on investor trades that acts as a proxy 

for the representation of disposition-prone investors in the market and test how it relates to stock 

returns. 12 The authors report a strong negative correlation between the disposition effect and 

stock returns. Grinblatt and Han (2005) also study the disposition effect, and in particular the 

tendency of investors to hold on to their losing stocks.13 They attribute this behavior to prospect 

theory, or the tendency to under weigh outcomes that are merely probable in comparison to 

outcomes that are obtained with certainty, and to a psychological phenomenon known as “mental 

accounting”. The authors find that the tendency for households to fully sell winning stocks is 

weaker for wealthy investors with diversified portfolios of individual stocks. 

Franzini (2006) uses a database of mutual funds holdings to construct a measure of 

reference prices for individual stock and confirms the existence of the disposition effect.14

Moreover, the author suggests that the disposition effect can induce under-reaction by individual 

investors to news, leading to return predictability and post-announcement price drift. In 

particular, bad news travels slowly among stocks trading at large capital losses, in turn leading to 

a negative price drift, and good news travels slowly among stocks trading at large capital gains. 

Nor is this literature limited to academic circles. The Morgan Stanley Consulting Group 

(2014), for example, studied the various behavior biases that can impair the performance of 

individual investors in managing their own portfolios.

15

 The authors point to “psychological 

blindspots” that negatively influence investors such as overconfidence, mental accounting, 

anchoring biases, framing biases and loss aversion. Their research suggests that a financial 

advisor can mitigate the effects of these problems because they have a clearer understanding of 

the investment process.

2. Mental heuristics disproportionately affect people with fewer savings

As argued above, the academic literature has documented evidence that individual 

investors display irrational and costly investing behavior in the form of the disposition effect. 

 

12 Goetzmann, W. and M. Massa (2004), “Disposition Matters: Volume, Volatility and Price Impact of Behavioural Bias,”

Centre for Economic Policy Research, Paper No. 4814.

13 Grinblatt, Mark and Bing Han (2005), “Prospect theory, mental accounting and momentum,” Journal of Financial Economics,

78, 311-339. 

14 Frazini, Andrea (2006), “The Disposition Effect and Underreaction to News,” The Journal of Finance, 61, No. 4 

15 Morgan Stanley Consulting Group, “The Value of Advice,” (2014), available on-line at

www.morganstanleyfa.com/public/projectfiles/thevalueofadvice.pdf
15 

Beyond this general observation, there is also a strand of research that shows that these flaws 

tend to disproportionately affect people with lower levels of wealth. 

Grinblatt and Keloharju (2000) employ the central register of shareholdings for Finnish 

stocks in the Finnish Central Securities Depository (FCSD), a comprehensive data source which 

covers 97 percent of the total market capitalization of Finnish stocks beginning in 1995.16 The 

data set reports institutional holdings and stock trades on a daily basis. The authors find that 

generally the more sophisticated the investor and the greater the wealth invested in stocks, the 

less contrarian (buying losing stock and selling winning stock) is the investment strategy. The 

degree of contrarianism appears to be inversely related to a ranking of the sophistication of 

investor types.

Dhar and Zhu (2002) analyze the trading records of a major discount brokerage house 

and confirm the existence of the disposition effect.

17 The paper finds empirical evidence that 

wealthier and individual investors in professional occupations exhibit less disposition effect. 

Trading experience also tends to reduce the disposition effect.

Calver, Campbell and Sodini (2009) study a dataset containing the disaggregated wealth 

of all households in Sweden between 1999 and 2002. The authors find that contrary to rational 

expectations, households are more likely to fully sell directly held stocks if those stocks have 

performed well and more likely to exit direct stockholding if their stock portfolios have 

performed well.18 This paper examines changes in household behavior over time, specifically 

decisions to scale up or down the share of risky assets in the total portfolio, to enter or exit risky

financial markets, to full sell individual risky assets and to scale up or down the share of 

individual assets in the risky portfolio. By doing so, the authors develop an adjustment model 

with different target risky shares across households. The authors find that wealthy, educated 

investors with better diversified portfolios tend to rebalance more actively. Specifically, the 

authors point to wealth and portfolio diversification as more relevant than income in predicting 

the strength of the disposition effect 

 

16 Grinblatt, Mark and Matti Keloharju (2000), “The investment behavior and performance of various investor types: a study of 

Finalnd’s unique data set” Journal of Financial Economics, 55, 43-67. 

17 Dhar, Ravi and Ning Zhu (2002), “Up Close and Personal: An Individual Level Analysis of the Disposition Effect,” Yale ICF 

Working Paper No. 02-20.

18 Calver, Laurent E. and John Y. Campbell and Paolo Sodini (2009), “Fight or Flight?” The Quarterly Journal of Economics, 

124, 1. 
16 

 Cerqueira Leal, Rocha Armada and Duque (2010) use a database of 1,496 trading records 

of individual investors in the Portuguese stock market from January 1, 1999 to December 31, 

2002, consisting of initial position, account movements, events and daily closing stock prices.19

The authors then calculate the “proportions of gains realized and the proportions of losses 

realized” based on each investor’s portfolio for each day of the sampling period. The authors 

find that less sophisticated investors (defined by average account value, number of shares traded 

and number of trades) exhibit a stronger disposition effect.

3. Individual investors churn 

Aside from the disposition effect described above, another well-known error that is 

commonly observed in un-advised, self-directed, individual investors is the tendency to trade too 

often, or “churn”. In a seminal paper, Barber and Odean (2000), analyze the returns earned on 

common stock investment by 66,465 self-directed households. The net return earned by these 

households underperforms a value-weighted market index by about 9 basis points per month (or 

1.1 percent annually).20 Those that trade the most earn an annual return rate of 11.4 percent, 

while the market returns 17.9 percent. The poor performance of the average household can be 

traced to the costs associated with this high level of trading. The authors find a negative 

correlation between trading frequency and investment returns. 

 Similarly, Barber, Lee, Liu and Odean (2007) use a complete trading history of all 

investors in Taiwan, and document that the aggregate portfolio of individual investors suffers an 

annual penalty of 3.8 percentage points.21 These losses virtually all come from aggressive 

trading. In contrast, institutional investors enjoy an annual performance boost of 1.5 percentage 

points--even after commission and transaction taxes. Foreign institutional investors garner 

nearly half of the institutional profits. The author points out that investors who are saving to meet 

long term goals would benefit from effective guidance regarding best investment practices.

 

19 Cerqueira Leal, Cristiana and Manuel J. Rocha Armada, and Joao C. Duque (2010), “Are All Individual Investors Equally 

Prone to the Disposition Effect All The Time? New Evidence from a Small Market,” Frontiers in Finance and Economics, 7, No. 

2, 38-68. 

20 Barber, M. Brad and Terrance Odean (2000), “Trading is Hazardous to Your Wealth: The Common Stock Investment 

Performance of Individual Investors” The Journal of Finance, 60, No. 2. 

21 Barber, Brad M., Yi-Tsung Lee, Yu-Jane Liu, and Terrance Odean (2007) “Just How Much Do Individual Investors Lose by 

Trading?” AFA 2006 Boston Meetings Paper. 
17 

C. Benefits of Financial Advisors

 Having established that individual investors are prone to making systematic mistakes in 

their investing due to behavioral biases, it is natural to ask whether such errors are reduced, on 

average, by having access to professional advice. The answer, unsurprisingly, tends to be “yes” 

in the by extensive academic and professional literature. 

1. Portfolio allocations that are more diversified and closer to model portfolios 

Bluethgen, Gintschel, Hackethal and Mueller (2008) examine a dataset of 12,000 German 

bank accounts, categorizing bank customers as “advised customers” or “self-directed”, and find 

that financial advice enhances portfolio diversification, and makes investor portfolios more 

congruent with predefined model portfolios.22 While the bank in the study derived more revenues 

from advised clients, the advised clients’ portfolios also resembled more closely the optimal 

portfolios prescribed by financial theory. The authors conclude that financial advisory service 

has a “significant impact on household investment behavior.” 

Gerhardt and Hackethal (2009) collect a data set on 65,000 private investors and analyzed 

the portfolio composition and trading behavior of more than 14,000 persons and note that there 

are clearly positive effects to working with an advisor.23 These benefits include: less speculative 

trading and a more diversified portfolio. 

A study commissioned by the Investment Funds Institute of Canada (2010) analyzed a 

longitudinal database with Canadian households’ financial behaviors and attitudes.24 The study 

isolated 3200 households and broke the sample into two groups – those who had an advisor in 

both years and those who did not have an advisor in either year. The authors found that 

households that received investment advice had substantially higher investable assets that nonadvised households, controlling for age and income level. Additionally, investors without advice 

save less, utilize tax-advantaged savings opportunities less, and invest in securities with less 

opportunity for future investment growth than their advised counterparts. 

 

22 Bluethgen, Ralph, Andreas Gintschel, Andreas Hackethal, and Armin Mueller (2008), “Financial Advice and Individual 

Investors' Portfolios.” 

23 Gerhardt, Ralf and Andreas Hackethal (2009), “The Influence of Financial Advisors on Household portfolios: A study on 

Private Investors switching to Financial Advice,” February 14, 2009. 

24 The Investment Funds Institute of Canada (2010), “The Value of Advice Report,” available on-line at 

www.ific.ca/wp-content/uploads/2010/07/IFIC-Value-of-Advice-Report-2010-July-2010.pdf/4001/ 
18 

A paper by the Investment Funds Institute of Canada (2012) stresses the importance of 

the CIRANO 2012 research, as well as citing papers from Australia and the United States.25

Summarizing the existing literature, the paper notes that research proves that advice has a 

positive and significant impact on wealth accumulation, leads to better long term investment 

strategies and benefits the wider macroeconomy. 

Kramer (2012) compares portfolios of advised and self-directed Dutch individual 

investors to investigate whether financial advisers add value to individual investors’ portfolios.26

The author finds that advised portfolios are more diversified and perform better than selfdirected portfolios, thus reducing avoidable risk. The author (at least partly) attributes the 

reduction of idiosyncratic risk observed in advised portfolios to advisory intervention 

In a widely-cited paper, Kinniry, Jaconetti, DiJoseph and Zilbering (2014), argue that 

through suitable asset allocation using broadly diversified funds/ETFs, cost effective 

implementation, rebalancing, behavioral coaching, asset location, spending strategy, and totalreturn versus income investing strategies, advisors can potentially add about 3 percent in net 

returns to investors.27 For some investors, the value of working with an advisor is peace of mind. 

The value of an advisor for investors “without the time, willingness, or ability to confidently 

handle their financial matters” should not be ignored by “the inability to objectively quantify it.” 

The authors argue that value added cannot be analyzed as an annual figure because “the most 

significant opportunities to add value occur during periods of market duress or euphoria when 

clients are tempted to abandon their well-thought-out investment plan.” 

Mardsen, Zick and Mayer (2011) argue that working with an advisor is related to several 

important financial planning activities including goal setting, calculation of retirement needs, 

retirement account diversification, use of supplemental retirement accounts, accumulation of 

emergency funds, positive behavioral responses to the recent economic crisis and retirement 

confidence.28

 

25 The Investment Funds Institute of Canada (2012), “The Value of Advice Report,” available on-line at www.ific.ca/wpcontent/uploads/2013/02/IFIC-Value-of-Advice-Report-2012.pdf/1650 /

26 Kramer, Marc M. (2012), “Financial Advice and Individual Investor Portfolio Performance,” Financial Management, 41, No. 

2, 395-428. 

27 Kinniry, Francis M., Jr., Colleen M. Jaconetti, Michael A. DiJoseph, and Yan Zilbering (2014), “Putting a value on your value: 

Quantifying Vanguard advisor’s Alpha,” The Vanguard Group. 

28 Mardsen, Mitchell, Cathleen D. Zick, and Robert N. Mayer (2011), “The Value of Seeking Financial Advice,” Journal of 

Family and Economic Issues, 32, No. 4, 625-643. 
19 

Winchester, Huston and Finke (2011) collect data containing 3,022 respondents with at 

least $50,000 in annual income.29 These individuals also had equity holdings that they could 

control or direct during market downturns. The authors used “investor prudence” as the 

dependent variable and noted whether the individuals rebalanced their portfolio over a market 

decline. The authors find that investors who use a financial advisor are about one-and-a half 

times more likely to adhere to long-term investment decisions. Moreover, investors with a 

written financial plan are almost twice as likely to make optimal long term financial decisions. 

2. Advisors help investors stop making investing mistakes 

Shapira and Venezia (2001) argue that professionally-managed accounts experienced 

better roundtrip performance than those administered independently.30 The authors find that the 

disposition effect, or the tendency of investors to sell shares whose price has increased, while 

keeping assets that have dropped in value, is significantly weaker for professional investors. This 

indicates that professional training and experience reduces judgmental biases, even though it 

cannot eliminate them. The authors point to this as an advantage in enlisting professional advice. 

Maymin and Fisher (2011) used data from a boutique investment management firm, 

Gertstein Fisher.31 The data includes all account and household information, client introduction 

history, notes, and portfolio allocations and performances since 1993. The authors test five 

predictions by analyzing the contacts actually recorded between clients and the manager in the 

data set. The authors conclude that the advisor’s role in helping investors stay disciplined and on 

plan in the face of market volatility, including dissuading them from excessive trading, is one 

that is highly valued by the individual investor. 

3. Tax minimization 

Horn, Meyer and Hackethal (2009) use transaction data from a German bank from 1999-

2008, to study a natural experiment of the introduction of a withholding tax in Germany in order 

to see how private investors react to changes in taxation.32 The authors conclude that financial 

 

29 Winchester, Danielle D., Sandra J. Huston, and Michael S. Finke (2011), “Investor Prudence and the Role of Financial 

Advice,” Journal of Financial Service, 65, No. 4, 43-51. 

30 Shapira, Zur and Itzhak Venezia (2001). Patterns of Behavior of Professionally Managed and Independent Investors, Journal 

of Banking and Finance, 25, No. 8, 1573-587. 

31 Maymin, Philip Z. and Gregg S. Fisher (2011), “Preventing Emotional Investing: An Added Value of an Investment Advisor.” 

The Journal of Wealth Management, 13, No. 4. 

32 Horn, Lutz, Steffen Meyer and Andreas Hackethal (2009), “Smart Investing and the Role of Financial Advice – Evidence from 

a natural Experiment Using Data Around a Tax Law Change,” Working Paper Series. 
20 

advisors help people make smarter investment decisions because of their financial sophistication 

and experience in tax-related investment decisions. 

 Martin and Finke (2012) uses both the 2004 and the 2008 waves of the National 

Longitudinal Survey of Youth to estimate the impact of financial advice on retirement savings 

and the change in accumulated retirement wealth between 2004-2008.33 The authors compare the 

effectiveness of creating one’s own retirement plan versus using a professional advisor. The 

authors find that the use of a comprehensive financial professional overwhelmingly increases the 

likelihood that households will go through the process of calculating retirement needs. 

Respondents who rely on an advisor to help plan for retirement are more likely to own taxadvantaged accounts. Authors conclude that planning, with the help of a comprehensive advisor, 

improves retirement outcomes. 

4. Increased savings 

Montmarquette and Nathalie (2015) used Ipsos Reid collected data in the form of a 45-

question internet survey from 18,333 Canadian Households.34 The data were filtered to produce a 

high quality sample of 3,610 households. After splitting up the data into “advised households” 

and “non-advised households” the authors used econometric modelling in order to isolate the 

benefits of advisors in the accumulation of wealth. 

Econometric results show that participants retaining the services of a financial advisor for 

more than 15 years have about 174 percent more financial assets (in other words, 2.73 times the 

level of assets) than non-advised respondents. The authors conclude that a highly plausible 

explanation for this finding comes from the greater savings and improved asset selection that is 

associated with having a financial advisor. Those investors who have advice are more likely to 

trust financial advisors, associate satisfaction with financial advisors and have confidence in 

financial advisors.

Similarly, in a KPMG Econtech (2009) paper based on the results of a regression analysis 

from an economy-wide model, the authors conclude that an individual who has a financial 

planner is estimated to save $2,457 more in a year compared to similar individuals without 

 

33 Martin, T. K. and Michael S. Finke (2012), “Planning for Retirement,” (December 31, 2012), available at SSRN: 

papers.ssrn.com/sol3/papers.cfm?abstract_id=2195138 

34 Montmarquette and Nathalie Viennot-Briot (2015), “The Value of Advice,” Annals of Economics and Finance, 16-1, 69-94. 

This paper was also published as Montmarquette and Veinnot-Briot (2012), “Econometric Models on the Value of Advice of a 

Financial Advisor,” at the Centre interuniversitaire de recherché en enalyse des des organisations. 
21 

financial advisors/planners.35 Investors with a financial planner have greater savings and 

investment balances than those who do not. 

A study by Standard Life (2012) based on collected data from the UK, reports that the 

current average pension pot for consumers who have been advised on their retirement planning is 

£74,554.30, nearly double that of those not seeking advice.36 Those who have taken advice put 

nearly a third more a month into their pension plan. On investments, people with an adviser save 

for longer and contribute more, leading to an average investment value which is over £40,000 

higher than the average for those who haven’t sought advice. 

 Lastly, Antunes, Macdonald and Stewart (2014) construct a hypothetical scenario using 

collected survey data that included age, average savings, average income and the presence of an 

advisor.37 After collecting the data, the authors assume that 10 percent of the income of nonadvised savers is now saved at the higher rate of those who do receive financial advice in order 

to capture the increased savings level that is correlated with having an advisor. This paper then 

applied the percentage difference between this savings rate and the baseline savings rate to the 

Conference Board of Canada’s long term national forecasting model to quantify the economic 

impact of the increased savings in the long run. On top of positively impacting an investor’s 

savings rate, the presence of an advisor was also shown to boost real GDP, turn consumer 

expenditures positive and raise the aggregate household savings rate.

5. Economies of scale with respect to the cost of information 

In a highly-regarded paper by Stoughton, Wu and Zechner (2010), the authors create a 

model with three classes of agents: the active portfolio manager, the set of financial advisers and 

the pool of investors in the economy.38 The authors first derive an equilibrium assuming that 

financial advisers are independent and must charge their investors their full costs in order to 

break even and allow portfolio manager to provide payments to the adviser. Then, the authors 

run the model to solve for the optimal amount of rebates preferred by the portfolio manager and 

 

35 “Value Proposition of Financial Advisory Networks” (2009), KPMG Econtech. 

www.fsc.org.au/downloads/uploaded/2009_1105_KPMGEcontech(FinalReport)_7d94.pdf 

36 Standard Life (2012), “Value of Advice Report,” available on-line at www.unbiased.co.uk/Value-of-Advice-Report-2012.pdf 

37 Antunes, Pedro, Alicia Macdonald and Matthew Stewart (2014), “Boosting Retirement Readiness and the Economy Through 

Financial Advice,” The Conference Board of Canada. 

38 Stoughton, Neal M., Youchang Wu, and Josef Zechner (2010), “Intermediated Investment Management,” Journal of Finance,

66, No. 3. 947-980. 
22 

the impact on management fees, fund sizes and flows. Finally, the paper derives the equilibrium 

without an adviser and compares all the scenarios. The authors find that financial advisers 

facilitate the participation of small investors in actively managed portfolios by economizing on 

information costs. 

It is also interesting to note that the DOL itself wrote, in a 2011 cost benefit analysis of 

the final rule on investment advice under ERISA39 (p. 66156) that “The Department therefore 

expects this final rule to produce cost savings by harnessing economies of scale and by reducing 

compliance burdens.” “For example, an adviser employed by an asset manager can share the 

manager’s research instead of buying or producing such research independently.” 

D. The Cost of Losing Access to Professional Investment Advice 

While the 2015 DOL regulatory impact analysis (RIA) ignored the costs of investors 

losing access to advice, the 2011 SEC staff’s 913 study as well as the 2011 DOL cost-benefit 

analysis, both mentioned above, both discussed the costs of investors not having access to 

advice. 

We note that the DOL’s 2010 proposal differs from the current one in some of its details. 

However, both proposals raise the same troubling implications for current investors in 

commission-based accounts by increasing the complexity and compliance costs associated with 

offering that fee structure to customers. 

1. Review of the SEC (2011) assessment: costs of imposing a fiduciary standard on 

brokers 

As mentioned above, the SEC staff undertook a study in 2011 designed to evaluate the 

effectiveness of existing regulatory standards for investment advisers and brokers. The study 

was mandated under Section 913 of Title IX of the Dodd-Frank Act and analyzed some of the 

potential costs associated with changes to the current regulatory framework (see p.143-165), 

including imposition of a fiduciary standard on brokers. 

In this section we review the discussion in SEC (2011) regarding the potential costs and 

expenses to retail customers, and the potential impact on the profitability of their investment 

 

39 See footnote 10. 
23 

decisions, including access to the range of products and services offered by broker-dealers, 

resulting from imposing on broker-dealers the fiduciary standard associated with the Investment 

Advisers Act of 1940. 

The primary concern mentioned in SEC (2011) is with respect to the cost and availability 

to retail investors of accounts, products, services, and relationships with broker-dealers, which 

could inadvertently be eliminated or impeded (for example, through higher costs to brokers being 

passed on to investors).40

In general imposition of a new regulatory standard of conduct on broker-dealers has the 

potential for additional costs on broker-dealers, which would be passed on to the customers at 

least in part, according to the standard economic theory of “effective incidence”. That theory 

simply states that it is likely that at least some portion of the regulatory costs imposed by the 

government is ultimately passed on to the public.41 In turn, costs passed on to retail investors 

would have the effect of eroding the profitability of their investments. 

The net cost impact on retail customers would likely depend on a complex interplay of 

various factors, such as investor wealth, investor willingness to pay additional fees, and size of 

the particular broker-dealers in question as well as the competitive landscape. To take an extreme 

example, in relation to the UK experience, the FSA found42 that smaller firms and firms with less 

revenue were more likely to either exit the market or alter the types of services provided, in 

response to new government regulations. 

The following discussion presents some further detail on specific concerns discussed in 

SEC (2011). 

a. Brokers may deregister and register as investment advisers and, in the 

process, convert their brokerage accounts into advisory accounts subject to 

advisory fees. 

One concern expressed in SEC (2011) associated with the imposition of a fiduciary 

standard is the possibility that brokers would convert existing accounts from commission-based 

 

40 See p. 155-159. 

41 See, for example, Mukherjee, S. (2002), Modern Economic Theory, at p.833. 

42 Oxera, Retail Distribution Review Proposals: Impact on Market Structure and Competition, prepared for the 

 Financial Services Authority, Mar. 2010 
24 

accounts to fee-based accounts, in order to respond to new requirements placed on those account. 

The ultimate cost impact of this would depend on the actual fees and commissions, the relative 

extent to which the accounts in question had been actively trading, and any increased costs 

associated with providing advice for a fee.43 

Additionally, there could also be “fee layering” (whereby fees are charged based both on 

the value of the assets as well as account fees such as administrative and custodial fees), 

especially for less actively traded accounts.44

An Oliver Wyman/SIFMA 2010 study45 notes that there are significant cost differences 

between broker-dealer and advisory accounts, and if a change in the regulatory regime has the 

effect of pushing more clients toward the higher-cost model then this could be a suboptimal 

outcome for those investors. They estimate cumulative returns to retail customers with $200,000 

in assets would be reduced by $20,000 over the next 20 years in such a scenario. 

The 2011 SEC study states on p.162 that: “One possible way that costs could increase is 

if broker-dealers whose customers want advice and who currently provide the full range of 

brokerage services...for a single commission (or mark-up) and perhaps minor account level fees, 

simply converted these accounts to investment adviser status and cease to provide execution 

services to retail investors who sought advice. If that were the case, custody costs to the retail 

investors would be higher. Advice costs charged, at least initially upon conversion (and absent 

the investor researching competitors’ prices), would also be higher for those investors who buy 

and hold, because either an hourly or asset-based fee would likely exceed the current 

commission or mark-up on a retail trade.” 

The 2011 SEC study goes on to note: “In sum, to the extent that broker-dealers respond 

to a new standard by choosing from among a range of business models, such as converting 

brokerage accounts to advisory accounts, or converting them from commission-based to feebased accounts, certain costs might be incurred and ultimately passed on to retail investors in the 

 

43 See p. 155-159. 

44 See p. 172 

45 Oliver Wyman, Securities Industry and Financial Markets Association, Standard of Care Harmonization: Impact 

 Assessment for SEC, Oct. 2010. 
25 

form of higher fees or lost access to services and products. Any increase in costs to retail 

investors detracts from the profitability of their investments.”46 

b. Broker-dealers may unbundle their services and provide them separately 

through affiliates or third parties. 

The SEC (2011) study notes that broker-dealers might choose to unbundle their services 

and provide some of the component services through third parties.47 A brokerage relationship 

involves various component functions: finding customers; providing advice to those customers; 

executing orders; clearance and settlement services; custodial services; and recordkeeping 

services, such as trade confirmations and account statements. 

SEC (2011) argues that costs to broker-dealers are likely to depend on whether these 

services were provided by one firm or whether they were divided among affiliates. For example, 

a broker can self-clear securities transactions or contract with a third-party clearing broker to 

clear transactions. A broker can act as custodian for securities itself or contract with a third party

such as a bank. 

Brokers could decide to divide some or all of these functions. As noted in SEC (2011), to 

the extent broker-dealers may transfer accounts or personnel to affiliates, this may generate 

additional administrative costs. 

2. The DOL (2011) Federal Register Study 

While the most recent 2015 DOL RIA did not provide estimates of the cost to investors 

of losing professional investment advice, an earlier DOL (EBSA) study in 2011, previously 

cited, did in fact do so. The 2011 DOL Federal Register article published the final rule relating 

to the provision of professional investment advice to plans and beneficiaries of IRAs, under 

ERISA. 

The 2011 DOL publication explicitly argues that participants in participant-directed 

retirement savings accounts make mistakes. In particular, the study notes (p.66151) that: 

 

46 See p. 162. 

47 See p. 164, 173. 
26 

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

provisions of 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. Specifically, these ‘prohibited transaction’ 

provisions of section 406 of ERISA and section 4975 of the Internal Revenue Code prohibit 

fiduciaries from dealing with DC plan or IRA assets in ways that advance their own interests.” 

The DOL estimates this error rate costs an aggregate of “more than $114 billion in 2010” 

(p.66151). The study goes on to say (p. 66159) that: “The Department is highly confident in its 

conclusion that investment errors are common and often large, producing large avoidable losses 

(including foregone earnings) for participants. It is also confident that participants can reduce 

errors substantially by obtaining and following good advice. While the precise magnitude of the 

errors and potential reductions therein are uncertain, there is ample evidence that that magnitude 

is large.” 

The DOL then argued that the PPA, by permitting a broader array of investment advice 

under ERISA, decreased the amount of errors made by investors. For example, the study states 

(p.66152): “the Department believes 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. The Department believes that 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 assume less uncompensated risk, 

achieve a more optimal level of compensated risk, and/or pay less excess taxes.” 

The DOL estimated that the reduction in investment errors due to the expansion of 

availability of investment advice would amount to between $7 billion and $18 billion annually, 

or approximately 6 percent to 16 percent of the $114 billion total in investment errors made per 

year.

48 At the upper range these numbers are as large as the supposed cost of conflicted advice 

that the DOL Fiduciary Standard is designed to alleviate. 

 

48 The DOL stated that it based its estimates on the retirement assets in DC plans and Individual Retirement Accounts reported by 

the Federal Reserve Board’s Flow of Funds Accounts (Mar. 2011), at www.federalreserve.gov/releases/z1/Current/. The study 

also refers the reader to earlier DOL studies including 74 FR No 164 (Aug. 22, 2008), 74 FR No 12 (Jan. 21, 2009), and 75 FR 

No 40 (Mar. 2, 2010). 
27 

The investment mistakes discussed in the 2011 RIA are grounded in the behavioral 

finance literature, which we have discussed in detail above. For example, the DOL stated (p. 

66153) that “in practice many investors do not optimize their investments, at least not in 

accordance with generally accepted financial theories. Some investors fail to exhibit clear, fixed 

and rational preferences for risk and return. Some base their decisions on flawed information or 

reasoning. For example some investors appear to anchor decisions inappropriately to plan 

features or to mental accounts or frames, or to rely excessively on past performance measures or 

peer examples. Some investors suffer from overconfidence, myopia, or simple inertia.” 

The study then goes on to focus on five types of investment mistakes: 

a) Fees and Expenses. The DOL stated that it believes that (p. 66153) “there is a strong 

possibility that at least some participants, especially IRA beneficiaries, pay inefficiently 

high investment prices.” However, it is not clear what empirical evidence the DOL used 

as its basis for this statement. 

b) Poor Trading Strategies. The study cited churning, failure to rebalance, attempts to time 

the market, and chasing past returns as examples of strategies that tend to underperform. 

c) Inadequate Diversification. The DOL claims that DC plan participants sometimes 

concentrate their assets excessively in stock of their employer, as well as being underinvested in international equity or debt. 

d) Inappropriate Risk. The study notes that investors may construct portfolios that are too 

risky or too safe, given their preferences. 

e) Excess Taxes. The DOL study mused that some households appear to follow sub-optimal 

strategies with respect to minimizing taxes, such as not placing taxable bonds in taxdeferred accounts. However, the DOL also stated that (p. 66154) “the Department 

currently has no basis to estimate the magnitude of excess taxes that might derive from 

participants’ investment mistakes.” 

Despite the rather lengthy description of the above types of investment errors, the DOL did not 

use data from actual investor-held accounts to estimate the magnitude of the associated losses. 

Instead, they made a variety of assumptions, summarized as follows: 
28 

1) The DOL assumed that approximately 40 percent of DC plan sponsors provided access to 

investment advice before the PPA.49 After enactment of the PPA, they assumed this 

percentage increased to between 56 and 69 percent. 

2) They assumed that about 25 percent of plan participants that are offered advice use the 

advice (both pre-PPA and post-PPA). For IRAs, they assumed that 33 percent used 

advice pre-PPA, and between 50 percent and 80 percent post-PPA.50,51

3) Investors who received advice make mistakes about half as often as those who are 

unadvised (they also consider other fractions). 

Finally, the above assumptions are combined with the previously mentioned assumption that 

aggregate investment errors cost consumers about $114 billion per year to arrive at the final 

estimates of between $7 billion to $18 billion per year from having increased access to 

professional investment advice. 

 Taking the DOL’s methodology and results at face value, by their own calculations the 

loss of access to advice, by even a small fraction of investors, would result in investment errors 

so large as to be of the same magnitude as the problem that the DOL is purportedly trying to 

solve—the “cost of conflicted advice,” by the DOL’s own reckoning, is on par with the losses 

that would be incurred by a government policy that curtails the availability of professional 

investment advice. 

III. THE COST OF CONFLICTED INVESTMENT ADVICE

We begin with a review of the claims of harm associated with purportedly conflicted 

investment advice, as put forth in White House memo entitled “The Effects of Conflicted 

Investment Advice on Retirement Savings” (“WH/CEA memo”) published in February 2015 and 

the Department of Labor’s (DOL) proposed conflict of interest rule and definition of the term 

 

49 The DOL attributed these numbers at least partly to surveys including Hewitt Associates LLC, Survey Findings: Hot Topics in 

Retirement, 2007 (2007); Profit Sharing/401(k) Council of America, 50th Annual Survey of Profit Sharing and 401(k) Plans 

(2007); and Deloitte Development LLC, Annual 401(k) Benchmarking Survey, 2005/2006 Edition (2006). 

50 These are based on Employee Benefit Research Institute, 2007 Retirement Confidence Survey, Wave XVII, Posted 

Questionnaire (Jan. 2007); Hewitt Associates LLC, Survey Findings: Hot Topics in Retirement, 2007 (2007); Profit 

Sharing/401(k) Council of America, 50th Annual Survey of Profit Sharing and 401(k) Plans (2007); and Deloitte Development 

LLC, Annual 401(k) Benchmarking Survey, 2005/2006 Edition (2006). 

51 It is interesting to note that the DOL assumed that “a large majority of IRA beneficiaries who invest in mutual funds purchase 

them via such professionals.” 
29 

“fiduciary” under ERISA (the “proposal”), and associated Regulatory Impact Analysis 

(“RIA”).52,53 

The estimates in these documents form the basis of the Department of Labor’s argument 

that the proposed conflict of interest rule would “benefit” the public. The Regulatory Impact 

Analysis in particular purports to quantify these benefits in dollar terms. As shown in detail in 

the next section, however, the RIA fails to do so. The RIA produces many different numbers 

representing different underlying assumptions, and results in estimates that vary wildly over an 

incredible set of values. This range of numbers is so wide as to suggest no scientific confidence 

in the DOL’s methodology. As a result, the estimates in the RIA provide little confidence as to 

the actual benefits, if any, arising from the DOL’s proposal. 

A. Estimates of the Benefits of the Proposal Vary Wildly in the RIA 

In the WH/CEA memo entitled “The Effects of Conflicted Investment Advice on 

Retirement Savings” published in February 2015, the authors estimated that a baseline aggregate 

cost to consumers from purportedly conflicted advice is about $17 billion per year. They 

calculated this number as one percent times the total number of mutual funds and variable 

annuities in IRAs. The one-percent factor came from their assessment of an average of estimates 

produced by various academic papers using differing methodologies and datasets. 

However, this number does not appear in the subsequent DOL Regulatory Impact 

Analysis published two months later in April 2015. Instead, the RIA provides many different 

numbers, all generated by different sets of assumptions. 

Table 5 summarizes the various estimates of the cost of purportedly conflicted advice that 

appeared in the RIA. A review of the table indicates an astounding range of different estimates. 

On the low end, there is mention in three separate places in the RIA (p. 8, p. 102, and p. 106) of 

an estimated cost from $20 billion to $22 billion over a ten year horizon. These numbers appear 

to come from an analysis that assumes the new DOL rules will eliminate 50 percent of 

 

52 29 CFR 2509 and 2510, DOL, Definition of the Term ``Fiduciary''; Conflict of Interest Rule-- Retirement 

Investment Advice; Proposed Rule in Federal Register Volume 80, Number 75 (Monday, April 20, 2015), Pages 

21927-21960. 

53 “Fiduciary Investment Advice Regulatory Impact Analysis”, Department of Labor, Available on-line at 

http://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf. 
30 

underperformance due to front-end-load sharing, and that this is the only effect considered. 

These numbers equate to between $2 billion to $2.2 billion per year (setting aside discount rates 

and any growth in the asset base over time), which are about 13 percent of the WH/CEA memo’s 

$17 billion per year estimate. 

On the high range, the RIA states on p. 7 and p. 98 that the costs of conflicted advice 

could be “nearly $1 trillion” over a horizon of 20 years. This is consistent with approximately 

$50b in costs per year (again, setting aside discount rates, compounding of returns and other 

dynamic assumptions the DOL may have made). The estimate seems to come from an analysis 

in which it is assumed that investors lose 200 basis points (two percentage points) of annualized 

return per year due to “conflicted advice,” instead of the 100 bps (one percentage point) assumed 

in the WH/CEA memo. It is not clear where the 200 bps number comes from. Nor is it clear 

why this number is so large, given that simply doubling the 100 bps number should 

approximately double the estimate from $17 billion per year to $34 billion per year. Presumably, 

the DOL increased the number from $34 billion to $50 billion by apparently compounding 

returns over time, but the RIA does not specify this in enough detail to be certain. 

One reason for the incredible range in aggregate estimates is that the RIA numbers vary 

in terms of the horizon of interest (some are per year, some cover a 10-year horizon, and some 

cover a 20-year horizon), assumptions made (e.g., some assume a 100 bps reduction in 

investment performance, and others assume a 200 bps reduction in performance), and the 

universe of assets that are considered (e.g., some consider all mutual funds held in individual 

retirement accounts (“IRAs”) while others focus only on front-end load mutual funds, and so 

forth). 

Nevertheless, given the variety to the DOL’s own numbers, the “benefit” estimates do not 

provide a credible foundation on which to base significant changes in policy and regulation. The 

very wide range in the numbers suggests that the DOL itself does not have a good measure of the 

dollar magnitude of purportedly conflicted advice that they seek to ameliorate. 

This range of numbers is so wide as to provide no scientific confidence in the DOL’s own 

methodology, and is inconsistent with a cost-benefit analysis that is concrete enough to form the 

basis of a change to federal government policy. 
31 

An additional problem with the “benefits” of the proposal, as presented by the DOL, is 

that the academic literature on which they base their argument does not directly apply to the 

question of how to best define and implement a fiduciary standard under ERISA. 

B. The RIA Misapplies the Academic Literature 

In this section, we discuss some important ways in which the RIA misapplies the existing 

academic literature in an attempt to justify the DOL proposal. 

Before discussing the methodological shortcomings, we note that much of the academic 

literature which is cited by the RIA is based on data which is now dated and may no longer be 

relevant. Significant changes have occurred in the past several years. Indeed, one of the most 

salient recent developments is that mutual fund fees have been declining substantially, and that 

has occurred independently of any explicit government driven interventions. 

Over the period 1990-2013, front-end sales loads have declined by nearly 75 percent for 

equity funds and hybrid funds, and even more than that for bond funds.54 The ICI argues this 

decline, at least in part, may reflect the increasing role of mutual funds in helping investors save 

for retirement. That is, mutual funds now often waive load fees on purchases made through 

defined contribution plans, such as 401(k) plans. 

Additionally, nearly all net new cash flows in recent years have accrued to no-load 

mutual funds. Net flows to load mutual funds have been negative for all four years of the most 

recent data.55 

1. The cited literature focuses on mutual funds, yet the DOL applies the results 

more widely 

The academic research that serves as the basis for conflicted cost-of-advice estimates 

focuses on the commissions embedded in mutual fund purchases and sales. These are typically 

front-end loads, although there may be back-end loads and on-going fees such as 12b-1 fees.56

 

 

54 See Chapter 5 of the 2014 Investment Company Fact Book, Mutual Fund Expenses and Fees, available on-line 

at http://www.icifactbook.org/fb_ch5.html 

55 Id., in Figure 5.10. 
32 

Yet the DOL proposal extends far beyond mutual funds. To cite one example, the 

proposal ends the existing prohibited transaction exemption for variable annuities and states that 

they would be able to be sold only under existing compensation structures under the Best Interest 

Contract Exemption. Other assets classes, such as options on stocks, do not appear to be 

permitted for sale to IRA accounts under any of the proposed exemptions. 

There is no justification provided, therefore, as to why the DOL would propose making 

such radical shifts to the way in which all assets are sold to IRA account holders, given that the 

academic literature on which the RIA relies so heavily is almost exclusively limited to the 

mutual fund literature. There is no basis in the academic literature for extrapolating conclusions 

applicable to mutual funds to other investment products that may not even have front-end sales 

loads. 

2. The research cited in the RIA takes results associated with higher-than-average 

load funds and misapplies them to all funds. 

One of most heavily cited academic papers in the RIA is Christoffersen, Evans and 

Musto (2013).57 It is cited dozens of times, and is one of the leading sources of the baseline 

estimate of 100 bps per year in apparent “cost of conflicted advice” that the DOL claims is 

suffered by investors in commission-based retirement accounts. 

It is therefore important to understand the claims that actually appear in Christoffersen et 

al. (2013). In particular, their study finds evidence that a subset of funds, those whose front-end 

loads are higher than other funds with similar characteristics, underperformed the average return 

of their fund category during the next year. In formulating much of their “cost of conflicted 

advice” aggregate figures, the DOL then assumes that all IRAs invested in front-end load funds 

 

56 The RIA attempts to portray brokers and investment advisers in the professional IRA market as charging excessive fees to 

investors, yet it fails to mention one of the most salient developments in recent years – namely, that mutual fund fees have been 

declining substantially. It is notable that this has occurred independently of any explicit government driven interventions. 

Investment Company Institute (ICI) expense ratio data for three broad types of mutual funds over the years 2000-2013 indicate, 

for example, that in 2000 equity mutual fund investors incurred average expense ratios of 99 basis points. By 2013, that number 

fell to 74 basis points, a decline of 25 percent. The same basic pattern is true for hybrid and bond funds. In terms of front-end 

sales loads, it is again the case that they have declined substantially over time with no explicit government intervention. Over the 

period 1990-2013, they have declined by nearly 75% for equity funds and hybrid funds, and even more than that for bond funds. 

Additionally, nearly all net new cash flows in recent years have accrued to no-load mutual funds. Net flows to load mutual funds 

have been negative for all four years of the most recent data. See Chapter 5 of the 2014 Investment Company Fact Book, Mutual 

Fund Expenses and Fees, available on-line at http://www.icifactbook.org/fb_ch5.html 

57 Christoffersen, Susan E. K., Richard Evans, and David K. Musto (2013) “What Do Consumers’ Fund Flows Maximize? 

Evidence from Their Brokers’ Incentives,” Journal of Finance, Vol. 68(1), p. 201-235. 
33 

suffer the same underperformance, thereby mistakenly applying a result from a subset of load 

funds to all load funds. 

The extrapolation the DOL made is analogous to the following: Suppose we conduct 

medical research and find that people who consume more salt than average have a lower life 

expectancy by five years, and we then conclude that eating no salt will increase the life 

expectancy of everyone by five years. This is a logical fallacy. We have no evidence that people 

who eat a “normal” amount of salt would benefit from reduced salt intake, and so extrapolating 

to them is an error in logic. 

Again, we emphasize this point because an official cost-benefit analysis needs to be 

precise and free of logical fallacies. By incorrectly extrapolating from a subset of mutual funds 

to all mutual funds, the DOL is effectively applying the 100 bps cost number to assets for which 

it does not apply. Hence, the benefit side of the cost-benefit analysis presented in the RIA is 

seriously flawed. The result is that it is impossible to conclude whether the benefits of the DOL 

proposal outweigh the costs. 

3. The academic literature cited in the RIA does not compare the costs and benefits 

of fiduciary accounts with those of brokerage accounts 

The academic literature on which the DOL relies, such as Christoffersen, Evans, and 

Musto (2013), Bergstresser, Chalmers, and Tufano (2009),58 Del Guercio and Reuter (2014),59

 

generally compares the performance of mutual funds with loads (paid as commission to brokers) 

versus mutual funds sold directly to the public. 

None of these academic studies actually compares the performance of accounts with a 

financial advisor who is a fiduciary to the performance of accounts with a broker or other 

financial advisor that is not a fiduciary. Hence they are using results that do not address the 

central question of the proposal. It is absolutely inappropriate to conclude that investors would 

 

58 Bergstresser, Daniel, John Chalmers, and Peter Tufano (2009), “Assessing the Costs and Benefits of Brokers in the Mutual 

Fund Industry”, The Review of Financial Studies, 22(10), p. 4129-4156. 

59 Del Guercio, Diane and Jonathan Reuter (2014) “Mutual Fund Performance and the Incentive to Generate Alpha”, The Journal 

Of Finance, Vol. 69(4), p. 1673-1704. 
34 

be better off under an expanded fiduciary standard on the basis of the academic literature being 

cited. 

The bulk of the literature considers data at the mutual fund level and measures their loads 

and performance. These can be compared to direct-to-public investments such as a “S&P 500” 

index fund. The academic research generally has not undertaken a direct way of comparing how 

investors would fare under a fiduciary standard in relation to a broker-based suitability model or 

a self-direction model because that analysis requires account-level data from actual investors, 

rather than aggregate fund-level data.60 

Absent account-level data, the DOL is drawing fallacious conclusions. Even if it were 

true that fund loads cause underperformance—which is not proven—there is no reason to 

conclude that consumers would be better off in fiduciary advised accounts based on the evidence 

cited by the DOL. Fiduciary advisors do not work for free. They must also be compensated for 

their work, and in some cases they may be providing a great deal more service than a 

commission-based non-fiduciary broker and may need even more compensation. If certain 

investors are forced out of commission-based accounts, they may either lose access to advice 

entirely, or they may switch to advisory accounts which may charge more, not less. Moreover, 

this increased expense is likely to be particularly acute for low-balance and low-activity accounts 

who may pay very low annual fees and loads because their portfolios tend to be static. Hence the 

DOL proposal is likely to disproportionately hurt low-income Americans. 

 

 

 

60 A small number of academic papers have looked at account-level data, but these are generally limited to extremely small 

sample sets that are not in any way representative of the spectrum of American consumers. For example, Chalmers and 

Reuter (2014) collect account level data, but it is limited to faculty and administrators in the Oregon University’s optional 

retirement plan (ORP). See Chalmers, J. and J. Reuter (2014), “What is the Impact of Financial Advisors on Retirement 

Portfolio Choices and Outcomes?” working paper, University of Oregon.
35 

Table 5 

The Cost of Conflicted Advice Estimated by DOL Varies Widely 

 

Entry Page Amount Horizon Methodology Notes 

(1) (2) (3) (4) (5) (6) 

 

Estimates found in The Effects of Conflicted Investment Advice on Retirement Savings 1 

 

 1 2 $17 bil. per year 100 bps (from 

academic lit) * $1.7 

trillion assets in IRA 

funds 

 N/A 

 

Estimates found in Fiduciary Investment Advice: Regulatory Impact 2 

 

 1 7 100 bps per year "Careful review" of 

academic literature 

 N/A 

 2 7, 98 $210 bil. 10 years Applying performance 

gap (100 bps based on 

academic lit) to the 

current IRA 

marketplace 

 100 bps figure is the 

average 

underperformance 

associated with 

conflicts of interest in 

the mutual funds 

segment 

 3 7, 98 $500 bil. 20 years See above N/A 

 4 7, 98 $430 bil. 10 years Applying performance 

gap (200 bps based on 

academic lit) to the 

current IRA 

marketplace 

 200 bps figure is based 

on academic studies 

that suggest that the 

underperformance of 

broker-sold mutual 

funds may be even 

higher than 100 bps, 

possibly due to loads 

that are taken off the 

top and/or poor timing 

of broker sold 

investment 

 5 7, 98 "nearly" $1 

tril. 

 20 years See above On pg. 8 the RIA also 

mentions that adviser 

conflicts "could cost 

IRA investors as much 

as $410 bil. over 10 

years and $1 tril. over 

20 years. The $410 bil. 

number seems to come 

from the 200 bps 

points, but the RIA is 

unclear 
36 

 6 8 $410 bil. 10 years DOL estimate based 

on reduction in 

excessive trading, 

associated transaction 

costs, timing errors, 

improvements in 

performance of IRA 

investments other than 

front-load mutual 

funds 

 See above 

 7 8, 101 $40-44 bil. 10 years DOL estimate based of 

assumption that rule 

will eliminate 100 

percent of 

underperformance due 

to variable front-endload sharing 

 "Baseline scenario" 

where the 1975 rule 

remains in place. 

Loads projected to 

decrease over time at 

the same rate as the 

baseline scenario. 

Quantifying gains 

expected to accrue to 

IRA investments in 

front-end load mutual 

funds attributable to 

variations in load 

sharing. DOL 

considers this estimate 

"conservative". 

Quantified gains 

pertain only to 13 

percent of all IRA 

assets that are 

involved in front-endload mutual funds 

 8 8, 101 $88-100 

bil. 

 20 years See above See above 

 9 8, 102, 

106 

 $30-33 bil. 10 years DOL estimate based of 

assumption that rule 

will eliminate 75 

percent of 

underperformance due 

to variable front-endload sharing 

 The Report offers no 

basis for the selection 

of 75 percent 

underperformance 

 10 8, 102, 

106 

 $20-22 bil. 10 years DoL estimate based of 

assumption that rule 

will eliminate 50 

percent of 

underperformance due 

to variable front-endload sharing 

 The Report offers no 

basis for the selection 

of 50 percent 

underperformance 
37 

 11 105 $44.1 bil. 10 Loads decrease over 

time at twice the rate 

of the baseline 

scenario. Quantifying 

gains expected to 

accrue to IRA 

investments in frontend load mutual funds 

attributable to 

variations in load 

sharing and increased 

investment 

performance for 

broker-sold mutual 

funds. The DOL 

considers this estimate 

"reasonably high" 

Quantified gains 

pertain only to 13 

percent of all IRA 

assets that are involved 

in front-end-load 

mutual funds 

 N/A 

 12 105 $99.7 bil. 20 See above N/A 

 13 105 $65.6 bil. 10 Represents upper limit. 

Loads paid by 

investors immediately 

fall to zero 

Quantifying gains 

expected to accrue to 

IRA investments in 

front-end load mutual 

funds attributable to 

variations in load 

sharing and increased 

investment 

performance for 

broker-sold mutual 

funds. The DOL 

considers this to be an 

"illustration but does 

not expect the proposal 

to result" in this 

number. Quantified 

gains pertain only to 

13 percent of all IRA 

assets that are involved 

in front-end-load 

mutual funds 

 N/A 

 14 105 $135.1 bil. 20 See above N/A 

 15 98 $18 bil. per year Applying performance 

gap (100 bps) to the 

current IRA 

marketplace 

 N/A 
38 

 16 98 $10 bil. per year Christoffersen, Evans,

and Musto (2013) find 

that each 100 basis 

points in load sharing 

paid to an unaffiliated 

adviser reduces future 

returns by 50 bps and 

100 bps paid to a 

captive broker reduces 

future performance by 

15 bps. Authors of the 

RIA project these 

results onto the current 

IRA marketplace 

 N/A 

 17 98 $125 bil. 10 years See above N/A 

 18 98 $285 bil. 20 years See above N/A 

 19 98 $26 bil. per year Harm to consumers if 

industry has simply 

shifted conflicted 

revenue streams, rather 

than reducing conflicts 

 This refers to a 

hypothetical where the 

industry shifts away 

from front-end load 

mutual funds into 

other revenue streams 

with conflicts of 

interest. Appears to be 

based off of 

Christoffersen, Evans, 

and Musto (2013). 

 20 98 $300 bil. 10 years See above See above 

 21 98 $700 bil. 20 years See above See above 

 22 101 $80 bil. 10 years Underperformance 

seen by focusing only 

on how load shares 

paid to brokers affect 

the size of loads IRA 

investors holding load 

funds pay and the 

returns they achieve 

 The Report assesses 

the gains to investors 

attributable to the rule 

by specifically 

quantifying benefits in 

an area of the IRA 

market where the 

conflicts are well 

measured-namely 

front-end load mutual 

funds 

 23 101 $200 bil. 20 years See above See above 

 

Sources: 

1 The Effects of Conflicted Investment Advice on Retirement Savings. The White House. February 2015 

2 Fiduciary Investment Advice: Regulatory Impact Analysis. The Department of Labor 
39 

APPENDIX: THE COST OF COMPLYING WITH THE DOL PROPOSAL 

The Regulatory Impact Analysis published by the DOL also reported estimates for the 

costs of implementing the DOL’s new Fiduciary Standard rules. These are essentially limited to 

compliance costs. 

A detailed overview is presented in Table 6. Turning to the top row, compliance costs 

are estimated to range from range from $240 million to $570 million per year (equivalently, $2.4 

billion to $5.7 billion over a 10 year horizon, abstracting from applying discount rates, inflation 

corrections or other dynamic adjustments). 

Perhaps more important than the baseline numbers, however, is the incredibly complex 

and opaque, ad hoc, methodology and set of assumptions which were used to formulate these 

estimates. 

For example, The DOL’s cost estimates for complying with the DOL’s proposed 

fiduciary rule rely on data submitted by SIFMA to the SEC in 2013 (the “SIFMA Data”).61 The 

SIFMA Data was collected and submitted by SIFMA to the SEC for the purpose of estimating 

the costs of complying with potential SEC fiduciary rule changes under Dodd-Frank Section 

913.62 Although the DOL states that “there will be substantive differences between the [DOL]’s 

new proposal and exemptions and any future SEC regulation that would establish a uniform 

fiduciary standard... ”, the DOL nevertheless relies on the SIFMA Data as part of the basis for 

its cost estimates.63 DOL’s stated reason for doing so is that there are “some similarities 

between the cost components” in the SIFMA Data and the costs that would be required to 

comply with the DOL proposal. 

However, the phrase “some similarities” implies there are some differences and the DOL 

is, by definition, unable to address the compliance costs that may arise due to such differences in 

the two regulatory regimes in question. 

The SIFMA Data estimates the costs of implementing an SEC-established uniform 

fiduciary standard in two parts. The first was the cost for broker-dealers to develop and maintain 

 

61 Regulatory Impact Analysis, http://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf, at pp. 160 – 65.

62 SIFMA Comment to SEC dated July 5, 2013, http://www.sifma.org/issues/item.aspx?id=8589944317. 

63 Regulatory Impact Analysis at p. 161. 
40 

a disclosure form and customer relationship guide, similar to the Form ADV Part 2A that 

registered investment advisors use today. 

The DOL proposal does not require a Form ADV Part 2A-type disclosure for brokerdealers, but it would require an extensive range of new disclosure obligations that do not exist 

today. These include: (i) contractual disclosures under the Best Interests Contract Exemption, 

(ii) point of sale disclosure, including the total cost of the acquired asset over periods of 1, 5, and 

10 years; (iii) annual fee and compensation disclosure; (iv) public website disclosure, including a 

list of all direct or indirect material compensation; and (v) aggregated data regarding inflows, 

outflows, holdings, and returns, including the identity and amounts of revenue received, which 

DOL reserves the right to publicly disclose. 

The disclosure estimates in the SIFMA Data are for broker-dealers to adopt an essentially 

“known quantity” disclosure form that is used by advisors today. The disclosure estimates in the 

SIFMA Data do not address any of the new disclosure obligations in the DOL proposal. Hence it 

is erroneous for DOL to use SIFMA’s disclosure estimates to approximate the costs of the 

extensive, new, separate and distinct, disclosures required under the DOL proposal. 

The second part of the SIFMA Data is the estimated cost of implementing compliance 

oversight and training programs to adapt to a new SEC standard. In providing these estimates, 

SIFMA member firms were asked to make a host of assumptions. None of these assumptions, 

however, include the new obligations and potential liabilities that the DOL proposal may create, 

including: (i) new contractual liability under the Best Interest Contract Exemption, including 

potentially significant individual and class action litigation exposure; (ii) compliance with a new 

DOL exemption in order to engage in principal transactions; (iii) new restrictions on products 

that may be offered and sold, and (iv) the costs of creating the new data and information that are 

subject to the new disclosures outlined above. 

In sum, the SIFMA Data applies to estimating the cost of a contemplated SEC fiduciary 

regime, under specific assumptions that were applied to such a contemplated SEC approach. It is 

not methodologically appropriate to use the SIFMA Data to estimate the cost of a separate and 

distinct DOL regime, with separate and distinct requirements, obligations, liabilities, and costs. 

The DOL further compounds the apparent inconsistency by relying on the SIFMA Data 

and then suggesting that “the SIFMA submission significantly overestimates the costs of the new 
41 

proposal.”

64 The DOL thus appears to be relying on inputs into its cost analysis that it does not 

view as accurate, thereby undermining the reliability of its own methodology. 

Lastly, we note that the US Chamber of Commerce submitted a comment letter to the 

OMB on May 20, 2015 outlining their view that the Department of Labor vastly underestimated 

the compliance costs associated with the proposed Fiduciary rule.65 Specifically, the Chamber 

states (on p. 2) that real costs associated with the information collection requests alone may be 

“five to ten times greater” than the DOL’s estimate of $792 million over ten years. The ten-page 

letter goes on to detail the various shortcomings and implausible assumptions made by the DOL 

in their calculations. 

While we will not undertake to comment on the OMB letter, it does serve to emphasize 

the clear shortcoming of the DOL’s estimates. Namely, they are not based on a scientific or 

empirical approach and the resulting estimates may or may not be wildly inaccurate reflections 

of the true costs. As a result, it would be inappropriate to include them as part of a formal 

assessment of the costs and benefits of a proposed change in public policy. 

 

 

64 Regulatory Impact Analysis at p. 162. 

65 Available on-line at http://www.uschamber.com/sites/default/files/oira_comments.pdf. 
42 

Table 6 

The Costs of Compliance Are Based on Complex and Opaque Set of Assumptions 

Estimates found in Fiduciary Investment Advice: Regulatory Impact 1

 

Page Source Amount Horizon Notes 

(1) (2) (3) (4) (5) 

157 Department of Labor Estimate $2.4b-5.7 bil. 10 years Total compliance cost. Cost 

mostly reflects the costs 

incurred by new fiduciary 

advisers to satisfy relevant 

PTE conditions 

 

 

162 SIFMA estimate of average start 

up cost to develop and implement 

new, comprehensive supervisory 

systems, procedures and training 

$5 mil. one year Estimated costs that would 

be incurred by brokerdealers 

162 SIFMA estimate of annual ongoing costs $2 mil. annual 

165 DOL estimated start-up cost of 

compliance for medium firms 

based on values provided by 

SIFMA 

$663,000 one year $5 million x (0.133). 0.133 

is the estimated ratio of 

medium firms and large 

firms' cost based on figures 

provided for RIAs in the 

IAA comment letter 

165 DOL estimated start-up cost of 

compliance for small firms based 

on values provided by SIFMA 

multiplied by DoL's ratio 

$242,000 one year 5 million x (0.048). 0.048 

is the estimated ratio of 

small firms and large firms' 

cost based on figures 

provided for RIAs in the 

IAA comment letter 

166 DOL total estimated start-up cost 

of compliance in the first year 

$892 mil. one year 

165 DOL estimated on-going cost of 

compliance for medium firms 

$265,000 annual $2 million x 0.133 (the 

IAA ratio) 

165 DOL estimated on-going cost of 

compliance for small firms 

$96,900 annual $2 million x 0.048 (the 

IAA ratio) 

166 DOL estimated on-going cost of 

compliance after first year 

$357 mil. annual 

166 Estimated start-up cost of 

compliance for large firms based 

on values provided by the IAA 

$1 mil. one year 

166 DOL estimated start-up cost of 

compliance for medium firms 

based on values provided by the 

IAA 

$145,000 one year The DoL took the ratio 

between the cost SIFMA 

and IAA provided (.2181) 

and derived the costs from 

that ratio referred to as the 
43 

"ADV ratio" 

166 DOL estimated start-up cost of 

compliance for small firms based 

on values provided by the IAA 

$53,000 one year SIFMA estimates 

multiplied by ADV ratio 

166 DOL total start-up cost of 

compliance after first year based 

on IAA 

$195 mil. one year See above 

166 Estimated on-going cost of 

compliance for large firms based 

on values provided by the IAA 

$436,000 annual See above 

166 Estimated on-going cost of 

compliance for medium firms 

based on values provided by the 

IAA 

$58,000 annual SIFMA estimates 

multiplied by ADV ratio 

166 Estimated on-going cost of 

compliance for small firms based 

on values provided by the IAA 

$21,000 annual See above 

166 DOL estimated total annual 

ongoing costs for subsequent 

years based on IAA 

$78 mil. annual See above 

Cost of Developing and Maintaining a Disclosure Form and Customer Relationship Guide 

161 SIFMA reported start-up cost for 

preparing a relationship guide 

similar to the Form ADV 2A 

$2.8 mil. one year 

161 SIFMA reported "low" start up 

cost 

$1.2 mil. one year 

161 SIFMA reported "high" start-up 

cost 

$4.6 mil. one year 

161 SIFMA reported average annual 

on-going cost 

$631,000 annual 

Costs Incurred by Registered Investment Advisors 

166 DoL Analysis of cost for legal 

consultation for small firms 

$3,840 one year Hourly rate of $480. 8 

hours assumed 

166 DoL Analysis of cost for legal 

consultation for medium firms 

$7,680 one year Hourly rate of $480. 16 

hours were assumed. 

166 DoL Analysis of cost for legal 

consultation for large firms 

$19,200 one year Hourly rate of $480. 40 

hours were assumed. 

167 DoL Analysis of costs of training 

for a large firm in the first year 

$30,000 one year 

167 DoL Analysis of costs of training 

for a large firm after the first year 

$10,000 annual 

167 DoL Analysis of costs of training 

for a medium firm in the first 

year 

$4,000 one year 
44 

167 DoL Analysis of costs of training 

for a medium firm after the first 

year 

$1,500 annual 

167 DoL Analysis of costs of training 

for a small firm in the first year 

$1,500 one year 

167 DoL Analysis of costs of training 

for a small firm after the first year 

$1,500 annual 

167 Total cost to evaluate compliance 

with rule and provide training for 

a large RIA firm in the first year 

$49,200 one year 

167 Total cost to evaluate compliance 

with rule and provide training for 

a medium RIA firm in the first 

year 

$11,700 one year 

167 Total cost to evaluate compliance 

with rule and provide training for 

a small RIA firm in the first year 

$5,300 one year 

167 Total cost to evaluate compliance 

with rule and provide training for 

a large RIA firm in the 

subsequent years 

$10,000 annual 

167 Total cost to evaluate compliance 

with rule and provide training for 

a medium RIA firm in the 

subsequent years 

$1,500 annual 

167 Total cost to evaluate compliance 

with rule and provide training for 

a small RIA firm in the 

subsequent years 

$500 annual 

167 Total Cost for IRA firms in the 

first year 

$110.8 mil, one year 

167 Total Cost for IRA firms in the 

subsequent years 

$11.9 mil. annual 

Costs Incurred by Plan Service Providers 

168 Start-up cost for a large firm $49,000 one year 

168 Start-up cost for a medium firm $12,000 one year 

168 Start-up cost for a small firm $5,000 one year 

168 Aggregate start-up cost for 

training employees 

$24.1 mil. one year 

169 On-Going Costs for small firm $10,000 annual 2,275 small service 

providers, 437 medium 

service providers, 142 large 

service providers 

169 On-Going Costs for medium firm $2,000 annual 

169 On-Going Costs for large firm $1,000 annual 

169 Aggregate on-going costs for 

training employees, yearly 

$3.2 mil. annual 
45 

2,275 small service 

providers, 427 medium 

service providers, 142 large 

service providers 

Additional Costs 

 

171 Increased insurance premiums for 

consultants, firms and brokerdealer representatives 

premiums for 

these affected 

service providers 

could be expected 

to increase 10 

percent; average 

insurance 

premium is $3,000 

per representative. 

Premium increase 

would be $300 per 

insured

N/A DoL estimates that 50% of 

the cost reflects the 

expenses and profits of 

insurance carriers, while 

the remainder is not a cost 

but a transfer in the form of 

compensation paid to those 

harmed by the insured 

fiduciary investment 

adviser 

172 one year premium increase for 

broker dealer representatives 

$87 mil. one year 290,000 broker dealers 

multiplied by $300 

173 Cost of premiums and transfers 

from firms to plans or IRA 

investors 

$63 mil. annual 418,00 BD representatives 

and plan service provider 

employees could 

experience a $300 increase. 

50% is paid out as 

compensation and 50% is 

paid to the insuring firm 

174 First year cost for each BD 

representative converting to RIA 

status 

$5,600 one year 50 hours preparing for 

Series 65 exam (at 

$106.06/hour) plus 

additional costs 

174 Total first year cost of BD to RIA 

conversion 

$59.4 mil. one year 

174 Ten year cost of BD to RIA 

conversion 

 $445 mil. ten 

years 

177 first year cost for producing and 

distributing the disclosures and 

subsequent compliance 

$77.4 mil. one year 

177 on-going cost for subsequent 

years for producing and 

distributing disclosures 

$29.2 mil. annual 

177 first year cost of the 6.3 million 

disclosures required under the 

new Principal Transactions PTE 

$57.4 mil. one year 

on-going cost of the 6.3 million 

disclosures required under the 

new Principal Transactions PTE 

$47.8 mil. annual 

177 Disclosure requirements required 

by the amended PTE 86-128 

$198,000 annual 

177 Seller's Carve-Out disclosures $6.2 mil. annual Assumes 43,000 

disclosures 
46 

178 The Platform Provider Carve-Out $39,000 annual Assumes 1,800 disclosures 

178 The Investment Education CarveOut $121,000 annual Assumes 2,800 disclosures 

178 Total exemptions and carve-outs 

cost in the first year 

$141.5 mil. one year Assumes 92.4 million 

additional disclosures 

178 Total exemptions and carve-outs 

cost in the subsequent years 

$83.5 mil. annual 

178 Total exemptions and carve-outs 

cost in 10 years 

$791.8 mil. 10 years 

Mentioned But Not Quantified 

175 Increased traffic in Call Centers 

176 Cost of creating or updating 

contracts 

176 transitional impacts on the 

financial sector market 

176 impact on asset providers 

177 costs for complying with the new 

and amended PTEs 

Sources 

1 Fiduciary Investment Advice: Regulatory Impact Analysis. The Department of Labor

Our work in this matter is ongoing and we may update or change our opinions as we continue 

our review and analysis. 
APPENDIX 5
COMMENT TO THE DEPARTMENT OF LABOR 

Tax Consequences to Investors Resulting from Proposed Rules 

Relating to Financial Representative Fiduciary Status 

COMPASS LEXECON 

JULY 20, 2015
1 

I. BACKGROUND AND SUMMARY OF OPINIONS 

1. The Department of Labor (“DOL”) has proposed amendments to the existing rule 

that defines when financial representatives are fiduciaries for purposes of ERISA and the Internal 

Revenue Code, including with respect to advice provided regarding IRA assets.1 We understand 

that much or all of the assistance currently provided to investors through commission-based 

accounts is not currently subject to fiduciary status, but arguably would be so under the proposed 

amendments. 

2. We understand participants in this rulemaking have stated that, if subjected to the 

changes in fiduciary status imposed by the proposed amendments, firms currently offering 

commission-based IRAs will no longer find it cost-effective to offer IRAs to small account 

holders, such as those with a balance below $25,000. The impact on IRAs is particularly 

problematic because the IRS strictly limits annual deductions for IRA contributions. For 

instance, in 2015, total contributions to all traditional and Roth IRAs cannot be more than $5,500 

(or $6,500 for those 50 or older).2

 As a consequence, there would be essentially no way for an 

investor to start a new IRA with one of these firms, unless the investor already had more than 

$25,000 in another retirement account that could be “rolled over.”3

3. We understand that the proposed amendments will only affect tax-qualified 

accounts such as IRAs and Roth IRAs; the proposed amendments will not change firms’ ability 

to offer commission-based taxable accounts. Obviously, taxable savings accounts lack the tax 

                                                            

1. 80 FR 21927 (April 20, 2015). 

2. Internal Revenue Service, Publication 590-A (2014). 

3. Making the maximum $5,500 contributions, and earning 10 percent returns per year, it would take 

four years before a new IRA account achieved a $25,000 balance. ∑ 5,500ሺ1.07ሻ ସ ௧ ௧ୀଵ = $26,129. A “rollover” is a 

withdrawal from an existing retirement plan (such as a 401(k) or another IRA) that is reinvested within 60 days into 

an IRA. If reinvested into a traditional IRA, the rollover amount will generally not be taxed, although it will incur 

taxes at the time of retirement. Internal Revenue Service, “Rollovers of Retirement Plan and IRA Distributions,” 

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Rollovers-of-Retirement-Plan-and-IRADistributions [accessed July 13, 2015]. 
2 

advantages of IRAs. Therefore, if, as a consequence of the DOL’s proposed amendments, an 

investor who would have opened an IRA instead opens a taxable savings account, the investor 

will experience lower retirement savings, all else equal. 

4. Compass Lexecon was asked by counsel for Primerica, Inc. (“Primerica”) to 

analyze and quantify these reductions in retirement savings.4 The size of the reductions varies 

depending on a number of factors about an investor and his or her investment choices, such as 

the length of time the account is held and the investor’s income (and hence, his or her tax rate). 

As a consequence, for this study, we considered a range of possible values for these parameters. 

5. Nevertheless, as a general matter, we conclude that, for most investors, the loss 

associated with opening a taxable savings account instead of an IRA would be large. For 

example, consider a 30-year-old investor who starts a new IRA, expects to hold it 35 years until 

retirement, and contributes 4.5 percent of his income annually. The median outcome of our 

model for this investor involves an effective average tax rate on savings (relative to a totally 

untaxed account) of 23.8 percent for a Roth IRA and 15.0 percent for a traditional IRA, whereas 

the effective average tax rate on savings for the same investor making the same investment, but 

in a taxable savings account, is 38.7 percent. In other words, the taxpayer in this case would see 

his effective tax rate rise by 62.6 percent relative to a Roth IRA, and 158.0 percent relative to a 

traditional IRA if the DOL’s proposed amendments caused him to open a taxable savings 

account. 

6. The median effective tax increase due to the DOL’s proposed amendments varies 

across investors who start saving at different ages, but in any case, the tax increases remain very 

substantial, with the median never below 32.9 percent. Therefore, to the extent that the DOL’s 

                                                            

4. Appendix A includes a brief description of Compass Lexecon. Appendix B includes a list of 

materials relied upon in the preparation of this comment. 
3 

proposed amendments lead a substantial number of investors to open taxable savings accounts 

instead of IRAs, the amendments would in essence constitute a sizable tax increase on many 

Americans’ retirement savings. 

7. To put these effective tax increases into perspective, we estimated their effect on 

the number of years of retirement an investor can fund at a desired level of annual retirement 

income. As an example, consider again the 30-year-old new IRA investor described above who 

can fund annual retirement income equal to 60 percent of his expected final pre-retirement 

income. We estimate that the effective tax increase to this investor from opening a taxable 

account reduces the number of retirement years funded at this level by about 2.7 years or 4.3 

years, relative to if he had opened a Roth IRA or a traditional IRA, respectively. For someone 

who expects 20 total retirement years, these reductions reflect between a 13.5 percent (Roth 

IRA) and 21.4 percent (traditional IRA) reduction in financially-secure retirement years. 

8. These examples above are illustrative, but this type of effective tax increase 

potentially affects any future investor who seeks to start an IRA with a commission-based 

professional through contributions or through a relatively small rollover. Available evidence 

indicates that there are around 7.0 million existing households with these types of IRAs. If 7.0 

million future households experience the effective tax increases we estimate in our model, the 

total reduction in retirement savings would be between $147 billion and $372 billion. This is a 

rough estimate of the potential impact, and, to the extent some investors do not switch to taxable 

accounts as a consequence of the proposed amendments, the actual impact may be lower. But in 

any case, this calculation illustrates that the proposed amendments may have very substantial 

costs which nevertheless do not appear to have been considered in the DOL’s cost-benefit study. 
4 

9. For our model, we considered investors with typical values of key parameters, 

such as income and asset allocations. Section II below describes in detail the assumptions about 

these and other parameters. 

10. Section III describes in detail how the model was run. In brief, the model 

calculates effective tax rates for three different possible savings vehicles: a traditional IRA, a 

Roth IRA, and a taxable savings account, based on the after-tax value of each at the time of 

retirement, relative to the value of a hypothetical fully untaxed account. The three types of 

accounts are assumed to include the same assets, which provide the same fundamental returns; 

nevertheless, the three types of accounts grow at different rates due to different tax treatments. 

11. Future returns to IRA assets are obviously not known in advance. To estimate 

effective tax rates, we perform what is known as a “Monte Carlo” model. First, we draw a set of 

returns at random for each year until retirement based on the historical distribution of returns to 

different types of assets. We then calculate the resulting effective tax rates for each type of 

account based on the results of the model using these randomly-drawn returns. We then repeat 

the entire process 10,000 times. This allows us to report the median effective tax rates, as well 

as other statistics, such as the 95th percentile. 

12. Section IV reports the resulting effective tax rates and the potential tax impacts of 

the DOL’s proposed amendments for investors starting accounts at various ages and with various 

income levels. Section IV also describes in more detail the calculations noted above regarding 

the effect on the number of secure retirement years and the total potential tax impact on U.S. 

investors. 
5 

II. DESCRIPTION OF MODEL 

13. We first describe the key parameters of the model, including the investor’s age, 

income, tax rates, annual size and frequency of contributions to savings, and asset allocations. 

We then describe how investment returns are calculated each year. 

A. Investor Characteristics 

14. We considered an investor who plans to retire at age 65. In order to understand 

the impact of the DOL’s proposed amendments on different types of investors, we considered 

investors who begin a new retirement savings account today at ages ranging between 30 and 45. 

15. Available evidence indicates that IRA investors have somewhat higher income 

than the average household. According to a recent large survey, the median household income 

of a household that contributed to an IRA in 2013 was $87,500 for traditional IRAs, and $95,000 

for Roth IRAs.5

 An average of these two is $91,250. The same survey indicates a median age of 

45 years for a household head contributing to an IRA.6 By contrast, U.S. Census data indicates 

that in 2013, median household income for a household with a 45-year-old head-of-household 

was $66,057.7 Therefore, the typical IRA-contributing household has an income level 

approximately 38 percent higher than the median U.S. household of the same age.8 

16. For our model, we assumed that a typical investor’s household income when 

starting an IRA would be approximately 38 percent above the median U.S. household income for 

                                                            

5. Sarah Holden and Daniel Schrass (2015) “Appendix: Additional Data on IRA Ownership in 

2014,” ICI Research Perspective 21(1A), at 11. 

6. The median age of the household solo or co-decisionmaker for saving and investing was 47 years 

for a traditional IRA and 43 years for a Roth IRA. Id., at 11. 

7. Median household income for a household with a 35-44 year-old head-of-household was $64,973, 

and the similar figure for households with a 45-54 year-old head-of-household was $67,141. $66,057 is the average 

of these two figures. U.S. Census Historical Income Table H.10, 

http://www.census.gov/hhes/www/income/data/historical/household/index.html [accessed July 7, 2015]. 

8. $91,250 / $66,057 = 1.38. 
6 

individuals of the same age. For example, at age 30, household income of $72,729 is 38 percent 

above the median household income,9 and at age 45, $91,159 is 38 percent above the median.10 

In 2011, these incomes would correspond to approximately the 70th percentile of U.S. household 

income for each age.11

17. We also allow the investor’s income to increase over the period of the investment 

in the model. This happens for three reasons. First, incomes rise with age due to increased 

human capital accumulation and other effects. The U.S. Census data on household income 

described above indicates an average 1.3 percent higher household income per year of age in 

2013.12 Second, our model is based on nominal dollars, and there is likely to be at least a 

moderate amount of inflation in the future. The most recent long-term forecast for annual 

growth in inflation from the Philadelphia Federal Reserve’s “Survey of Professional Forecasters” 

is 2.14 percent.13 Third, median household incomes have historically grown faster than inflation. 

Between 1980 and 2013, median real household income for all U.S. households experienced a 

compound annual growth rate of 0.26 percent in constant dollars.14 Combining these three 

effects, we assumed annual income growth for the investor of 3.70 percent until retirement at age 

65 ( = 1.30 percent + 2.14 percent + 0.26 percent). 

                                                            

9. In 2013, median household income for households with head-of-household aged 24-34 years was 

$52,702. Id. $72,729 = $52,702 x 1.38. 

10. In 2013, median household incomes for households with head-of-household aged 35-44 years and 

45-54 years were $64,973 and $67,141, respectively. Id. $91,159 = (($64,973 + $67,141) / 2) x 1.38. 

11. U.S. Census Bureau, 2011 Annual Social and Economic (ASEC) Supplement, HINC-02, Total All 

Races, http://www.census.gov/hhes/www/cpstables/032012/hhinc/hinc02_000.htm [accessed July 17, 2015]. 

12. Median household income for households with head-of-household aged 15-24 was $34,311, and 

the similar figure for households with head-of-household aged 55-64 was $57,538. U.S. Census Historical Income 

Table H.10, op. cit. 1.30 percent = (57,538 / 34,311)(1/(59.5 – 19.5)) -1. 

13. https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professionalforecasters/2015/survq215 [accessed July 7, 2015]. 

14. In 2013 dollars, median household income was $51,939 in 2013, and $47,668 in 1980. U.S. 

Census Historical Income Table H.10, op. cit. 0.26 percent = (51,939 / 47,668)(1/(2013 – 1980)) -1. 
7 

18. Upon retirement, we assumed a reduction in income of 40 percent, relative to 

income in the prior year (in other words, an income replacement rate of 60 percent). This is 

consistent with findings in the academic literature,15 as well as recent data from the Social 

Security Administration.16 

19. Federal income tax rates ranging between 10 percent and 39.6 percent were 

applied in each year based on the current marginal tax rates applicable to a married jointly-filing 

household with taxable income calculated as described above. The threshold incomes defining 

each income tax bracket are assumed to increase annually by 2.14 percent from their current 

(2015) levels based on the long-term forecasts published by the Philadelphia Federal Reserve 

described above. The current capital gains tax rates that correspond to each income tax bracket 

are assumed to maintain that same relationship in the future.17 For investors with income above 

$250,000, the recently implemented Net Investment Income Tax of 3.8 percent was also 

applied.18

20. As noted above, the median household income of an investor contributing to a 

traditional IRA is $87,500, and the median age of the head-of-household for traditional IRA 

contributors is 47.19 The average annual contribution to a traditional IRA for a contributing 

                                                            

15. See, e.g., B. Douglas Bernheim, Jonathan Skinner, and Steven Weinberg (1997) “What Accounts 

for the Variation in Retirement Wealth Among U.S. Households?” NBER Working Paper 6227, at 53 (indicating 

median income replacement rate of 0.60). 

16. Andrew G. Biggs and Glenn R. Springstead (2008) “Alternate Measures of Replacement Rates for 

Social Security Benefits and Retirement Income,” Social Security Bulletin 68(2), at Table 3 (indicating replacement 

rate relative to final earnings of 69 percent for households in the 3rd highest quintile, and 52 percent for households 

in the 4th highest quintile). 

17. For taxpayers in the 10 or 15 percent income tax bracket, the capital gains tax rate is 0 percent. 

For taxpayers in the 25, 28, 33, or 35 percent income tax bracket, the capital gains tax rate is 15 percent. For 

taxpayers in the 39.6 percent income tax bracket, the capital gains tax rate is 20 percent. Internal Revenue Service, 

“Publication 17 (2014),” at Chapter 16. 

18. By law, the $250,000 threshold is not adjusted for inflation. See

http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs [accessed July 10, 2015]. 

19. Holden and Schrass (2015) op. cit.
8 

household with head-of-household between 45 and 49 is $3,975.20 This therefore corresponds to 

approximately 4.5 percent of household income. Hence, we assume that investors make a 

contribution to retirement savings equal to 4.5 percent of income (on a pre-tax basis), unless the 

contribution is limited, as described below. (Of course, investors may contribute additional 

amounts to other forms of retirement savings outside our model, such as company plans.) 

21. Current contribution limits to an IRA are $5,500 per year ($6,500 for investors 

age 50 or above).21 By statute, these limits increase according to a formula relating to the 

inflation rate, and we applied this formula to project contribution limits in each year over the 

period of investment until retirement.22 If an investor’s contribution of 4.5 percent of income 

exceeds these limits in any year, we assumed the investor contributed only the limited amount. 

In order to maintain comparability, we assumed the same limited contribution, whether the 

investment was made in an IRA or a taxable savings account. 

22. Available evidence indicates that many investors who own IRA accounts 

nevertheless do not contribute to them every year.23 Therefore, in our model we considered two 

possibilities for the investor: (a) contribute the amount described above every year, or (b) 

contribute the amount described above every other year. 

                                                            

20. Craig Copeland (2014) “Individual Retirement Account Balances, Contributions, and Rollovers, 

2013; With Longitudinal Results 2010-2013: The EBRI IRA Database,” Employee Benefit Research Institute Issue 

Brief 414, at 17 (Figure 16). 

21. Internal Revenue Service, “Retirement Topics – IRA Contribution Limits,” 

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

[accessed July 7, 2015]. 

22. The contribution limit for investors under age 50 is calculated as $5,000, multiplied by the ratio of 

the CPI for the relevant year and the CPI for 2007. 26 USC §§219(b)(D) & 1(f)(3). The contribution limit for 

investors age 50 and above is $1,000 higher than the limit for younger investors. 26 USC §§219(b)(B). 

23. Craig Copeland (2014) “Individual Retirement Account Balances, Contributions, and Rollovers, 

2013; With Longitudinal Results 2010-2013: The EBRI IRA Database,” Employee Benefit Research Institute Issue 

Brief 414, at 1. 
9 

23. A recent survey indicates the typical asset allocation held in IRAs, by the age of 

the account owner.24 While essentially any asset can be held in an IRA, the bulk of assets are 

equities, bonds, and money / cash.25 For instance, the typical IRA held by a 25-44 year-old 

contained 66.3 percent equity, 12.9 percent bonds, 13.9 percent money, and 6.9 percent other 

assets. For each age group, we allocated the “other” assets evenly across the equity, bonds, and 

money categories, and then linearly extrapolated these asset allocations reported for age groups 

to individual ages. We assume that the investor holds these age-specific allocations in their 

retirement savings, rebalancing annually.26

B. Investment Returns 

24. For each year until retirement, the model requires a set of four investment returns: 

(a) equity appreciation; (b) dividends; (c) bond interest; and (d) bond appreciation. As proxies 

for the equity appreciation and dividend returns, we calculated these returns for the S&P500 over 

the past 38 years.27 As proxies for the bond yield and appreciation, we calculated these returns 

for the Barclay’s U.S. Aggregate Bond Index, also over the past 38 years.28 These returns are 

gross of commissions paid to brokers or other fees, which will vary depending on the specific 

asset an investor purchases, but because these commissions and fees would be paid in either an 

                                                            

24. Craig Copeland (2014) “IRA Asset Allocation, 2012, and Longitudinal Results, 2010 – 2012,” 

Employee Benefit Research Institute Notes 35(10), at 8. 

25. Other assets account for between 5.7 and 11.1 percent of assets, depending on the age of the 

account holder. Id. 

26. Given the assumed annual contributions, as well as dividend, interest, and capital gains 

distributions (as described below), we assumed this rebalancing could be made without selling any current holdings 

(and thus potentially triggering capital gains tax liability). 

27. Both returns are calculated, assuming reinvestment (of capital gains or dividends, respectively). 

The mean annual S&P total return (including price appreciation and dividends) over this period is 12.6 percent, with 

a16.7 percent standard deviation. The mean annual dividend return over this period is 2.8 percent, with a 1.3 

percent standard deviation. 

28. The mean annual Barclay’s Aggregate Bond Index total return (including coupons and price 

appreciation) over this period is 7.9 percent, with a 6.9 percent standard deviation. The mean annual coupon return 

over this period is 7.4 percent, with a 3.1 percent standard deviation. 
10 

IRA or a taxable savings account, a comparison of the value of the two accounts will likely not 

suffer a material bias due to this omission. 

25. For each year until retirement in our model, we selected at random (with 

replacement) one year from the past 38 years, and applied the four historical returns from that 

selected year. Given the asset allocation described above, we can, for each year until retirement, 

calculate the gain in the value of the account. We assume that all dividends and interest are 

reinvested in the account. We also assume that a share of the equity portion of the portfolio is 

distributed each year as (long-term) realized capital gains, but then reinvested. Over the last five 

years, the three largest U.S. load-bearing equity-only mutual funds distributed an average of 2.2 

percent of fund value as long-term capital gains,29 so we assume 2.2 percent of the equity held in 

the account is distributed as realized capital gains each year (and then reinvested). 

III. MODEL OPERATION 

26. At the beginning of each year, the investor makes her annual contribution and 

draws a set of equity and bond returns, as described above. For a taxable savings account or a 

Roth IRA, the annual contribution is made using after-tax dollars (i.e., the contribution is 

reduced by the contemporaneous marginal tax rate), while for a traditional IRA, the annual 

contribution is made using pre-tax dollars.30 The portfolio then grows during the year according 

to the returns drawn, and at the end of the year, the investor pays any taxes due before the start of 

the next year. In the case of IRAs, no taxes are paid at the end of each year. In the case of a 

                                                            

29. According to Morningstar, the three largest equity-only load-bearing mutual funds are AGTHX, 

AIVSX, and CWGIX. The calculation was performed over the years 2010 – 2014. None of these funds distributed 

short-term capital gains in any of these years. 

30. In the case of a traditional IRA, the deduction that allows the contribution to be made in pre-tax 

dollars may not be realized until the end of the year, but we assume the deduction is available at the beginning of the 

year. 
11 

taxable savings account, ordinary income taxes are paid each year on interest and dividends 

received that year, and long-term capital gains taxes are paid on capital gains distributions. After 

taxes, the remaining interest, dividends, and capital gains are reinvested in the account.31

27. At age 65, the investor retires and we value the account at that point. For a Roth 

IRA, no taxes are due on withdrawal. For a traditional IRA, taxes are paid on the full amount of 

the account at the point of retirement, based on the marginal income tax rate applicable in 

retirement, calculated as described above (40 percent below the last working year income). For a 

taxable savings account, taxes are paid at retirement on the gain in the account, relative to the 

cost basis, based on the long-term capital gains tax rate applicable in retirement, calculated as 

described above. The cost basis each year is calculated as the annual contributions made to the 

account, plus reinvested interest, dividends, and realized capital gains (net of taxes). The cost 

basis at retirement is the sum of the cost basis calculated each year. 

28. The values at retirement of the various accounts, and hence, the effective tax 

rates, depend on the investment returns experienced each year. As noted above, these are a 

random draw from historical returns. Hence, the results will differ in any given run of the model. 

We ran a Monte Carlo simulation of the model with 10,000 iterations.32

                                                            

31. We do not allow for loss “harvesting” in the case of a taxable savings account, in which investors 

strategically realize capital losses on certain assets to offset any gains they may have. Some evidence indicates that 

such harvesting can, if performed rigorously, increase the value of a portfolio materially. Robert D. Arnott, Andrew 

L. Berkin, and Jia Ye (2001) “Loss Harvesting: What’s It Worth to the Taxable Investor?” First Quadrant 

Perspective, No. 1, at 13 (“We have simulated returns for 500 assets over 25 years to examine the benefits of loss 

harvesting for taxable portfolios ... Even after liquidation, net of all deferred taxes, this advantage is still an 

impressive 14%.”) However, available evidence indicates that few investors actually realize gains through such a 

strategy. Brad M. Barber and Terrance Odean (2003) “Are individual investors tax savvy? Evidence from retail and 

discount brokerage accounts,” Journal of Public Economics 88:419-42, at 440 (“both discount and retail households 

have a strong preference for realizing gains, rather than losses, in their taxable accounts.”) 

32. See William H. Greene (2012) Econometric Analysis (7th ed.), Prentice Hall, at 615-7. Ten 

thousand iterations is relatively large compared with other Monte Carlo studies of tax behavior. See, e.g., Robert D. 

Arnott, Andrew L. Berkin, and Jia Ye (2001) op. cit., at 6 (indicating 500 simulations). 
12 

IV. RESULTS 

A. Effective Tax Rates 

29. Exhibit A summarizes the results of eight specifications of the model, 

corresponding to different ages at account inception and different contribution frequencies. The 

results of each specification are based on a separate set of 10,000 runs of the model. In the first 

specification, an investor who starts contributing at age 30 makes a contribution to the account 

every year. In the second model, the same investor makes a contribution only every other year. 

The remaining specifications increase the investor’s age at account inception in five-year 

increments up to age 45. In each specification, we report the after-tax value at retirement of four 

types of accounts that differ only in their tax treatment: a completely untaxed account (for 

reference), a traditional IRA, a Roth IRA, and a taxable savings account. We report the median 

value for each of these (across all 10,000 runs), as well as the 5th and 95th percentiles. 

30. For an investor who begins an account at age 30 and contributes every year, the 

median traditional IRA at retirement after taxes is worth $1,021,747, with a 5th to 95th percentile 

range of $498,220 to $2,102,672 (these figures are in nominal 2050 dollars, when the investor in 

question retires). The median Roth IRA is worth $916,524, with a 5th to 95th percentile range of 

$444,695 to $1,891,507. The median taxable savings account is worth $736,068, with a 5th to 

95th percentile range of $364,754 to $1,495,796. This demonstrates the substantial tax savings 

generated by IRAs, relative to taxable savings accounts. Unsurprisingly, Exhibit A also shows 

that all account values diminish substantially for investors who either wait until later ages to 

begin an account or who do not contribute every year; nevertheless, IRAs still have substantial 

tax benefits in all cases. (In part, the decline in value for investors who start accounts at later 

ages is due to the fact that the account values are calculated in nominal dollars at the time of 
13 

retirement. Thus, the results for a 45-year-old investor are denominated in nominal 2035 dollars, 

whereas the results for a 30-year-old investor are denominated in nominal 2050 dollars.) 

31. We also report in Exhibit A the median, 5th, and 95th percentiles of the effective 

tax rates on each of the IRAs and the taxable savings account. The effective tax rate is 

calculated separately in each of the 10,000 runs of the model, based on the difference between 

the value of the IRA or taxable savings account, and the value of the completely untaxed 

account. For instance, if in a particular run, a completely untaxed account would be worth 

$500,000 in retirement, and an otherwise equivalent taxable savings account is only worth 

$350,000, then the effective tax rate is 30 percent ( = $150,000 / $500,000). (The median, 5th, 

and 95th percentile tax rate may not correspond to the same run of the model as the median, 5th, 

and 95th percentile account value; hence, the tax rates in Exhibit A cannot necessarily be 

calculated directly using the account values reported in Exhibit A.) 

32. For an investor who begins an account at age 30 and invests every year, the 

median effective tax rate for a traditional IRA is 15.0 percent, a Roth IRA is 23.8 percent, and a 

taxable savings account is 38.7 percent. The traditional IRA tax rate is based entirely on the tax 

bracket at retirement, while the Roth IRA tax rate reflects the various tax brackets throughout the 

working life. If the investor is in the same tax bracket at retirement as throughout his working 

life, then a Roth IRA and a traditional IRA have the same value at retirement. If the investor is 

in a lower tax bracket in retirement than during the working life, then the traditional IRA will 

have a higher value at retirement than a Roth IRA, and vice-versa if the investor is in a higher tax 

bracket at retirement. For the taxable account, taxes are paid both during the working life and at 

retirement, so the effective tax rate we calculate reflects both. 

33. While contributing only every other year substantially diminishes the value of any 

account at retirement, it has little impact on the effective tax rates. The age at which the investor 
14 

begins contributing can affect the effective tax rates on each type of account. This reflects 

investors’ movements between various tax brackets during the working life and at retirement. 

Investors’ incomes rise over time, but the tax bracket thresholds also rise, although at a different 

rate. For this reason, investors of different ages today may end up retiring in different tax 

brackets. 

34. Exhibit A also reports the lost retirement savings for an investor who opens a 

taxable savings account instead of an IRA. For an investor who begins an account at age 30 and 

contributes every year, the median loss is $179,541 relative to a Roth IRA, and $286,046 relative 

to a traditional IRA (again, these figures are in nominal 2050 dollars). The loss is so much larger 

for a traditional IRA because, in foregoing a traditional IRA, the investor in this case loses the 

advantage granted by his lower tax bracket in retirement. However, that additional advantage of 

traditional IRAs does not apply to all investors of different ages in our model, because, even 

assuming retirement income is 60 percent of pre-retirement income, some investors may 

nevertheless end up retiring in the same tax bracket as they spent most or all of their working 

life. In addition, starting to save at a later age (or contributing only every other year) reduces the 

loss from opening a taxable savings account instead of an IRA simply because the accounts are 

worth less. 

35. The last statistic in Exhibit A is the effective tax increase in percent imposed by 

placing IRA investors into taxable savings accounts. For instance, if, in a particular run of the 

model, the effective tax rate on an IRA is 25 percent, and the effective tax rate on a taxable 

savings account is 35 percent, then the effective tax increase on retirement savings is 40 percent ( 

= 10 percent / 25 percent). For an investor who begins an account at age 30 and contributes 

every year, the median effective tax increase in moving from a Roth IRA to a taxable account is 

62.6 percent; the equivalent figure for a traditional IRA is 158.0 percent. Again, the tax increase 
15 

imposed on a traditional IRA holder is larger because, in addition to the tax benefits of IRAs 

generally, the investor also loses the benefit of paying taxes at the lower rate applicable during 

retirement. The 5th-to-95th percentile of the tax rate increase is 52.6 percent to 72.0 percent for 

the Roth IRA, and 145.8 percent to 169.1 percent for the traditional IRA, indicating that in all or 

nearly all cases, the investor would be expected to suffer a substantial tax increase. 

36. Contributing only every other year has little effect on these effective tax increase 

estimates. The effective tax increases do depend to some degree on the age at which the investor 

begins the accounts, but the median tax increase is never less than 32.9 percent at any age, and 

even at the 5th percentile, the tax increases for investors of different ages are at or above 28 

percent. Hence, investors of all types are very likely to experience a substantial tax increase if, 

as a consequence of the DOL’s proposed amendments, they open taxable accounts instead of 

IRAs. 

37. One factor not incorporated into our model is the penalty for early withdrawal 

imposed on IRAs. Investors always face the temptation to raid retirement savings in response to 

financial shocks and other needs.33 For IRAs, the law imposes a 10 percent additional tax on 

early distributions from both traditional and Roth IRAs in most cases.34 No such additional tax 

applies to taxable accounts. This difference in incentives may make it more likely that investors 

maintain their savings in IRAs, relative to taxable accounts. If so, then the difference in account 

balances between IRAs and taxable accounts at the time of retirement will be even larger than we 

estimate in our model. 

                                                            

33. Gene Amromin and Paul Smith (2003) “What Explains Early Withdrawals from Retirement 

Accounts? Evidence from a Panel of Taxpayers,” National Tax Journal 56(3):595-612. 

34. Internal Revenue Service, “Topic 557,” http://www.irs.gov/taxtopics/tc557.html [accessed July 

15, 2015]. 
16 

38. While, as noted above, the typical IRA investor has household income higher than 

the U.S. median, IRAs are nevertheless popular investments for households of all income levels. 

In order to better understand the effects of placing IRA investors into taxable savings accounts, 

we therefore also ran variants of the model, assuming different household income levels for the 

investor. For illustrative purposes, we focused on the specification of the model in which the 

investor begins an account at age 30 and contributes every year. As discussed above, we 

estimate the median household income of such an investor at age 30 as $72,729. In Exhibit B, 

we also ran the model assuming the investor’s household income at age 30 was either higher or 

lower than this value by 10 percent or 25 percent, producing a range between $54,547 and 

$90,911. In 2011, this range of household incomes would encompass approximately the 54th

percentile up to the 80th percentile of the distribution of the household incomes of 30-year-olds in 

the U.S.35

39. As in Exhibit A, we report in Exhibit B the median, 5th, and 95th percentiles of 

account values, effective tax rates, lost retirement income, and effective tax increases when 

opening a taxable savings account instead of an IRA. Exhibit B shows that higher income 

households have higher account values at retirement, since they are able to contribute more to 

their accounts each year. Effective tax rates on all accounts also generally rise with income, 

consistent with the progressive tax structure. Placing higher income IRA investors into taxable 

savings accounts sometimes involves larger tax increases and sometimes involves lower tax 

increases, relative to lower income investors, due to the different tax brackets during the working 

career and retirement for households of different incomes. At all income levels considered, 

however, the median tax increase for an investor who would have opened a Roth IRA but instead 

                                                            

35. U.S. Census Bureau, 2011 Annual Social and Economic (ASEC) Supplement, HINC-02, Total All 

Races. 
17 

opens a taxable account is greater than 62 percent, and the median tax increase for an investor 

who would have opened a traditional IRA but instead opens a taxable account is greater than 73 

percent. Thus, investors with a wide range of incomes would experience substantial losses if the 

DOL’s proposed amendments reduced their access to IRAs. 

B. Implications for Retirement Security 

40. The effective tax increases calculated above are clearly substantial, but in order to 

make these results concrete, we examined the impact these tax increases would have on 

investors’ retirement security. To illustrate, we considered the effect for investors initiating 

accounts at age 30, as described above, and contributing annually throughout the working life. 

Immediately before retirement (i.e., in 2049, at age 64), the investor’s household income is 

$250,141 (in nominal 2049 dollars, not current dollars). As noted above, the typical retirement 

income replacement rate, relative to pre-retirement income, is about 60 percent, so suppose this 

investor was able to maintain retirement income at about $150,085 (again, in nominal 2049 

dollars).36 

41. In Appendix C, we use the Social Security Administration’s benefit formula to 

project the annual Social Security payment this investor would receive at the time of retirement 

in 2050 as $83,291. This means that the investor’s savings must cover the remaining $66,794 

each year.37 In Exhibit A above, we estimated median account values at retirement for the 

investor of $916,524 for a Roth IRA, $1,021,747 for a traditional IRA, and $736,068 for a 

taxable savings account. Of course, investors may also have other assets that they can use to 

fund their retirement, but these figures indicate that an investor can fund her retirement at the 

                                                            

36. $150,085 = $250,141 x 60 percent. 

37. $66,794 = $150,085 - $83,291. 
18 

desired level for approximately 13.7 years with a Roth IRA, 15.3 years with a traditional IRA, 

and 11.0 years with a taxable savings account.38 

42. This means that if, as a consequence of the DOL’s proposed amendments, an 

investor opens a taxable savings account instead of an IRA, they would lose approximately 2.7 

years of fully-funded retirement based on a Roth IRA, and approximately 4.3 years based on a 

traditional IRA. For an investor who expects roughly 20 years of retirement, this reflects a 13.5 

percent or 21.4 percent reduction in fully-funded retirement, respectively. 

C. Aggregate Tax Increase Estimates 

43. Finally, we also estimated the potential overall dollar impact to U.S. investors 

from the effective tax increases calculated above. Our calculation necessarily is a rough 

estimate, and relies on several assumptions for which there is some uncertainty. The actual 

impact may be larger or smaller than we calculate here. Nevertheless, this illustrates that the 

total impact may be very large if investors open taxable accounts instead of IRAs as a 

consequence of the proposed amendments. It must therefore be seriously considered in any 

reasonable cost-benefit analysis of the proposed amendments. 

44. The DOL has indicated that in 2013, 34 million U.S. households had IRAs, and 

41 percent of IRA-owning households reported holding IRAs at brokerages.39 This implies there 

are approximately 14.0 million U.S. households with brokerage IRAs. As noted above, we 

understand that, as a consequence of the proposed amendments, many of the firms offering these 

                                                            

38. We ignore additional investment returns after retirement for these calculations. This is appropriate 

if investors switch to less risky assets that provide expected returns that do not exceed inflation by much. If 

investors are able to maintain returns above inflation during retirement, then these accounts can fund more years of 

retirement at the desired level, and the differences between the accounts in the number of years funded will be 

higher. This is one reason why the results presented here may be conservative. 

39. Department of Labor (2015) “Fiduciary Investment Advice: Regulatory Impact Analysis,” at 52 & 

53. 
19 

accounts have indicated they will restrict the availability of new IRAs with balances less than 

$25,000. Therefore, the proposed amendments have the potential to affect all households that 

(absent the amendments) would have started brokerage IRAs either from a contribution or a 

rollover of less than $25,000. 

45. The DOL has claimed that approximately half of all existing IRAs include no 

rollover funds.40 Moreover, many IRAs initiated with rollover funds were likely started with less 

than $25,000. Indeed, the median traditional IRA rollover amount was only $22,840 in 2012.41 

To be conservative, we assume that only half of the 14.0 million U.S. households with brokerage 

IRAs started those accounts with a contribution or a rollover less than $25,000. 

46. Available data indicates that the average value (in 2013 dollars) of an IRA held by 

a 65-year-old investor is $188,976.42 This reflects all IRAs, not only brokerage IRAs, but we are 

not aware of any available data providing information on average balances at age 65 among only 

brokerage IRAs. If the average balance for the 7.0 million households calculated above was 

$188,976 (in 2013 dollars) at the time these households retire, then these accounts would be 

worth, in total, $1,323 billion upon retirement. 

47. We do not know whether the proposed amendments will affect these 7.0 million 

households who hold existing IRAs, but even if their access to existing IRAs is not affected, 

these households will, over time, be replaced with new households who may be affected if their 

ability to start new IRAs is impaired. The median results of the model for all ages of investors 

(as reported in Exhibit A) indicate that, at the time of retirement, taxable saving accounts have a 

                                                            

40. Id., at 54. 

41. Investment Company Institute (2014) “The IRA Investor Profile: Traditional IRA Investors’ 

Activity, 2007 - 2012,” at 36. 

42. Craig Copeland (2014) “Individual Retirement Account Balances, Contributions, and Rollovers, 

2013; With Longitudinal Results 2010-2013: The EBRI IRA Database,” Employee Benefit Research Institute Issue 

Brief 414, at 9 (indicating average IRA balance of $165,139 for individuals 60-64 and $212,812 for individuals 65-

70; the average of these two figures is $188,976). 
20 

value that is between 11.1 percent and 21.9 percent lower than Roth IRAs, and between 18.2 

percent and 28.1 percent lower than traditional IRAs. This provides a range of the potential 

effect on savings at the time of retirement if investors forego IRAs for taxable accounts. 

48. Applying this range to the estimated $1,323 billion in IRA savings at the time of 

retirement for 7.0 million future households similar to those existing today, the potential investor 

losses due to a regulation that moves these households into taxable accounts would be between 

147 billion and 372 billion. 

49. These losses would be spread out over many years, of course, as some of the 7.0 

million households in question would likely not retire until well into the future. Moreover, it is 

possible some of these households could avoid or mitigate the impact of the effective tax 

increases we calculate by finding other ways to invest in IRAs, such as through non-commissionbased accounts or by putting off starting an IRA until a later age when greater rollover assets 

may be available to them. (Of course, these alternative options may involve costs as well.) 

Nevertheless, these figures do illustrate that the potential total impact to U.S. savers of any 

regulation that restricts access to IRAs may be very large and must be at least considered in any 

reasonable cost-benefit analysis of such a regulation. 
Exhibit A

Summary of Model Estimates of Tax Impact of Placing IRA Investors Into Taxable Accou

Untaxed1

Traditional 

IRA Roth IRA

Taxable 

Account

Traditional 

IRA

Roth 

IRA

Taxable 

Account

Relative to 

Traditional IRA

Relative to 

Roth IRA

Median Values (50th Percentile)

30 Annual $1,202,055 $1,021,747 $916,524 $736,068 15.0% 23.8% 38.7% $286,046 $179,541 30 Biennial $623,203 $529,723 $475,040 $380,843 15.0% 23.8% 38.8% $149,021 $93,930 35 Annual $816,199 $612,149 $612,149 $480,709 25.0% 25.0% 41.0% $131,057 $131,057 35 Biennial $418,982 $314,237 $314,237 $245,492 25.0% 25.0% 41.3% $68,425 $68,425 40 Annual $530,698 $398,024 $398,024 $325,439 25.0% 25.0% 38.7% $72,553 $72,553 40 Biennial $277,475 $208,106 $208,106 $169,772 25.0% 25.0% 38.8% $38,339 $38,339 45 Annual $306,697 $260,693 $230,023 $204,503 15.0% 25.0% 33.2% $55,907 $25,202 45 Biennial $157,224 $133,640 $117,918 $104,386 15.0% 25.0% 33.5% $29,197 $13,433 

5th Percentile Values (95% of Outcomes Involve Larger Values)

30 Annual $586,141 $498,220 $444,695 $364,754 15.0% 23.3% 36.9% $131,965 $77,816 30 Biennial $302,958 $257,514 $229,727 $188,380 15.0% 23.3% 37.0% $68,584 $40,494 35 Annual $418,407 $313,805 $313,805 $265,144 25.0% 25.0% 36.6% $48,499 $48,499 35 Biennial $211,518 $158,639 $158,639 $133,429 25.0% 25.0% 37.0% $25,402 $25,402 40 Annual $300,127 $225,095 $225,095 $196,335 25.0% 25.0% 34.6% $28,909 $28,909 40 Biennial $156,689 $117,517 $117,517 $102,111 25.0% 25.0% 34.6% $15,158 $15,158 45 Annual $185,452 $157,635 $139,089 $124,898 15.0% 25.0% 32.0% $32,883 $14,066 45 Biennial $93,845 $79,768 $70,384 $62,662 15.0% 25.0% 32.3% $16,863 $7,424 

95th Percentile Values (95% of Outcomes Involve Smaller Values)

30 Annual $2,473,732 $2,102,672 $1,891,507 $1,495,796 15.0% 24.3% 40.4% $606,129 $398,323 30 Biennial $1,289,872 $1,096,391 $986,903 $778,113 15.0% 24.3% 40.5% $318,622 $209,811 35 Annual $1,534,900 $1,151,175 $1,151,175 $865,575 25.0% 25.0% 43.7% $285,561 $285,561 35 Biennial $796,981 $597,736 $597,736 $447,234 25.0% 25.0% 44.0% $150,603 $150,603 40 Annual $927,703 $695,777 $695,777 $546,565 25.0% 25.0% 41.3% $151,255 $151,255 40 Biennial $488,306 $366,230 $366,230 $285,822 25.0% 25.0% 41.5% $80,123 $80,123 45 Annual $496,239 $421,803 $372,179 $329,396 15.0% 25.0% 34.5% $92,870 $43,711 45 Biennial $258,089 $219,375 $193,566 $170,684 15.0% 25.0% 34.8% $48,972 $23,497 

Note: See text for assumptions regarding income at inception, income growth rate, inflation rate, investment returns, and other parameters.1. Untaxed account value is reported in order to identify effective tax rates.3. Lost retirement savings is difference in dollar value between taxable account and specified IRA account at time of retirement.2. Effective tax rate is loss in specified account value, relative to untaxed account, at time of retirement. For instance, if an untaxed account would be worth account would be worth $800,000, then the effective tax rate is 20%.4. Effective tax increase is percentage increase in effective tax rate between taxable account and specified IRA. For instance, if the effective tax rate on a taxeffective tax rate on an IRA is 25 percent, then the effective tax increase is 40% ((35% - 25%) / 25%).

Account Value at Retirement 

(Nominal $ at Time of Retirement)

Effective Tax Rate on Retirement 

Savings2 Age at 

Account 

Inception

Contribution Frequency

Lost Retirement Savings From 

Taxable Acct.3
Exhibit B

Summary of Model Estimates of Tax Impact of Placing IRA Investors Into Taxable A

30-Year-Old Account Holder Making Annual Contributions

Various Initial Income Levels

Untaxed1

Traditional 

IRA Roth IRA

Taxable 

Account

Traditional 

IRA Roth IRA

Taxable 

Account

Relative to 

Traditional IRA

Relative to 

Roth IRA

$54,547 $901,545 $766,314 $748,296 $631,862 15.0% 17.1% 30.0% $135,149 $116,292 $65,456 $1,081,848 $919,571 $861,046 $698,208 15.0% 20.5% 35.5% $222,911 $162,351 $72,729 $1,202,055 $1,021,747 $916,524 $736,068 15.0% 23.8% 38.7% $286,046 $179,541 $80,002 $1,322,262 $991,697 $991,697 $748,521 25.0% 25.0% 43.4% $243,303 $243,303 $90,911 $1,495,024 $1,121,268 $1,126,455 $847,465 25.0% 24.6% 43.3% $273,541 $279,053 

5th Percentile Values (95% of Outcomes Involve Larger Values)

$54,547 $439,608 $373,667 $359,700 $307,331 15.0% 16.2% 28.6% $65,817 $51,680 $65,456 $527,526 $448,397 $413,849 $341,857 15.0% 19.3% 34.1% $105,480 $70,444 $72,729 $586,141 $498,220 $444,695 $364,754 15.0% 23.3% 36.9% $131,965 $77,816 $80,002 $644,756 $483,567 $483,567 $393,465 25.0% 25.0% 38.9% $89,977 $89,977 $90,911 $725,301 $543,976 $549,053 $445,299 25.0% 24.3% 38.6% $98,726 $103,331 

95th Percentile Values (95% of Outcomes Involve Smaller Values)

$54,547 $1,855,308 $1,577,011 $1,550,245 $1,300,330 15.0% 18.4% 31.3% $276,875 $253,013 $65,456 $2,226,355 $1,892,402 $1,788,560 $1,434,272 15.0% 22.0% 36.9% $460,337 $360,193 $72,729 $2,473,732 $2,102,672 $1,891,507 $1,495,796 15.0% 24.3% 40.4% $606,129 $398,323 $80,002 $2,721,109 $2,040,831 $2,040,831 $1,468,177 25.0% 25.0% 46.1% $569,552 $569,552 $90,911 $3,082,532 $2,311,899 $2,318,621 $1,663,083 25.0% 24.8% 46.2% $646,241 $652,563 

Note: See text for assumptions regarding income at inception, income growth rate, inflation rate, investment returns, and other parameters.

1. Untaxed account value is reported in order to identify effective tax rates.3. Lost retirement savings is difference in dollar value between taxable account and specified IRA account at time of retirement.2. Effective tax rate is loss in specified account value, relative to untaxed account, at time of retirement. For instance, if an untaxed account IRA or taxable account would be worth $800,000, then the effective tax rate is 20%.4. Effective tax increase is percentage increase in effective tax rate between taxable account and specified IRA. For instance, if the effective percent and the effective tax rate on an IRA is 25 percent, then the effective tax increase is 40% ((35% - 25%) / 25%).

Median Values (50th Percentile)

Household 

Income at 

Age 30

Account Value at Retirement 

(Nominal $ at Time of Retirement)

Effective Tax Rate on Retirement 

Savings2

Lost Retirement Savings From 

Taxable Acct.3
1 

Appendix A: About Compass Lexecon 

Compass Lexecon is an economic consulting firm that specializes in the application of 

economics to a variety of legal and regulatory issues. Compass Lexecon has a professional staff 

of more than 325 individuals and fourteen offices throughout the United States, Europe and 

South America. Compass Lexecon also maintains affiliations with leading academics including 

several Nobel Prize winners in Economics. 

Lexecon, Compass Lexecon’s predecessor firm, was founded in 1977 by, among others, 

then Professor (now Judge) Richard A. Posner of the Seventh Circuit Court of Appeals. 

Compass Lexecon was formed in January 2008 through the combination of Lexecon with 

Competition Policy Associates, another premier economic consulting firm. Compass Lexecon is 

a wholly owned subsidiary of FTI Consulting, Inc., a global business advisory firm. Professor 

Daniel R. Fischel currently serves as Compass Lexecon’s Chairman and President. 

Compass Lexecon’s practice areas include antitrust, securities and financial markets, 

intellectual property, accounting, valuation and financial analysis, pension economics and policy, 

corporate governance, bankruptcy and financial distress, derivatives and structured finance, class 

certifications and employment matters, damages calculations, business consulting, regulatory 

investigations and public policy. 

Compass Lexecon’s clients include the United States Department of Justice and other 

agencies of the federal government, state and local governments, regulatory bodies, major 

corporations, investor groups, and leading law firms across the globe. 

For more information about Compass Lexecon, see its website at: 

www.compasslexecon.com
1 

Appendix B: Materials Relied Upon 

Public Documents 

80 FR 21927 (April 20, 2015) 

Internal Revenue Service, Publication 590-A (2014) 

Internal Revenue Service, Publication 17 (2014) 

U.S. Census Bureau, 2011 Annual Social and Economic (ASEC) Supplement, HINC-02, Total 

All Races 

26 U.S.C. § 219 : US Code - Section 219: Retirement savings 

Department of Labor (2015) “Fiduciary Investment Advice: Regulatory Impact Analysis” 

Articles & Books: 

Sarah Holden and Daniel Schrass (2015) “Appendix: Additional Data on IRA Ownership in 

2014,” ICI Research Perspective 21(1A) 

B. Douglas Bernheim, Jonathan Skinner, and Steven Weinberg (1997) “What Accounts for the 

Variation in Retirement Wealth Among U.S. Households?” NBER Working Paper 6227 

Andrew G. Biggs and Glenn R. Springstead (2008) “Alternate Measures of Replacement Rates 

for Social Security Benefits and Retirement Income,” Social Security Bulletin 68(2) 

Craig Copeland (2014) “Individual Retirement Account Balances, Contributions, and Rollovers, 

2013; With Longitudinal Results 2010-2013: The EBRI IRA Database,” Employee Benefit 

Research Institute Issue Brief 414, May 2015 

Craig Copeland (2014) “IRA Asset Allocation, 2012, and Longitudinal Results, 2010 – 2012,” 

Employee Benefit Research Institute Notes 35 

Robert D. Arnott, Andrew L. Berkin, and Jia Ye (2001) “Loss Harvesting: What’s It Worth to 

the Taxable Investor?” First Quadrant Perspective, No. 1. 

Brad M. Barber and Terrance Odean (2003) “Are individual investors tax savvy? Evidence from 

retail and discount brokerage accounts,” Journal of Public Economics 88 

William H. Greene (2012) Econometric Analysis (7th ed.), Prentice Hall 

Gene Amromin and Paul Smith (2003) “What Explains Early Withdrawals from Retirement 

Accounts? Evidence from a Panel of Taxpayers,” National Tax Journal 56(3) 
2 

Investment Company Institute (2014) “The IRA Investor Profile: Traditional IRA Investors’ 

Activity, 2007 - 2012” 

Websites: 

U.S. Census Bureau, 2011 Annual Social and Economic (ASEC) Supplement, HINC-02, Total 

All Races, 

http://www.census.gov/hhes/www/cpstables/032012/hhinc/hinc02_000.htm [accessed July 17, 

2015]. 

U.S. Census Historical Income Table H.10, 

http://www.census.gov/hhes/www/income/data/historical/household/index.html [accessed July 7, 

2015] 

https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professionalforecasters/2015/survq215 [accessed July 7, 2015] 

http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs [accessed July 10, 2015] 

Internal Revenue Service, “Retirement Topics – IRA Contribution Limits,” 

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRAContribution-Limits [accessed July 7, 2015] 

http://www.ssa.gov/oact/cola/cbbdet.html [accessed July 17, 2015]. 

 http://www.ssa.gov/oact/TR/TRassum.html [accessed July 17, 2015]. 

http://www.ssa.gov/oact/cola/piaformula.html
1 

Appendix C: Estimated Social Security Payments 

1. We estimated the annual Social Security payout for a 30-year-old in 2015 who 

retires in 2050. As noted above, we assumed household income at age 30 of $72,729, and 

increased this income by approximately 4.5 percent per year until age 65.1 We indexed these 

earnings to the investor’s age 60 year (i.e., 2045, two years before retirement eligibility) 

according the Social Security Administration’s most recent projections for the National Average 

Wage Index (NAWI).2 These are reported in the table below. The Average Indexed Monthly 

Earnings (AIME) is the sum of these indexed earnings over the entire 35 year period, divided by 

420 months during that period.3 This value is $18,527. 

2. The Primary Insurance Amount (PIA) is calculated as a function of two “bend 

points” that serve to graduate Social Security benefits for high-income households. These bend 

points can be calculated based on future values of NAWI, projected as described above, and are 

reported for each year in the table below. The table indicates that, in the investor’s age 62 year 

(the first year of retirement eligibility), the two bend points are projected to be B1 = $2,876 and 

B2 = $17,334. 

3. If B1 and B2 are the two bend points, then the PIA is equal to 0.9 x B1 + 0.32 x 

(B2 – B1) + 0.15 x (AIME – B2).4 At age 62, the PIA for this investor is projected to be $7,394. 

This value is then increased between ages 62 and 65 at the projected future COLA of 2.7 

percent.5

 A 30-year-old investor today was born in 1985. Therefore, under current regulations, 

                                                            

1. The assumed incomes are always below the Contribution and Benefit Base that constitutes the 

maximum annual earnings relevant for the calculation of Social Security benefits. 

http://www.ssa.gov/oact/cola/cbbdet.html [accessed July 17, 2015]. 

2. http://www.ssa.gov/oact/TR/TRassum.html [accessed July 17, 2015]. Earnings after age 60 are 

not indexed. 

3. We assume all of the investor’s highest 35 years of earnings take place after age 30. 

4. http://www.ssa.gov/oact/cola/piaformula.html [accessed July 17, 2015]. 

5. Id. 
2 

if this investor retires at age 65, he receives a monthly Social Security benefit equal to 86.67 

percent of the COLA-adjusted PIA, or $6,941. On an annual basis, this is $83,291.6

 

                                                            

6. $83,291 = $6,941 x 12. 
3 

Indexed Earnings and Bend Points for Social Security Benefit Calculation 

Year Age 

Assumed 

Household 

Income1

Projected 

NAWI Growth 

Rate2

Projected 

NAWI3

Index 

Earnings to 

Age 60 Year4

Projected 

Bend Point 

15

Projected 

Bend Point 25

2013 28 1.8% $44,888 

2014 29 3.7% $46,549 

2015 30 $72,729 4.9% $48,830 $232,700 $826 $4,980 

2016 31 $75,420 5.0% $51,271 $229,818 $857 $5,164 

2017 32 $78,211 4.9% $53,784 $227,189 $899 $5,418 

2018 33 $81,104 4.7% $56,312 $225,020 $944 $5,688 

2019 34 $84,105 4.3% $58,733 $223,725 $990 $5,967 

2020 35 $87,217 4.1% $61,141 $222,865 $1,036 $6,248 

2021 36 $90,444 4.1% $63,648 $222,009 $1,081 $6,516 

2022 37 $93,791 4.0% $66,194 $221,369 $1,125 $6,783 

2023 38 $97,261 3.9% $68,775 $220,943 $1,171 $7,062 

2024 39 $100,859 3.8% $71,389 $220,730 $1,218 $7,344 

2025 40 $104,591 3.8% $74,101 $220,517 $1,266 $7,630 

2026 41 $108,461 3.8% $76,917 $220,305 $1,314 $7,920 

2027 42 $112,474 3.8% $79,840 $220,092 $1,364 $8,221 

2028 43 $116,636 3.8% $82,874 $219,880 $1,416 $8,534 

2029 44 $120,951 3.8% $86,023 $219,669 $1,470 $8,858 

2030 45 $125,426 3.8% $89,292 $219,457 $1,525 $9,195 

2031 46 $130,067 3.8% $92,685 $219,245 $1,583 $9,544 

2032 47 $134,880 3.8% $96,207 $219,034 $1,644 $9,907 

2033 48 $139,870 3.8% $99,863 $218,823 $1,706 $10,283 

2034 49 $145,045 3.8% $103,658 $218,612 $1,771 $10,674 

2035 50 $150,412 3.8% $107,597 $218,402 $1,838 $11,080 

2036 51 $155,977 3.8% $111,686 $218,191 $1,908 $11,501 

2037 52 $161,748 3.8% $115,930 $217,981 $1,980 $11,938 

2038 53 $167,733 3.8% $120,335 $217,771 $2,056 $12,391 

2039 54 $173,939 3.8% $124,908 $217,561 $2,134 $12,862 

2040 55 $180,375 3.8% $129,654 $217,352 $2,215 $13,351 

2041 56 $187,049 3.8% $134,581 $217,142 $2,299 $13,858 

2042 57 $193,970 3.8% $139,695 $216,933 $2,386 $14,385 

2043 58 $201,147 3.8% $145,004 $216,724 $2,477 $14,931 

2044 59 $208,589 3.8% $150,514 $216,515 $2,571 $15,499 

2045 60 $216,307 3.8% $156,233 $216,307 $2,669 $16,088 

2046 61 $224,310 3.8% $162,170 $224,310 $2,770 $16,699 

2047 62 $232,610 3.8% $168,333 $232,610 $2,876 $17,334 

2048 63 $241,216 3.8% $174,729 $241,216 $2,985 $17,992 

2049 64 $250,141 3.8% $181,369 $250,141 $3,098 $18,676 

1. As described above, income is based on typical IRA investor income at age 30, and increased at approximately 

4.5 percent per year. 

2. Source: http://www.ssa.gov/oact/TR/TRassum.html. 

3. Calculated as prior year NAWI, increased at projected growth rate. 

4. Calculated as Household Income x (Specified Year NAWI / NAWI in 2045), and equal to Household Income 

after 2045. 

5. Calculated as $180 x (NAWI from 2 years prior / $9,779.44). See 

http://www.ssa.gov/oact/cola/piaformula.html. 

6. Calculated as $1,085 x (NAWI from 2 years prior / $9779.44). See 

http://www.ssa.gov/oact/cola/piaformula.html. 
APPENDIX 6
GIBBON DUNN

July 20, 2015

VIA ELECTRONIC MAIL

Office of Regulation and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

U.S. Department of Labor

200 Constitution Ave., NW

Washington, DC 20210

Re: Definition of the Term "Fiduciary"; Conflict of Interest Rule—Retirement

Investment Advice (RIN 1210-AB32);

Proposed Best Interest Contract Exemption (ZRIN 1210-ZA25~

To the Office of Regulation and Interpretations:

Gibson, Dunn & Crutcher LLP

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036-5306

Tel 202.955.8500

www.gibsondunn.com

Eugene Scalia

Direct. +1 202,955.8206

Fax: +1 202.530.9606

EScalia@gibsondunn.com

I write to comment on the rules proposed by the Employee Benefits Security

Administration to broaden the definition of "fiduciary" under ERISA and the Internal

Revenue Code, and to institute "best interest contract" requirements for financial

representatives falling within this new definition. The purpose of this comment is to address

certain legal flaws in the rulemakings and proposed rules.

The Department states that "changes in the marketplace" and its "experience" with

the current definition of fiduciary have caused it to propose a new regulatory framework for

broker-dealers and IRAs. Definition of the Term "Fiduciary"; Conflict of Interest Rule—

Retirement Investment Advice, 80 Fed. Reg. 21,928, 21,932 (Apr. 20, 2015) (to be codified

at 29 C.F.R. pts. 2509, 2510). The DOL also asserts that broker-dealers labor under conflicts

of interest that cause them to act contrary to their client's interests, which warrants a

regulatory response by the Department. Id. at 21,934.

The Department's assertion that "conflicted investment advice" by broker-dealers has

resulted in substantial investment underperformance might—if accurate—be reason to call

on Congress to enact corrective legislation. Indeed, Congress has already acted in the area

by authorizing the Securities and Exchange Commission to establish a fiduciary standard of

conduct for brokers and dealers consistent with the standard applicable to investment

advisers under the Investment Advisers Act of 1940 ("IAA" or the "Advisers Act"). DoddFrank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203,

§ 913(g), 124 Stat. 1376, 1828 (2010). But the Department's perceptions ofbroker-dealers

Beijing •Brussels •Century City •Dallas •Denver •Dubai •Hong Kong •London •Los Angeles •Munich

New York •Orange County •Palo Alto •Paris •San Francisco •Sao Paulo •Singapore •Washington, D.C.
GIBBON DUNN

July 20, 2015

Page 2

and investment performance do not empower it to radically rewrite its long-standing

definition of "fiduciary investment advice" in a manner that conflicts with ERISA's plain

statutory language, its common law roots, and the framework established by Congress for the

regulation ofbroker-dealers and investment advisers. Nor do the Department's policy views

authorize it to deploy its exemptive authority to construct a whole new regulatory and

enforcement regime for IRAs and broker-dealers.

For at least two overarching reasons, therefore, the Department's expansive new

regulatory program is legally flawed.

First, the Department's proposed interpretation of "fiduciary" is vastly overbroad and

impermissible. In enacting ERISA's fiduciary definition, Congress drew upon principles of

trust law and the law governing investment advisers and broker-dealers that must be

considered in interpreting the statute today. See Corning Glass Works v. Brennan, 417 U.S.

188, 201 (1974); Blitz v. Donovan, 740 F.2d 1241, 1245 (D.C. Cir. 1984). Under trust law, a

fiduciary relationship arises in the context of a relationship of special "trust and confidence"

between the parties. The DOL proposal, however, would deem persons to be fiduciaries

where those hallmarks of a fiduciary relationship are absent, for example, when making a

recommendation regarding a single transaction. See 80 Fed. Reg. at 21,934. Further,

ERISA's reference to "render[ing] investment advice for a fee or other compensation"

incorporates terminology in the IAA, which—in accordance with the industry understanding

and practice when the IAA was enacted—excludes broker-dealers executing sales from the

definition of "investment adviser." That is because the payment to broker-dealers is

principally for the product acquired or sold, not the advice. That limitation is incorporated in

ERISA: The phrase "render[ing] investment advice for a fee" by its terms means that the

payment is principally made for the investment advice provided, and not for execution of a

financial transaction or the sale of a financial product.

Second, the Department lacks the authority~to establish new standards and a

regulatory and enforcement program for broker-dealers. In the Dodd-Frank Wall Street

Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), Congress committed the

authority to establish uniform fiduciary duty standards for broker-dealers and investment

advisers to the SEC—the agency that has long held principal regulatory responsibility in that

area—and only after the Commission completed a study on the effects of any such standards.

DOL may not front-run the Commission by crafting its own new standards and enforcement

program, and certainly may not do so by bootstrapping its authority to interpret "fiduciary"

into a sweeping new regulatory program replete with private rights of action and mandatory

class actions.
GIBBON DUNN

July 20, 201 s

Page 3

DISCUSSION

I. The Department's Definition Of "Fiduciary" Is Vastly Overbroad And

Impermissible.

The Department has proposed a definition of "fiduciary" so broad that it must be

accompanied by seven carve-outs and six prohibited transaction exemptions to limit the

scope of even a small portion of the vast new regulatory regime it would establish over

broker-dealers and the IRA market. A regulatory definition that cannot function or be

harmonized with generations of practice unless it is re-worked through a dizzying array of

carve-outs and exemptions is, axiomatically, a definition that does not faithfully interpret the

words Congress wrote.

ERISA does not allow for this expansive new definition. Indeed, as discussed below,

its plain text precludes it.

A. The Proposed Definition Conflicts With ERISA's Plain Text.

ERISA is a "comprehensive and reticulated statute," Nachman Corp. v. PBGC, 446

U.S. 359, 361 (1980), and its definition of "fiduciary" is no different. Under ERISA,

[A] person is a fiduciary with respect to a plan to the extent (i) he exercises

any discretionary authority or discretionary control respecting management of

such plan or exercises any authority or control respecting management or

disposition of its assets, (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, or (iii) he has any

discretionary authority or discretionary responsibility in the administration of

such plan.

29 U.S.C. § 1002(21)(A) (emphasis added).

Congress did not develop this provision in a vacuum, but drew from existing law.

See, e.g., Firestone Tire &Rubber Co. v. Bruck, 489 U.S. 101, 110-11 (1989). That included

the law of trusts and the law embodied in, and developed under, the IAA. See infra pp. 4-6.

1 For simplicity, this comment refers to the proposed rule's interpretation of ERISA's

definition of "fiduciary," but the discussion applies equally to the Code's definition of

"fiduciary," which is identical as relevant here.
GIBBON DUNN

July 20, 2015

Page 4

In interpreting the definition of "fiduciary," therefore, both the common law of trusts and the

IAA must be consulted, since it is presumed that "Congress is knowledgeable about existing

law pertinent to the legislation it enacts." Goodyear Atomic Corp. v. Miller, 486 U.S. 174,

185 (1988).

1. A fundamental principle of trust law is that a "fiduciary" relationship arises only

under certain circumstances, specifically, where "special intimacy or ...trust and

confidence" exists between the parties. Bogert's Trusts &Trustees § 481; see also Black's

Law Dictionary 753 (rev. 4th ed. 1951) (defining "fiduciary" based on the "trust and

confidence involved" in the relationship). For example, at the time of ERISA's enactment,

courts had held relationships such as physician-patient or director-corporation stockholder to

be fiduciary based on the particularly close and trusting relationship between the parties.

See, e.g., Twin-Lick Oil Co. v. Marbury, 91 U.S. 587, 588 (1876) (recognizing that "a

director of a joint-stock corporation occupies [a] fiduciaxy relationship] [and] his dealings

with the subject-matter of his trust or agency, and with the beneficiary or party whose

interest is confided to his care" are protected by courts); Hammonds v. Aetna Cas. &Sur.

Co., 237 F. Supp. 96, 102 (N.D. Ohio 1965) (deeming physician a "fiduciary" to his patient

where patient "entrusted" information to the doctor).

Relationships lacking that special degree of "trust and confidence"—such as

everyday business interactions—are not fiduciary. The court in In re Codman, 284 F. 273,

274 (D. Mass. 1922), for example, rejected the contention that "the relation of the broker to

his margin customers is a fiduciary or trust relation," describing it instead as a "debtor and

creditor" relationship. And in Robinson v. Merrill Lynch, Pierce, Fenner &Smith, Inc., 337

F. Supp. 107, 113-14 (N.D. Ala. 1971), the court concluded that a broker "had no fiduciary

relationship to the plaintiff' where he was merely "executing the plaintiff's orders on an

open market."

These principles were well established by the time of ERISA's enactment and were

incorporated into ERISA. See Bruch, 489 U.S. at 110-11. As the report of the House of

Representatives stated in setting out ERISA's definition of the term, "[a] fiduciary is one

who occupies a position of confidence or trust." H.R. Rep. No. 93-533, at 11 (1973); see

also id. ("The fiduciary responsibility section, in essence, codifies and makes applicable to

these fiduciaries certain principles developed in the evolution of the law of trusts."). One

who does not occupy that position of heightened trust and confidence cannot be considered a

fiduciary under ERISA.

2. The law of trusts is not the only body of law that informs the meaning of

"fiduciary" in ERISA. So, too, does the law embodied in, and developed under, the IAA. In

the investment-advice prong of ERISA's definition of fiduciary, Congress used the phrase
GIBBON DUNN

July 20, 2015

Page 5

"renders investment advice for a fee or other compensation." That language reflects

terminology in the IAA, which for decades had held a central place in the regulation of

investment advisers, and which defines "investment adviser" as a person who `for

compensation ... advis[esJ others ... as to the value of securities or as to the advisability of

investing in, purchasing, or selling securities." 15 U.S.C. § 80b-2(a)(11) (emphasis added).

The language and history of the Advisers Act is informative of ERISA's meaning in

two ways. First, by the time of ERISA's enactment, investment advisers were widely

understood to be fiduciaries—and the reason they were fiduciaries was that they had a

closer, deeper relationship with their clients than did other financial professionals. Thus, the

Supreme Court wrote in 1963 that the Advisers Act "reflects a congressional recognition of

the delicate fiduciary nature of an investment advisory relationship"; therefore, "Congress

recognized the investment adviser to be" "a fiduciary." SEC v. Capital Gains Research

Bureau, Inc., 375 U.S. 180, 191, 194-95 (1963). In reaching this conclusion, the Court relied

on legislative history that recognized the "personalized character of the services of

investment advisers," id. at 191, and cited congressional testimony that characterized

investment advisers as having relationships of "trust and confidence with their clients," id. at

190 (internal quotation marks omitted). The Court cited this legislative history two decades

later in reiterating the fiduciary "character" of the investment-adviser relationship. Lowe v.

SEC, 472 U.S. 181, 190 (1985). Being an investment adviser, the Court said, is a "personalservice profession [which] depends for its success upon a close personal and confidential

relationship between the investment-counsel firm and its client. It requires frequent and

personal contact of a professional nature between [the advisers] and [their] clients." Id, at

195 (emphases altered and internal quotation marks omitted).

Second and related, when investment advisers were being described by the Court as

having the sort of "close and personal" relationship with clients—characterized by "frequent

and personal contact"—that rose to the level of a fiduciary relationship, the Court was not

considering investment advisers in isolation, but rather in contrast with other financial

professionals whose relationships did not rise to the same level, namely, broker-dealers.

Thus, the Advisers Act included acarve-out which clarified that "investment adviser" did not

include "any broker or dealer" who provided advice that was "solely incidental to the

conduct of his business as a broker or dealer and who receives no special compensation

therefor." 15 U.S.C. § 80b-2(a)(11)(C).

This exemption from the definition of investment adviser was not introduced by the

IAA, the D.C. Circuit has explained, but "reflected [a] distinction" then existing between the

"two general forms of compensation" that financial professionals received in connection with

offering investment assistance. Fin. Planning Assn v. SEC, 482 F.3d 481, 485 (D.C. Cir.

2007). "Some [representatives] charged only ...commissions (earning a certain amount for
GIBBON DUNN

July 20, 2015

Page 6

each securities transaction completed). Others charged a separate advice fee (often a certain

percentage of the customer's assets under advisement or supervision)." Id. This difference

in compensation structures—and the notion that a fee for advice was suggestive of a

fiduciary relationship, whereas a commission on a sale was not—was captured by the IAA in

the broker-dealer exemption. A financial representative became an "investment adviser"

when "[a]t least part [ofd the charge to customers receiving advice [was] attributable to such

advice," but not where the payment was principally for the sale of the product. SEC Op.,

1940 SEC LEXIS 1466, at *7 (1940); see also Thomas v, Metro. Life Ins. Co., 631 F.3d

1153, 1166 (10th Cir. 2011) ("[T]he IAA excludes abroker-dealer who provides advice that

is attendant to, or given in connection with, the broker-dealer's conduct as a broker or dealer,

so long as he does not receive compensation that is (1) received in exchange for the

investment advice, as opposed to ...the sale of the product, and (2) distinct from a

commission or analogous transaction-based form of compensation for the sale of a

product."). As explained in the Senate and House reports, the broker-dealer exemption was

"so defined as specifically to exclude ...brokers (insofar as their advice is merely incidental

to brokerage transactions for which they receive brokerage commissions)." S. Rep. No.

76-1775, at 22 (1940); H.R. Rep. No. 76-2639, at 28 (1940).

Following the IAA's enactment, this limitation on "investment advice" was

repeatedly recognized and enforced. In Robinson, for example, the district court concluded

that the broker was not an investment adviser and "had no fiduciary relationship to the

plaintiff' where "any investment advice was incidental to brokerage services." 337 F. Supp.

at 113-14. The SEC emphasized that "render[ing] investment advice merely as an incident to

...broker-dealer activities" does not by itself place broker-dealers "in a position of trust and

confidence as to their customers." Broker-Dealer Registration, Exchange Act Release No.

4048, 1948 WL 29537, at *7 (Feb. 18, 1948), aff'd, Hughes v. SEC, 174 F.2d 969 (D.C. Cir.

1949). See also Kaufman v. Merrill Lynch, Pierce, Fenner &Smith, Inc., 464 F. Supp. 528,

538 (D. Md. 1978) (broker not an investment adviser where "[tJhere is no indication that

[defendant] received any fees specifically for his advising [plaintiff ;rather it appears that

the commissions received were for his services in effecting the transactions, not for his

rendering of advice").

3. This understanding of what made investment advisers' relationship fiduciary in

character—as well as the form of compensation associated with it, and the difference from a

simple broker-dealer relationship—was well established when ERISA was enacted in 1974.

Accordingly, when Congress used the phrase "renders investment advice for a fee or other

compensation" in ERISA's fiduciary definition, it "is deemed to [have] known] the .. .

judicial gloss given to [that] language and thus [to have] adopted] the existing interpretation

unless it affirmatively acted] to change the meaning," Blitz v. Donovan, 740 F.2d 1241,

1245 (D.C. Cir. 1984) (internal quotation marks omitted). See also United States v. Wells,
GIBBON DUNN

July 20, 2015

Page 7

519 U.S. 482, 491 (1997) (it is presumed "that Congress incorporates the common-law

meaning of the terms it uses if those terms have accumulated settled meaning under the

common law and the statute does not otherwise dictate" (alterations and internal quotation

marks omitted)); Corning Glass Works v. Brennan, 417 U.S. 188, 201 (1974) ("[W]here

Congress has used technical words or terms of art, `it [is] proper to explain them by reference

to the art or science to which they [are] appropriate." (alterations in original) (quoting

Greenleaf v. Goodrich, 101 U.S. 278, 284 (1880))). Any interpretation of the investmentadvice prong must therefore be consistent with (1) the recognition under the law of trusts that

only relationships marked by a heightened degree of trust and confidence are fiduciary, and

(2) the common law recognition—embodied in the IAA—that broker-dealers providing

advice incidental to the sale of a product are not providing investment advice in a fiduciary

capacity. That meaning cannot be altered by Department of Labor regulation. See Chevron

U.S.A. Inc. v. Nat'l Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984); Thiess v. Witt, 100

F.3d 915, 918 (Fed. Cir. 1996) (agency interpretation of "compensation" impermissible

because it conflicted with the term's established meaning in the employment context).

The current regulatory interpretation, which was adopted shortly after enactment of

ERISA, reflected these established limitations on the meaning of "fiduciary." See 29 C.F.R.

§ 2510.3-21(c). The 1975 regulation appropriately clarifies that investment advice will

trigger fiduciary duties only when rendered "on a regular basis to the plan," "pursuant to a

mutual agreement" that the services will be a "primary basis" on which the plan makes

investment decisions. Id. Providing advice "on a regular basis," for example, reflects the

Supreme Court's recognition in Lowe, 472 U.S. at 191-95, that a fiduciary typically renders

advice in a close relationship characterized by "frequent" contact. This helps ensure

presence of the heightened "trust and confidence" associated with fiduciary status, and that

the advice is not merely "incidental" to the sale of a product.

The Department's proposal, by contrast, radically departs from these settled

limitations. The proposed rule conflicts with trust-law principles because it would deem

persons not in special relationships of "trust and confidence"—e.g., broker-dealers executing

sales—to be fiduciaries. To make a person a "fiduciary" for providing a "one-time .. .

recommendation or valuation" (80 Fed. Reg. at 21,934), for example, cannot reasonably be

viewed as consistent with the special relationship of trust and confidence envisioned under

the law of trusts—a relationship, the Supreme Court has said, characterized by "frequent and

personal contact." Lowe, 472 U.S. at 195 (emphasis omitted). The proposal reflects no

consideration of this trust-law principle (or others)—even though the DOL acknowledges

that the law of trusts must inform its interpretation of ERISA, 80 Fed. Reg. at 21,932,

21,938.
GIBBON DUNN

July 20, 2015

Page 8

The method applied by the Department in its proposal is instead to identify acts that

in its opinion should be performed by fiduciaries, and then to dub those actors fiduciaries

even when under the accepted meaning of that term and as a matter of historical fact, they are

not. In doing so, the Department departs not only from the accepted understanding of what

relationships are fiduciary in character, but also from the statutory requirement that an

investment fiduciary "render[ ]investment advice for a fee." Under this language, it is the

"advice" that must be the thing paid for, not the product that the purchaser selects, or the

transaction she conducts.Z Because a commissioned broker-dealer is only paid if a product is

purchased, the client's payment is plainly for the product, not for advice that might have

accompanied the sale.

The very definition of a broker is a "person engaged in the business of effecting

transactions in securities for the account of others," 15 U.S.C. § 78c(a)(4)(A); by definition,

he does not provide investment advice for a fee. Congress recognized this in the IAA by

excluding ordinary broker services from the "investment adviser" definition, as discussed

above. The Department's proposed definition ignores that exclusion, and instead

encompasses many activities customarily performed by broker-dealers that are not properly

considered "advice." For example, under the proposal, a broker's sales pitch is transformed

into advice when provided to a retail investor, but the same pitch is not advice when made to

an "expert plan investor." The Department's reasoning that an expert buyer will understand

"that it is buying an investment product, not advice," but that a retail buyer will not (80 Fed.

Reg. at 21,941-42), has no basis in principle or the long-standing financial regulatory

framework established by Congress. Sales pitches are a common experience, whether for

cars, electronics; or a range of financial products, and no ground exists for concluding that a

broker's offer is transformed into "advice" when tendered to a potentially less sophisticated

buyer.

The extent to which the Department's proposal captures activities ordinarily

conducted by broker-dealers is, in fact, powerful evidence of the over-breadth of its

"fiduciary" definition. At law, fiduciaries and broker-dealers are distinct, and broker-dealers

are paid by commission. But with its proposal, the Department first mis-defines "fiduciary"

The Department's proposed interpretation is also inconsistent with the term "render." To

"render" is "to pronounce or declare (a judgment, verdict, etc.), as in court," Webster's

New World Dictionary 1136 (3d ed. 1988), or "to furnish for consideration, approval, or

information: as (1) to hand down (a legal judgment) (2) to agree on and report (a

verdict)," Merriam-Webster's Collegiate Dictionary 1054 (11th ed. 2003). That means

something more than merely making investment suggestions the context of a sales

transaction.
GYBSON DUNN

July 20, 2015

Page 9

so broadly that it sweeps in hundreds of thousands ofbroker-dealers, and then locates a

supposed conflict of interest in broker-dealers being paid in exactly the manner they by

definition are paid. See Fin. PlanningAss'n, 482 F.3d at 485 ("Some [representatives]

charged only commissions (earning a certain amount for each securities transaction

completed). Others [which the Advisers Act treats as fiduciaries] charged a separate advice

fee (often a certain percentage of the customer's assets under advisement or supervision).").

It is not broker-dealers' compensation structure that is flawed, it is the Department's attempt

to define broker-dealers as fiduciaries.

B. The Department's Interpretation Also Conflicts With The Statutory

Definition Of "Fiduciary" As A Whole.

Section 3(21) of ERISA identifies three ways that a person or entity becomes a

fiduciary: by (i) "exercis[ing] any discretionary authority or discretionary control" over the

"management" of a plan or its assets; (ii) "render[ing] investment advice for a fee or other

compensation, direct or indirect"; and (iii) exercising "discretionary authority or

discretionary responsibility in" the plan's "administration." 29 U.S.C. § 1002(21)(A). The

management and administration of a plan are central functions, involving a meaningful,

substantial, and ongoing relationship to the plan. Subsection (ii) must be read in a manner

consistent with these provisions. Congress would not, for two of the provisions, have

required a substantial and direct connection to the essentials of plan operation, and for the

provision lying in-between have required only ashort-term relationship whose essence was

sales rather than significant investment advice provided on a regular basis. See Pollard v.

E.I. du Pont de Nemours & Co., 532 U.S. 843, 852 (2001) ("[W]e must not be guided by a

single sentence or member of a sentence, but look to the provisions of the whole law."

(alteration in original and internal quotation marks omitted)); Garcia v. Vanguard Car Rental

USA, Inc., 540 F.3d 1242, 1247 (11th Cir. 2008) ("By construing proximate statutory terms

in light of one another, courts avoid giving `unintended breadth to the acts of Congress."'

(quoting Gustafson v. Alloyd Co., 513 U.S. 561, 575 (1995))). This further demonstrates that

the definition in the proposed regulation is overbroad.

C. The Department Errs By Inexplicably Departing From Its 2005 Advisory

Opinion To Treat Actions In Connection With Rollovers As Fiduciary.

A significant consequence of the errors by the Department described above is that the

proposed rule would make any advice regarding investments of distributions from an ERISA

plan or IRA "fiduciary advice," regardless whether the advice is merely incidental to a sale

(or proposed sale), or whether it is specifically paid for, or even related to assets no longer

held by the plan. Thus, the proposed rule appears so broad that it might cover advice
GIBBON DUNN

July 20, 2015

Page 10

regarding investment of a distribution from an ERISA plan into an equity or debt security

rendered on a one-time basis.

That is improper, and directly contradicts the DOL's conclusion just ten years ago

that a recommendation regarding a rollover of plan assets to an IRA does not constitute

fiduciary advice. See Advisory Opinion 2005-23A. For an act to be fiduciary in character,

ERISA (and the Code) require, first, there be "advice" related to an "investment." 29 U.S.C.

§ 1002(21)(A)(ii). A distribution is not an investment; it follows that a recommendation to

rollover plan assets is outside the scope of the statute because it does not "concern[ ] a

particular investment."3 Advisory Opinion 2005-23A. Second, advice provided with respect

to the proceeds of a distribution does not fall within ERISA because the statute requires that

the advice relate to "any moneys or other property of [the ERISA] plan." 29 U.S.C.

§ 1002(21)(A)(ii). Upon distribution, the proceeds are no longer "moneys or other property"

of the plan and therefore do not fall within the scope of the statute. See Advisory Opinion

2005-23A; see also, e.g., Beeson v. Fireman's Fund Ins. Co., 2009 WL 2761469, at *6 (N.D.

Cal. Aug. 31, 2009) (stating that "providing financial advice as to the investment of non-plan

assets is generally not a fiduciary duty under ERISA" and noting that a DOL publication

"[did] not state that providing investment advice (or hiring advisors to do so) will be

considered a fiduciary act simply because the advice may cause participants to remove

money from a plan").

ERISA's plain language, accordingly, permits only one conclusion about whether

actions in connection with rollovers are fiduciary: They are not. Unlike the 2005 Advisory

Opinion, the DOL's current position regarding rollovers cannot be reconciled with the

statutory text. For that reason, it is precluded. See Chevron, 467 U.S. at 842-43.

II. The Department Lacks Statutory Authority To Adopt Its New Proposed

Regulatory Framework.

Together, the Department's "fiduciary" rule and "BIC" Exemption would

impermissibly expand the Department's authority outside its jurisdiction. As the Department

admits, the principal goal of the rulemaking is to regulate IRAs and the broker-dealers who

offer them (see 80 Fed. Reg. at 21,928, 21,932)—even though the DOL has no enforcement

authority over IRAs. Congress, moreover, recently made clear that the SEC, not the DOL,

should be the arbiter of what fiduciary standards of conduct should govern broker-dealers,

3 Similarly, providing a valuation opinion or appraisal is not equivalent to "render[ing]

investment advice." The valuation provides information regarding the market value of a

security or other property, but does not itself recommend its purchase.
GIBBON DUNN

July 20, 2015

Page 11

and what regulatory action should be taken, if any. In addition, the DOL's proposed BIC

Exemption, which would affect most of the IRA market, purports to create a private right of

action for plans and participants to sue broker-dealers who offer IRAs for breach of contract.

But only Congress may create private rights of action, Alexander v. Sandoval, 532 U.S. 275,

286 (2001), and nothing in ERISA or the Internal Revenue Code permits the cause of action

proposed in the BIC Exemption. In fact, section 4975 of the Code, which prohibits certain

transactions involving IRAs, does not provide for any civil enforcement. The BIC is also

flawed because the DOL lacks authority to ban class action waivers in arbitration

agreements, cf. 15 U.S.C. § 780(0) (permitting SEC to regulate arbitration agreements of

"customers or clients ofl' broker-dealers for disputes arising under the securities laws and

regulations), and its attempt to enact such a ban conflicts with the mandate of the Federal

Arbitration Act ("FAA") that arbitration agreements be enforced according to their terms,

CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012).

In short, DOL is the regulator of neither the IRA market in particular nor the financial

industry in general, and it cannot regulate through "exemption" matters that are beyond its

authority to regulate affirmatively. In a word, it cannot create "backdoor regulation" by

"manipulat[ing] the safe harbor criterion [of a regulation] to compel different or broader

compliance" by actors in that field. Hearth, Patio &Barbecue Assn v. U.S. Dept of

Energy, 706 F.3d 499, 507-08 (D.C. Cir. 2013).

A. The SEC, Not The DOL, Has Authority To Establish Standards Of

Conduct For Broker-Dealers.

The DOL seeks to apply fiduciary standards of conduct to broker-dealers. Congress,

however, recently considered the process for a possible extension of fiduciary duties to

broker-dealers, and in Dodd-Frank gave the SEC, which has nearly eighty years' experience

regulating financial markets, the authority to adopt a uniform fiduciary standard following a

study of the effects of such a regulatory change, and subject to certain express limitations.

This recent demonstration of congressional intent confirms that the Department lacks the

power to promulgate the proposed rules.

Section 913 of Dodd-Frank directs the SEC to evaluate the standards of care that

currently govern broker-dealers and investment advisers. Dodd-Frank Wall Street Reform

and Consumer Protection Act of 2010, Pub. L. No. 111-203, § 913, 124 Stat. 1376, 1824

(2010). Specifically, it instructs the SEC to consider "the potential impact of eliminating the

broker and dealer exclusion from the definition of `investment adviser' under section

202(a)(11)(C) of the Investment Advisers Act of 1940[.]" Id. § 913(c)(10). Dodd-Frank also

empowers the SEC to "promulgate rules to provide that, with respect to a broker or dealer,

when providing personalized investment advice about securities to a retail customer ...the
GIBBON DUNN

July 20, 2015

Page 12

standard of conduct ...shall be the same as the standard of conduct applicable to an

investment adviser." Id. § 913(g)(1).

The DOL's attempt to establish a new standard of care for broker-dealers disregards

Congress's expressed directive that such a decision is for the SEC. The Supreme Court

recently instructed that, where "a question of deep economic and political significance that is

central to [a] statutory scheme" exists, "had Congress wished to assign that question to an

agency, it surely would have done so expressly." King v. Burwell, No. 14-114, 2015 WL

2473448, at *8 (U.S. June 25, 2015) (internal quotation marks omitted). Further, "[i]t is

especially unlikely that Congress would have delegated this decision to [an agency] [with] no

expertise" in the matter. Id. Congress gave DOL no such authority here, but did expressly

assign the question of further broker-dealer regulation—which would have broad effects on

financial professionals and their clients—to an agency with expertise in the industry: the

SEC. In doing so, Congress did not leave the door open for DOL to use the Tax Code to

craft and impose its own fiduciary duties for more than half the assets in broker-dealer retail

customer accounts.

The Department's encroachment on the SEC (and FINRA) is also foreclosed by FDA

v. Brown &Williamson Tobacco Corp., 529 U.S. 120, 143, 161 (2000). There, the Supreme

Court held that the Food and Drug Administration lacked authority to regulate tobacco

because of the "tobacco-specific legislation that Congress ha[d] enacted over the [previous]

35 years." Id. at 143. At the time a statute is enacted, the Court explained, it may have "a

range of plausible meanings" that could seem to permit agency regulation, but "[o]ver time

...subsequent acts can shape or focus those meanings." Id. In particular, later-enacted

statutes that "more specifically address the topic at hand" may occupy the field in a manner

that forecloses agency action, even if that subsequent legislation does not explicitly block the

agency's jurisdiction. See id. at 127, 143, 157. So, here, even if DOL once possessed

authority to promulgate regulations of the nature proposed (it did not), Dodd-Frank "more

specifically address[es]" procedures for evaluating the standaxd of care for broker-dealers,

committing it to SEC review and, possibly, SEC regulation. Action on the subject is

foreclosed to the Department.

The specific terms of the Department's proposed rules are barred as well. DoddFrank requires that any new standard of conduct for broker-dealers be "the same" as

"applicable to an investment adviser under section 211" of the Advisers Act. Dodd-Frank

§ 913(g). The standards imposed by the new rules are far more onerous than under the IAA.

In Dodd-Frank Congress also provided that "[t]he receipt of compensation based on

commission or other standard compensation for the sale of securities shall not, in and of

itself, be considered a violation of such standard applied to a broker or dealer." Id. DOL's
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July 20, 2015

Page 13

"fiduciary" rule makes broker-dealers' "standard compensation" a prohibited transaction,

with only partial relief (supposedly) available through the unadministrable BIC Exemption.

The Dodd-Frank provisions regarding a potential uniform fiduciary standard show the

analysis underlying the Department's rules to be flawed as well. Congress instructed the

SEC to conduct a study and report to Congress before adopting a new standard for brokerdealers, enumerating in detail the potential effects on customers that the SEC study "shall"

consider, including "the potential impact on access of retail customers to the range of

products and services offered by brokers and dealers," and loss of access to "personalized

investment advice." Dodd-Frank §§ 913(c)(9)-(10), 913(d). Commenters in the current

rulemaking will show that these (and other) effects of the Department's rules will be severe,

yet the Department makes no attempt to consider these effects in its "regulatory impact

analysis." That is clear error: The proposals' effect on access to professional financial

assistance was an "important aspect of the problem" that the Department was obligated to

consider under any circumstance, Motor Vehicle Mfrs. Assn v. State Farm Mut. Auto. Ins.

Co., 463 U.S. 29, 43 (1983), and certainly the Department could not fail to address the issue

when Congress directed the SEC to consider that very thing before imposing fiduciary

standards on broker-dealers. The Department must conduct that assessment and make it

available for public review and comment. See Chamber of Commerce v. SEC, 443 F.3d 890,

894, 900 (D.C. Cir. 2006).

The inappropriateness of the DOL leaping out in front of the SEC is confirmed by the

findings of SEC staff in the study they performed under Dodd-Frank. After examining the

potential effect of eliminating the broker-dealer exclusion, SEC staff recommended against

such an amendment, in view of the negative effect on consumers. SEC Study on Investment

Advisers &Broker-Dealers 140, 152 (2011). As the staff explained: "If, in response to the

elimination of the broker-dealer exclusion, broker-dealers elected to convert their brokerage

accounts from commission-based accounts to fee-based accounts, certain retail customers

might face increased costs, and consequently the profitability of their investment decisions

could be eroded, especially accounts that are not actively traded[.]" Id. at 152 (footnote

omitted). IRAs are just such accounts, yet the DOL fails to give appropriate consideration to

those adverse effects.

Others with responsibility over broker-dealers have voiced similar concerns. The

Chairman and CEO of FINRA, Richard Ketchum, has said the SEC "should lead" the

drafting of a fiduciary standard applicable to broker-dealers, because it has the necessary

expertise and is better positioned than DOL to design and implement the standard. Oversight

of the Financial Industry Regulatory Authority: Hearing Before the Subcomm. on Capital

Mkts. &Gov't Sponsored Enters. of the H. Comm.'on Fin. Servs., 114th Cong. (2015)

(statement of Richard G. Ketchum, Chairman and CEO of FINRA). In testimony before
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July 20, 2015

Page 14

Congress, Chairman Ketchum expressed concern that the DOL's proposed rule would result

in conflicting standards of care and stated that "the right way to move forward is for ...the

[SEC] to look [at] the possibility of a balanced fiduciary standard across all products." Id.

These cautions from the self-regulatory organization with responsibility over broker-dealers

should be given great weight, and further demonstrate why proceeding with these proposed

rules is particularly inappropriate in light of the SEC's authority over the financial industry.

B. The Department Cannot Leverage Its Interpretive Authority To Exercise

Enforcement Authority Not Conferred By Congress.

The DOL does not have regulatory authority over IRAs because IRAs—when sold to

individual clients—are not "employee welfare benefit plans" or "employee pension benefit

plans" that are "established or maintained by an employer or by an employee organization."

See 29 U.S.C. § 1002(1) & (2). To be sure, the Department has authority to interpret the

definition of "fiduciary" under ERISA and the Internal Revenue Code. Its enforcement

authority, however, is limited to ERISA. See Reorganization Plan No. 4 of 1978, § 105.

Only the Treasury Department has authority to enforce Section 4975 of the Code, an

authority that is restricted to imposing excise taxes and conducting audits. Id. As the DOL

acknowledges in the proposal, ERISA's duties of prudence and loyalty do not apply to IRA

fiduciaries, and IRA fiduciaries are not liable undex ERISA for losses arising from breaches

of such duties: "Under the Code, advisers to IRAs are subject only to the prohibited

transaction rules," and "no private right of action under ERISA is available to IRA owners."

80 Fed. Reg. at 21,938.

This admission is fatal to the DOL's attempt in the BIC Exemption to leverage its

interpretive authority into enforcement power over matters outside, the Department's

jurisdiction. Among other things, DOL conditions the BIC Exemption—which is necessary

for the rule's newly-discovered fiduciaries to continue long-standing compensation

practices—on the fiduciary's consent to be sued by ERISA plans, IRAs, participants, and

others for breach of contract related to the best interest standards created in the rule.

Proposed Best Interest Contract Exemption, 80 Fed. Re.g. 21,960, 21,962, 21,972 (Apr. 20,

2015) (to be codified at 29 C.F.R. pt. 2550). That is a new private right of action. It is

axiomatic, however, that only Congress, not an agency, may create a cause of action. In

Sandoval, for instance, the Supreme Court rejected the government's argument that "the

regulations contain rights-creating language and so must be privately enforceable." 532 U.S.

at 291. "Language in a regulation may invoke a private right of action that Congress through

statutory text created, but it may not create a right that Congress has not.... [I]t is most

certainly incorrect to say that language in a regulation can conjure up a private cause of

action that has not been authorized by Congress." Id. (citation omitted).
GIBBON DUNN

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Page 15

What Sandoval forbids is what the DOL attempts to do. Nothing in ERISA or the

Code even hints that astate-law contract action can be brought against purported fiduciaries

to enforce statutory provisions. ERISA's civil remedies are limited both in nature and scope,

Great-W. Life &Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209-10 (2002), and the statute

broadly preempts most state law, including breach-of-contract actions, Cromwell v. EquicorEquitable HCA Corp., 944 F.2d 1272, 1275 (6th Cir. 1991). Further, ERISA's remedies

have no application to non-ERISA plans such as IRAs. See 29 U.S.C. § 1002(1) & (2). The

remedies under the Code are even more restricted than ERISA's, extending only to

conducting audits and imposing taxes. 26 U.S.C. § 4975; see also Reorganization Plan No. 4

of 1978, § 105. Accordingly, ERISA, the Code, and basic principles of separation of powers

preclude DOL's attempt to create its new "BIC" private rights of action. See also Mertens v.

HewittAssocs., 508 U.S. 248, 254 (1993) (stating Court's "unwillingness to infer causes of

action in the ERISA context, since that statute's carefully crafted and detailed enforcement

scheme provides strong evidence that Congress did not intend to authorize other remedies

that it simply forgot to incorporate expressly" (internal quotation marks omitted));

Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 19 (1979) ("[I]t is an elemental

canon of statutory construction that where a statute expressly provides a particular remedy or

remedies, a court must be chary of reading others into it.").

It is no answer that the DOL has interpretative authority with respect to the definition

of "fiduciary" in both statutes. The courts will reject an agency's attempt to use interpretive

authority to regulate beyond that authority. In American Bankers Assn v. SEC, 804 F.2d

739, 754-55 (D.C. Cir. 1986), for example, the D.C. Circuit explained that "[t]he

[Commission] cannot use its definitional authority to expand its own jurisdiction and to

invade the jurisdiction" of other agencies through rulemaking. In that case, the agency was

authorized to regulate banks, not broker-dealers, but wrongly sought to "redefine" "bank" in

away that gave it authority over broker-dealers as well. Id. at 742-43. See also Business

Roundtable v. SEC, 905 F.2d 406, 412-13 (D.C. Cir. 1990) (SEC had power to mandate

listing standards, but exceeded its authority by attempting to leverage that power to regulate

corporate governance). And in Home Care Assn ofAmerica v. Weil, 2014 U.S. Dist. LEXIS

176307, at * 14-15 (D.D.C. 2014), the court rejected the DOL's attempt to use "its

definitional authority" in a way that eliminated part of a statutory exemption, explaining that

"Congress surely did not delegate to the Department of Labor ...the authority to issue a

regulation that transforms defining statutory terms into drawing policy lines." So, here, the

DOL seeks to define "fiduciary" in a way that gives it authority over plans and persons

outside its reach, and then—having defined the term in an impossibly onerous manner—

wields its exemptive authority to offer clemency to those who are willing to accede to new

duties and private rights of action that have no basis in the statute DOL administers. But the

Department may not conduct "backdoor regulation" through manipulation of "safe harbor

criterion." Hearth, Patio &Barbecue Assn, 706 F.3d at 507-08. See also Chamber of
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July 20, 2015

Page 16

Commerce v. U.S. Dept of Labor, 174 F.3d 206, 210 (D.C. Cir. 1999) (concluding OSHA

had authority to conduct inspections, but could not use that as "leverage" to impose

obligations not required by law).

"[I]t is fundamental that an agency may not bootstrap itself into an area in which it

has no jurisdiction." Adams Fruit Co. v. Barrett, 494 U.S. 638, 650 (1990) (internal

quotation marks omitted). That is what the DOL attempts to do through these proposals, and

for this reason too, the proposals are impermissible.

C. The Department Lacks Authority To Ban Class Action Waivers In

Connection With Arbitration Agreements.

The Department also exceeds its statutory authority by purporting, in the BIC

Exemption, to bar all waivers of participation in class actions or other representative actions,

without regard to whether those waivers are in connection with arbitration agreements. 80

Fed. Reg. at 21,973, 21,985.

Under the FAA, valid arbitration agreements must be enforced according to their

terms unless the FAA "has been overridden by a contrary congressional command."

CompuCredit, 132 S. Ct. at 669 (internal quotation maxks omitted); see also, e.g., Am.

Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2309-11 (2013) (rule applies even to

statutes that "expressly permit[] collective actions"). This includes arbitration provisions

containing class waivers, which the Supreme Court has repeatedly upheld. Italian Colors,

133 S. Ct. at 2312; AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748 (2011).

"When [Congress] has restricted the use of arbitration," moreover, "it has done so with .. .

clarity." CompuCredit, 132 S. Ct. at 672.

Nothing in ERISA gives DOL clear authority—or any authority—to preclude

financial institutions and their clients from entering into and enforcing arbitration agreements

that include class waivers. See Kramer v. Smith Barney, 80 F.3d 1080, 1084 (5th Cir. 1996)

("Congress did not intend to exempt statutory ERISA claims from the dictates of the

[FAA]."); Bird v. Shearson Lehman/Am. Express, Inc., 926 F.2d 116, 120 (2d Cir. 1991)

(concluding ERISA does not preclude waiver of a judicial forum for ERISA claims). As for

Code Section 4975, it is not enforceable through a private right of action at all, see supra,
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Page 17

and plainly furnishes DOL no authority to regulate parties' arbitration agreements. Simply,

DOL's lack of authority to regulate arbitration agreements is dispositive of its attempt to bar

class waivers in those agreements. See CompuCredit, 132 S. Ct. at 672.

In this respect, as in so many others in this bundle of proposed rules, the Department

has overstepped its bounds.

Re ectfully submitte

Euge e c is

ES/bmr

cc: Office of Exemption Determinations
APPENDIX 7
July	20th,	2015

U.S.	Department	of	Labor	

Office	of	Regulations	and	Interpretations

Employee	Benefits	Security	Administration

200	Constitution	Avenue,	NW

Washington,	DC	20210		

Re:	Definition	of	the	Term	“Fiduciary”;	Conflict	of	Interest	Rule—Retirement	Investment	Advice	

(RIN	1210-AB32)

Ladies	and	Gentlemen:	

Thank	 you	 for	 the	 opportunity	 to	 provide	 comments	 regarding	 the	 Department	 of	 Labor’s	

(“Department”)	Proposed	Conflict	of	Interest	Rule	(“Proposed	Rule”)	and	Best	Interest	Contract	

Exemption	(“BIC	Exemption”)	under	the	Employee	Retirement	Income	Security	Act	of	1974,	as	

amended	 (“ERISA”).	 	 I	 am	 concerned	 that	 the	 Proposed	 Rule	 and	 BIC	 Exemption	 will	

unnecessarily	increase	barriers	for	Middle-Income	Americans	to	the	valuable	retirement	savings	

education	 and	 assistance	 that	 I	 and	 many	 thousands	 of	 other	 registered	 representatives	

provide.	It	is	my	hope	that	my	comments	are	helpful	to	the	Department.	

I	have	been	a	 registered	 representative	with	PFS	Investments	Inc.	since	1994.		My	office	is	in	

Londonderry,	New	Hampshire.		My	clients	come	from	the	community	in	which	I	live	and	work.		

They	are	hard-working,	very	busy	people,	and,	quite	typically,	before	they	meet	me,	no	one	has	

ever taken	 the	 time	 to	 sit	 down	with	 them	 to	assess	 their	 financial	 picture	and	 discuss	 basic	

financial	 concepts	with	 them,	 such	as	 the	 power	 of	 saving	 for	 retirement	 through	 systematic	

investing	 and	 what	 investment	 options	 are	 available	 to	 them.	 	 They,	 like	 so	 many	 people	 in	

Middle	America,	do	what	they	do	daily	very	well,	but	the	reality	of	life	is	that	there	is	no	time	

left	 in	 the	 day	 after	 their	 work	 day	 and	 evening	 family	 commitments	 end	 for	 them	 to	

proactively	seek	out	education	and	advice	on	saving	and	investing.		What	some	view	as	basic	

saving	 and	 investing	 concepts	 that	 everyone	 already	 knows,	 is	 typically	 not	 information	 they	

know.		They	are	starting	from	a	different	baseline,	and	it	takes	a	substantial	time	commitment	

to	understand	these	concepts	well enough	to	make	actual	investment	decisions	independently.		

While	it	may	appear	that	they	have access to	this	information	if	they	have	computers	or	other	

mobile	devices	from	which	they	can	search	the	internet,	they	do	not,	in	my	experience,	access

this	information	on	their	own.		It	is	time-consuming	and	overwhelming.			They	are	much	more	

comfortable	working	with	a	live	person,	and	more	successful	when	 they	do	so,	both	of	which	
studies	have	demonstrated.1 And	with	retirement	savings	and	retirement	plan	participation	at	

such	low	levels,	it	is	imperative	 that	we	help	Middle-Income	Americans	in	every	way	possible	

get	on	track	toward	ensuring	better	futures	for	themselves	and	their	families.		

Working	with	Middle-Income	Americans	to	achieve	their	financial	goals	is	what	I	have	done	my	

entire	career	in	the	financial	services	industry.			A	story	about	a	particular	client	of	mine	comes	

to	mind.	

About	four	years ago	 I	met	a	newly	married	couple	in	their	early	thirties	who	invited	me	to	help	

with	 their	 finances.	 	 The	 husband	 was	 a	 high	 school	 teacher	 and	 the	 wife	 was	 an	 office	

administrator	 for	a	 small	 business.	 	Additionally,	 the	 husband	worked	as	a	 bartender	 to	earn	

additional	income.		They	had	just	bought	a	condominium	and	had	one	child	with	the	desire	to	

have	another.		They	also	wanted	to	retire	and	wanted	more	information	about	how	to	better	

budget	 their	money.	They	had	 some	debt,	and	 the	wife	had	a	 small	amount	 saved	in	a	401k.		

Both	 had	 SIMPLE	IRAs	 provided	 by	 the	 small	 businesses	 where	 they	 worked.	 	Despite	 having	

these	options	 they	were	not	on	 track	 to	 reach	 their	 retirement	savings	goal.		They	had	never	

completed	a	retirement	calculation	and	were	blown	away	at	the	potential	to	reach	their	goal	if	

they	 made	 some	 changes.	 	 This	 education	 empowered	 them	 to	 make better	 decisions	 for	

themselves.	 	 They	 made	 some	 adjustments	 to	 their	 SIMPLE	 IRA	 savings.	 	 They	 also	 chose	 to	

each	open	IRAs	by	investing	$100	per	month.		The wife	also	chose	to	rollover	her	401k	savings	

because	she	wanted	more	investment	options	and	was	not	satisfied	with	 the	level	of	support	

her	employer’s	plan	offered.		She	valued	the	one-on-one	education	and	assistance	I	provided.		I	

periodically	check-in	with	them.		We	recently	met,	and	I	am	proud	to	say	they	did	not	need	to	

conduct	any	transactions	because	they	are	now	on	track	to	retire	at	67	based	on	their	current	

incomes.		They	also	 rent	 the	condo	where	we	initially	met	and	own	a	house.		They	are	doing	

well	financially.										

It	 is	 my	 belief	 that	 the	 Proposed	 Rule	 and	 the	 BIC	 Exemption	 as	 drafted	 will	 eliminate	 or	

substantially	reduce	people	like	this	couple’s	access	to	education	and	advice,	at	the	exact	time	

and	for	the	exact	purpose	they	need	it	most	– saving	for	retirement.		I	fear	that	the	translation	

of	education	into	advice,	the	imposition	of	the	new	BIC	contract,	the	uncertainties	created	by	

the	 Impartial	 Conduct	 Standards	 which	 substantially	 increase	 liability	 costs	 and	 effectively	

disqualify the	 commission	model, and	 the	 costs	 of	 complying	 with	all	 of	 the	many	 disclosure	

requirements	 will	 cause	 firms	 such	 as	 PFS	 Investments	 Inc.	 to	 conclude	 that	 it	 simply	 is	 not	

feasible	to	open	smaller	accounts.		If	a	decision	like	this	is	made,	my	clients	will	lose	access	to	

the	 education	 and	 advice	 they	 so	 badly	 need,	 and	 their	 futures	 will	 be	 severely	 negatively	

impacted	as	a	result.		

																																																												 1 Oliver	Wyman:	The	role	of	financial	advisors	in	the	US	retirement	market	(July	6,	2015).		Oliver	Wyman	states	that	

it	“.	.	.	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	non-advised	

individuals.”
It	is	my	hope	that	the	Department	will	take	this	into	consideration	and	withdraw	the	Proposed	

Rule.		Thank	you	again	for	the	opportunity	to	comment.

Sincerely,

Daniel	Campagna	

Londonderry,	New	Hampshire
APPENDIX 8
July 20, 2015

U.S. Department of Labor 

Office of Regulations and Interpretations

Employee Benefits Security Administration

200 Constitution Avenue, NW

Washington, DC 20210 

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice 

(RIN 1210-AB32)

Ladies and Gentlemen: 

Thank you for the opportunity to provide comments regarding the Department of Labor’s 

(“Department”) Proposed Conflict of Interest Rule (“Proposed Rule”) and Best Interest Contract 

Exemption (“BIC Exemption”) under the Employee Retirement Income Security Act of 1974, as 

amended (“ERISA”). I am concerned that the Proposed Rule and BIC Exemption will unnecessarily 

increase barriers for Middle-Income Americans to the valuable retirement savings education and 

assistance that I and many thousands of other registered representatives provide. It is my hope 

that my comments are helpful to the Department. 

I have been a registered representative with PFS Investments Inc. since 1999. My office is in 

Rosedale, New York. My clients come from the community in which I live and work. They are 

hard-working, very busy people, and, quite typically, before they meet me, no one has ever taken 

the time to sit down with them to assess their financial picture and discuss basic financial 

concepts with them, such as the power of saving for retirement through systematic investing and 

what investment options are available to them. They, like so many people in Middle America, do 

what they do daily very well, but the reality of life is that there is no time left in the day after 

their work day and evening family commitments end for them to proactively seek out education 

and advice on saving and investing. What some view as basic saving and investing concepts that 

everyone already knows, is typically not information they know. They are starting from a 

different baseline, and it takes a substantial time commitment to understand these concepts well 

enough to make actual investment decisions independently. 

While it may appear that they have access to this information if they have computers or other 

mobile devices from which they can search the internet, they do not, in my experience, access

this information on their own. It is time-consuming and overwhelming. They are much more 

comfortable working with a live person, and more successful when they do so, both of which 

studies have demonstrated.1 And with retirement savings and retirement plan participation at 

such low levels, it is imperative that we help Middle Americans in every way possible get on track 

 

1 Oliver Wyman: The role of financial advisors in the US retirement market (July 6, 2015). Oliver Wyman states that 

it “. . . 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 non-advised 

individuals.”
toward ensuring better futures for themselves and their families. This is particularly true in the 

African-American community, of which my clients and I are a part. African Americans lag behind 

the general population in saving for retirement,2 and I spend a significant amount of time 

educating my clients about the importance of saving for retirement and the ways they can do so.

Working with Middle-Income Americans to achieve their financial goals is what I have done my 

entire career in the financial services industry. A story about a particular client of mine comes 

to mind. 

Thirteen years ago I met a 26 year-old Registered Nurse. She was saving money in a bank account 

instead of an IRA because she was a little leery about investing in the stock market. She had 

accumulated several thousand dollars in the bank account. I worked with her one-on-one to 

educate her about basic investing concepts. For example, I explained how mutual funds operate, 

the importance of diversifying investments, and the benefits of tax-advantaged savings. The 

education provided her the understanding and confidence to open an IRA with the money she 

had saved in the bank account. She also chose to make monthly contributions of $100 per month. 

Today she is comfortable and satisfied with the decisions she made back then. She has even 

increased her retirement savings contributions to the maximum allowed. I communicate with 

her periodically to ensure her needs are met. 

It is my belief that the Proposed Rule and the BIC Exemption as drafted will eliminate or 

substantially reduce people like this Registered Nurse’s access to education and advice, at the 

exact time and for the exact purpose they need it most – saving for retirement. I fear that the 

translation of education into advice, the imposition of the new BIC contract, the uncertainties 

created by the Impartial Conduct Standards which substantially increase liability costs and 

effectively disqualify the commission model, and the costs of complying with all of the many 

disclosure requirements will cause firms such as PFS Investments Inc. to conclude that it simply 

is not feasible to open smaller accounts. If a decision like this is made, my clients will lose access 

to the education and advice they so badly need, and their futures will be severely negatively 

impacted as a result. 

It is my hope that the Department will take this into consideration and withdraw the Proposed 

Rule. Thank you again for the opportunity to comment.

Sincerely,

Joan Jones-White

Rosedale, New York 

 

2 The African American Financial Experience, Prudential Research, 2013-14; The Hispanic American Financial 

Experience, 2014 Prudential Research; Rhee, Nari, Ph.D., National Institute on Retirement Security, “Race and 

Retirement Insecurity in the United States,” (December 2013).
APPENDIX 9
July 20, 2015

U.S. Department of Labor 

Office of Regulations and Interpretations

Employee Benefits Security Administration

200 Constitution Avenue, NW

Washington, DC 20210 

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice 

(RIN 1210-AB32)

Ladies and Gentlemen: 

Thank you for the opportunity to provide comments regarding the Department of Labor’s 

(“Department”) Proposed Conflict of Interest Rule (“Proposed Rule”) and Best Interest Contract 

Exemption (“BIC Exemption”) under the Employee Retirement Income Security Act of 1974, as 

amended (“ERISA”). I am concerned that the Proposed Rule and BIC Exemption will unnecessarily 

increase barriers for Middle-Income Americans to the valuable retirement savings education and 

assistance that I and many thousands of other registered representatives provide. It is my hope 

that my comments are helpful to the Department. 

I have been a registered representative with PFS Investments Inc. since 1995. My office is in 

Lakewood, Washington. My clients come from the community in which I live and work. They are 

hard-working, very busy people, and, quite typically, before they meet me, no one has ever taken 

the time to sit down with them to assess their financial picture and discuss basic financial 

concepts with them, such as the power of saving for retirement through systematic investing and 

what investment options are available to them. They, like so many people in Middle America, do 

what they do daily very well, but the reality of life is that there is no time left in the day after 

their work day and evening family commitments end for them to proactively seek out education 

and advice on saving and investing. What some view as basic saving and investing concepts that 

everyone already knows, is typically not information they know. They are starting from a 

different baseline, and it takes a substantial time commitment to understand these concepts well 

enough to make actual investment decisions independently. 

While it may appear that they have access to this information if they have computers or other 

mobile devices from which they can search the internet, they do not, in my experience, access

this information on their own. It is time-consuming and overwhelming. They are much more 

comfortable working with a live person, and more successful when they do so, both of which 

studies have demonstrated.1 And with retirement savings and retirement plan participation at 

 

1 Oliver Wyman: The role of financial advisors in the US retirement market (July 6, 2015). Oliver Wyman states that 

it “. . . was engaged to perform a rigorous investigation of the role of financial advisors in the US retirement 
such low levels, it is imperative that we help Middle Americans in every way possible get on track 

toward ensuring better futures for themselves and their families. 

Working with Middle-Income Americans to achieve their financial goals is what I have done my 

entire career in the financial services industry. A story about a particular client of mine comes 

to mind. 

Several years ago I met a young couple with small children who lived in a duplex and earned a 

modest income. They provided me an opportunity to conduct a Financial Needs Analysis. The 

education I provided taught them how to more effectively pay off consumer debt they were 

paying. It also empowered them to begin saving a small monthly amount in an IRA. They were 

so excited! I spoke with them a few weeks ago. The choice to invest in an IRA helped them 

demonstrate tangible assets, which helped them qualify for their first mortgage. I am pleased to 

say that they continue to save toward their retirement every month. They are even confident 

that they will increase their savings in the future. This couple needed the opportunity to start 

small and grow. They can save more as their income grows but starting, even at a small amount, 

is the key. Many potential investors need to start small and often can’t meet the larger 

minimums of other types of in-person investment services. 

It is my belief that the Proposed Rule and the BIC Exemption as drafted will eliminate or 

substantially reduce people like this young couple’s access to education and advice, at the exact 

time and for the exact purpose they need it most – saving for retirement. I fear that the 

translation of education into advice, the imposition of the new BIC contract, the uncertainties 

created by the Impartial Conduct Standards which substantially increase liability costs and 

effectively disqualify the commission model, and the costs of complying with all of the many 

disclosure requirements will cause firms such as PFS Investments Inc. to conclude that it simply 

is not feasible to open smaller accounts. If a decision like this is made, my clients will lose access 

to the education and advice they so badly need, and their futures will be severely negatively 

impacted as a result. 

It is my hope that the Department will take this into consideration and withdraw the Proposed 

Rule. Thank you again for the opportunity to comment.

 

market, and quantify differences in investing behavior and outcomes between advised and non-advised 

individuals.”
APPENDIX 10
July	20th,	2015

U.S.	Department	of	Labor	

Office	of	Regulations	and	Interpretations

Employee	Benefits	Security	Administration

200	Constitution	Avenue,	NW

Washington,	DC	20210		

Re:	Definition	of	the	Term	“Fiduciary”;	Conflict	of	Interest	Rule—Retirement	Investment	Advice	

(RIN	1210-AB32)

Ladies	and	Gentlemen:	

Thank	 you	 for	 the	 opportunity	 to	 provide	 comments	 regarding	 the	 Department	 of	 Labor’s	

(“Department”)	Proposed	Conflict	of	Interest	Rule	(“Proposed	Rule”)	and	Best	Interest	Contract	

Exemption	(“BIC	Exemption”)	under	the	Employee	Retirement	Income	Security	Act	of	1974,	as	

amended	 (“ERISA”).	 	 I	 am	 concerned	 that	 the	 Proposed	 Rule	 and	 BIC	 Exemption	 will	

unnecessarily	increase	barriers	for	Middle-Income	Americans	to	the	valuable	retirement	savings	

education	 and	 assistance	 that	 I	 and	 many	 thousands	 of	 other	 registered	 representatives	

provide.	It	is	my	hope	that	my	comments	are	helpful	to	the	Department.	

I	have	been	a	 registered	 representative	with	PFS	Investments	Inc.	since	1992.		My	office	is	in	

Brooklyn,	New	York.		My	clients	come	from	the	community	in	which	I	live	and	work.		They	are	

hard-working,	 very	 busy	 people,	 and,	 quite	 typically,	 before	 they	 meet	 me,	 no	 one	 has	 ever	

taken	the	time	to	sit	down	with	them	to	assess	their	financial	picture	and	discuss	basic	financial	

concepts	with	 them,	 such	as	 the	power	of	 saving	 for	 retirement	 through	 systematic	investing	

and	 what	 investment	 options	 are	 available	 to	 them.	 	 They,	 like	 so	 many	 people	 in	 Middle	

America,	do	what	they	do	daily	very	well,	but	the	reality	of	life	is	that	there	is	no	time	left	in	the	

day	after	their	work	day	and	evening	family	commitments	end	for	them	to	proactively	seek	out	

education	and	advice	on	saving	and	investing.		What	some	view	as	basic	saving	and	investing	

concepts	 that	 everyone	 already	 knows,	 is	 typically	 not	 information	 they	 know.	 	 They	 are	

starting	 from	a	 different	 baseline,	and	it	 takes	a	 substantial	 time	 commitment	 to	 understand	

these	concepts	well	enough	to	make	actual	investment	decisions	independently.		

While	it	may	appear	that	they	have access to	this	information	if	they	have	computers	or	other	

mobile	devices	from	which	they	can	search	the	internet,	they	do	not,	in	my	experience,	access

this	information	on	their	own.		It	is	time-consuming	and	overwhelming.			They	are	much	more	

comfortable	working	with	a	live	person,	and	more	successful	when	 they	do	so,	both	of	which	
studies	have	demonstrated.1 And	with	retirement	savings	and	retirement	plan	participation	at	

such	low	levels,	it	is	imperative	 that	we	help	Middle-Income	Americans	in	every	way	possible	

get	on	track	toward	ensuring	better	futures	for	themselves	and	their	families.		

Working	with	Middle-Income	Americans	to	achieve	their	financial	goals	is	what	I	have	done	my	

entire	career	in	the	financial	services	industry.			A	story	about	a	particular	client	of	mine	comes	

to	mind.	

Ten	years	after	attending	college	 together	in	1991	a	classmate	of	mine	asked	me	 to	sit	down	

with	 his	 wife	 and	 him	 to	 discuss	 their	 finances.	 	 They	 both	 earned	 a	 decent	 salary	 with	 no	

children	or	house.		Although	he	was	a	college	graduate	and	a	genius	with	computers, he	did	not	

understand	how	money	works.		I	discovered	their finances	were	a	disaster.		They	spent	money	

like	 crazy	 and	 had	 no	 retirement	 savings.	 	 The	 education	 I	 provided	 gave	 them	 an	

understanding	about	basic	 financial	concepts	and	investing	 they	did	not have.		They	chose	 to	

fund	 two	IRA	accounts	on	a	monthly	basis.		They	started	with	small	contributions,	and	I	have	

been	 able	 to	 encourage	 them	 to	 increase	 their	 contributions	 as	 they	 go.	 	 As	 the	 years	 have	

passed,	 they	are	grateful	 for	 the	 time	I	spent	 to	get	 them	on,	and	 to	keep	 them	on,	 the	 right	

retirement	 track.	 	 They	 told	 me	 that	 having	 someone	 sit	 down	 with	 them	 helped	 make	 a	

positive	financial	difference	in	their	lives.		My	experience	has	taught	me	that	regardless	of	how	

educated	 a	 person	 may	 be,	 retirement	 and	 investment	 vehicles	 are	 intimidating	 to	 most	

people.	 	 It	 certainly	 was	 for	 this	 couple,	 yet	 over	 a	 decade	 later	 they	 are	 happy	 clients,	

homeowners,	parents,	and	on	their	way	to	a	brighter	retirement.					

It	 is	 my	 belief	 that	 the	 Proposed	 Rule and	 the	 BIC	 Exemption	 as	 drafted	 will	 eliminate	 or	

substantially	reduce	people	like	this	couple’s	access	to	education	and	advice,	at	the	exact	time	

and	for	the	exact	purpose	they	need	it	most	– saving	for	retirement.		I	fear	that	the	translation	

of	education	into	advice,	the	imposition	of	the	new	BIC	contract,	the	uncertainties	created	by	

the	 Impartial	 Conduct	 Standards	 which	 substantially	 increase	 liability	 costs	 and	 effectively	

disqualify	 the	 commission	model, and	 the	 costs	 of	 complying	 with	all	 of	 the	many	 disclosure	

requirements	 will	 cause	 firms	 such	 as	 PFS	 Investments	 Inc.	 to	 conclude	 that	 it	 simply	 is	 not	

feasible	to	open	smaller	accounts.		If	a	decision	like	this	is	made,	my	clients	will	lose	access	to	

the	 education	 and	 advice	 they	 so	 badly	 need,	 and their	 futures	 will	 be	 severely	 negatively	

impacted	as	a	result.		

It	is	my	hope	that	the	Department	will	take	this	into	consideration	and	withdraw	the	Proposed	

Rule.		Thank	you	again	for	the	opportunity	to	comment.

Sincerely,

																																																												 1 Oliver	Wyman:	The	role	of	financial	advisors	in	the	US	retirement	market	(July	6,	2015).		Oliver	Wyman	states	that	

it	“.	.	.	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	non-advised	

individuals.”
Alex	Franki

Brooklyn,	New York
APPENDIX 11
July 20th, 2015

U.S. Department of Labor 

Office of Regulations and Interpretations

Employee Benefits Security Administration

200 Constitution Avenue, NW

Washington, DC 20210 

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice 

(RIN 1210-AB32)

Ladies and Gentlemen: 

Thank you for the opportunity to provide comments regarding the Department of Labor’s 

(“Department”) Proposed Conflict of Interest Rule (“Proposed Rule”) and Best Interest Contract 

Exemption (“BIC Exemption”) under the Employee Retirement Income Security Act of 1974, as 

amended (“ERISA”). I am concerned that the Proposed Rule and BIC Exemption will 

unnecessarily increase barriers for Middle-Income Americans to the valuable retirement savings 

education and assistance that I and many thousands of other registered representatives 

provide. It is my hope that my comments are helpful to the Department. 

I have been a registered representative with PFS Investments Inc. since 1986. My office is in 

Wichita, Kansas. My clients come from the community in which I live and work. They are hardworking, very busy people, and, quite typically, before they meet me, no one has ever taken the 

time to sit down with them to assess their financial picture and discuss basic financial concepts 

with them, such as the power of saving for retirement through systematic investing and what 

investment options are available to them. They, like so many people in Middle America, do 

what they do daily very well, but the reality of life is that there is no time left in the day after 

their work day and evening family commitments end for them to proactively seek out 

education and advice on saving and investing. What some view as basic saving and investing 

concepts that everyone already knows, is typically not information they know. They are 

starting from a different baseline, and it takes a substantial time commitment to understand 

these concepts well enough to make actual investment decisions independently. 

While it may appear that they have access to this information if they have computers or other 

mobile devices from which they can search the internet, they do not, in my experience, access

this information on their own. It is time-consuming and overwhelming. They are much more 

comfortable working with a live person, and more successful when they do so, both of which 
studies have demonstrated.1

And with retirement savings and retirement plan participation at 

such low levels, it is imperative that we help Middle-Income Americans in every way possible 

get on track toward ensuring better futures for themselves and their families. 

Working with Middle-Income Americans to achieve their financial goals is what I have done my 

entire career in the financial services industry. A story about two particular clients of mine 

comes to mind. 

I once met a client after his prior financial representative decided to pursue a new career 

opportunity. The assistance I have been able to provide him over the past 25 years has helped 

him from making several financial mistakes. For example, he called me during the recessions of 

2001 and 2008 because he needed reassurance with his IRA investments. I also recently 

discovered that he wanted to cash out of a variable annuity that he had purchased elsewhere 

and had owned for some time. I encouraged him not to cash out. He is approximately 75 years 

old now. After I explained the surrender fees and the lifetime income options, he changed his 

mind because he wanted to continue receiving lifetime income. It was the right decision for 

him. 

Also, another gentleman and his wife who once purchased a long-term care policy from me 

recently expressed their desire to buy a variable annuity. The husband is about 70 years old. 

Despite the wife having her checkbook in hand during our conversation, I recommended they 

not purchase an annuity because it was not the right product for their particular circumstances. 

He may need some of the money that he wanted to invest in an annuity in a few years. He 

thanked me for the guidance I provided. 

It is my belief that the Proposed Rule and the BIC Exemption as drafted will eliminate or 

substantially reduce people like this couple’s access to education and advice, at the exact time 

and for the exact purpose they need it most – saving for retirement. I fear that the translation 

of education into advice, the imposition of the new BIC contract, the uncertainties created by 

the Impartial Conduct Standards which substantially increase liability costs and effectively 

disqualify the commission model, and the costs of complying with all of the many disclosure 

requirements will cause firms such as PFS Investments Inc. to conclude that it simply is not 

feasible to open smaller accounts. If a decision like this is made, my clients will lose access to 

the education and advice they so badly need, and their futures will be severely negatively 

impacted as a result. 

It is my hope that the Department will take this into consideration and withdraw the Proposed 

Rule. Thank you again for the opportunity to comment.

 

1

Oliver Wyman: The role of financial advisors in the US retirement market (July 6, 2015). Oliver Wyman states that 

it “. . . 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 non-advised 

individuals.”
Sincerely,

Thomas R. Pool

Wichita, Kansas
APPENDIX 12
July	20th,	2015

U.S.	Department	of	Labor	

Office	of	Regulations	and	Interpretations

Employee	Benefits	Security	Administration

200	Constitution	Avenue,	NW

Washington,	DC	20210		

Re:	Definition	of	the	Term	“Fiduciary”;	Conflict	of	Interest	Rule—Retirement	Investment	Advice	

(RIN	1210-AB32)

Ladies	and	Gentlemen:	

Thank	 you	 for	 the	 opportunity	 to	 provide	 comments	 regarding	 the	 Department	 of	 Labor’s	

(“Department”)	Proposed	Conflict	of	Interest	Rule	(“Proposed	Rule”)	and	Best	Interest	Contract	

Exemption	(“BIC	Exemption”)	under	the	Employee	Retirement	Income	Security	Act	of	1974,	as	

amended	 (“ERISA”).	 	 I	 am	 concerned	 that the	 Proposed	 Rule	 and	 BIC	 Exemption	 will	

unnecessarily	increase	barriers	for	Middle-Income	Americans	to the	valuable	retirement	savings	

education	 and	 assistance	 that	 I	 and	 many	 thousands	 of	 other	 registered	 representatives	

provide.	It	is	my	hope	that	my	comments	are	helpful	to	the	Department.

I	have	been	a	 registered	 representative	with	PFS	Investments	Inc.	since	1983.		My	office	is	in	

Pittsburgh,	Pennsylvania.		My	clients	come	from	the	community	in	which	I	live	and	work.		They	

are	hard-working,	very	busy	people,	and,	quite	typically,	before	they	meet	me,	no	one	has	ever	

taken	the	time	to	sit	down	with	them	to	assess	their	financial	picture	and	discuss	basic	financial	

concepts with	 them, such	as	 the	power	of	 saving	 for	 retirement	 through	 systematic	investing	

and	 what	 investment	 options	 are	 available	 to	 them.	 	 They, like	 so	 many	 people	 in	 Middle	

America, do	what	they	do	daily	very	well,	but	the	reality	of	life	is	that	there	is	no	time	left	in	the	

day	after	their	work	day	and	evening	family	commitments	end	for	them	to	proactively	seek	out	

education	and	advice	on	saving	and	investing.		What	some view	as	basic	saving	and	investing	

concepts	 that	 everyone	 already	 knows,	 is	 typically	 not	 information	 they	 know.	 	 They	 are	

starting	 from	a	 different	 baseline,	and	it	 takes	a	 substantial	time commitment to	 understand	

these	concepts	well	enough	to	make	actual	investment	decisions	independently.		

While	it	may	appear	that	they	have access to	this	information	if	they	have	computers	or	other	

mobile	devices	from	which	they	can	search	the	internet,	they	do	not,	in	my	experience,	access

this	information	on	their	own.		It	is	time-consuming	and	overwhelming.			They	are	much	more	

comfortable	working	with	a	live	person,	and	more	successful	when	 they	do	so,	both	of	which	
studies	have	demonstrated.

1 And	with	retirement	savings	and	retirement	plan	participation	at	

such	low	levels,	it	is	imperative	 that	we	help	Middle-Income	Americans	in	every	way	possible

get	on	track	toward	ensuring	better	futures	for	themselves	and	their	families.		

Working	with	Middle-Income	Americans to	achieve	their	financial	goals	is	what	I	have	done	my	

entire	career	in	the	financial	services	industry.			A	story	about	a particular	client	of	mine	comes	

to	mind.	

About	 thirty	 years	 ago	 I	 met	 a	 married	 couple	 at	 a	 local	 soccer	 game.	 	 The	 husband	 was	 a

Westinghouse	 employee	 and	 the	 mother	 was	 an	 elementary	 school	 teacher.	 	 Neither	 had	 a	

good	 understanding	 of	 how	 to	 take	 care	 of	 their	 household	 finances.	 	 I	 was	 able	 to	 educate	

them	 about	 protecting	 their	 family	 with	 life	 insurance	 and	 saving	 for	 retirement	 by	 saving	

through	 their	 employer-provided	 plans	 and	 with	 IRAs.	 	 They	 each	 began	 investing	 $50	 per	

month.			Over	time	they	started	saving	more,	and	their	investments	grew.		Tragically,	the wife	

recently	 died	 of	 breast	 cancer,	 and	 I	 received	 the	 below	 letter	 from	 the	 husband	 soon	

thereafter.		

Rita	and	Don,

I	 wanted	 to	 thank	 you	 so	 much	 for	 all	 you	 did	 in	 managing	 my	 investments.	

Thirty	 some	 years	 ago	 when	 you	 approached	 us	 with	 the	 different	 options	 for	

investing,	I	never	would	have	thought	it	would	turn out	this	way.	When	(my	wife)

passed	I	was	 so	wrapped	 up	in	emotions	and	 pain	I	 didn’t	 know	which	way	 to	

turn	with	my	finances.	I	was	so	glad	I	could	turn	to	you	for	help	and	advice.	The	

way	you	(Primerica	Investment	Services)	handled	that	very	difficult	situation	was	

unbelievable.	I	 truly	appreciated	how	quickly	and	easily	you	 turned	around	 the	

investments	and	life	insurance	 proceeds	which	 have	made	life	much	easier	 for	

me	and	my	 family.	Your	kindness	and	thoughtfulness	was	overwhelming	during	

this	 time	but	your	 financial	expertise	 [was]	unparalleled.		Now	in	 times	when	I	

need	 extra	 financial	 support,	 it	 is	 such	 a	 blessing	 to	 be	 able	 to	 utilize	 the	

resources	you	have	set	up	for	me	and	my	family.	I	will	never	be	able	to	replace	

(my	wife) but	because	of	the	help	you	gave	me,	it	is	so	comforting	knowing	that	

financially	we	are	sound.

Thank	you	again	for	all	your	help.

It is	 my	 belief	 that	 the	 Proposed	 Rule	 and	 the	 BIC	 Exemption	 as	 drafted	 will	 eliminate	 or	

substantially	reduce	people	like	this	couple’s access	to	education	and	advice,	at	the	exact	time	

																																																												 1 Oliver	Wyman:	The	role	of	financial	advisors	in	the	US	retirement	market	(July	6,	2015).		Oliver	Wyman	states	that	

it	“.	.	.	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	non-advised	

individuals.”
and	for	the	exact	purpose	they	need	it	most	– saving	for	retirement.		I	fear	that	the	translation	

of	education	into	advice,	the	imposition	of	the	new	BIC	contract,	the	uncertainties	created	by	

the	 Impartial	 Conduct Standards which	 substantially	 increase	 liability	 costs	 and	 effectively	

disqualify	 the	 commission	model, and	 the	 costs	 of	 complying	 with	all	 of	 the	many	 disclosure	

requirements, will	 cause	 firms	 such	 as	 PFS	 Investments	 Inc.	 to	 conclude	 that	 it	 simply	 is	 not	

feasible	to	open	smaller	accounts.		If	a	decision like	this	is	made,	my	clients	will	lose	access	to	

the	 education	 and	 advice	 they	 so	 badly	 need,	 and	 their	 futures	 will	 be	 severely	 negatively	

impacted	as	a	result.		

It	is	my	hope	that	the	Department	will take	this	into	consideration and	withdraw	the	Proposed	

Rule.		Thank	you	again	for	the	opportunity	to	comment.

Sincerely,

Rita	Huckle

Pittsburgh,	Pennsylvania	
APPENDIX 13
July	20th,	2015

U.S.	Department	of	Labor	

Office	of	Regulations	and	Interpretations

Employee	Benefits	Security	Administration

200	Constitution	Avenue,	NW

Washington,	DC	20210		

Re:	Definition	of	the	Term	“Fiduciary”;	Conflict	of	Interest	Rule—Retirement	Investment	Advice	

(RIN	1210-AB32)

Ladies	and	Gentlemen:	

Thank	 you	 for	 the	 opportunity	 to	 provide	 comments	 regarding	 the	 Department	 of	 Labor’s	

(“Department”)	Proposed	Conflict	of	Interest	Rule	(“Proposed	Rule”)	and	Best	Interest	Contract	

Exemption	(“BIC	Exemption”)	under	the	Employee	Retirement	Income	Security	Act	of	1974,	as	

amended	 (“ERISA”).	 	 I	 am	 concerned	 that	 the	 Proposed	 Rule	 and	 BIC	 Exemption	 will	

unnecessarily	increase	barriers	for	Middle-Income	Americans	to	the	valuable	retirement	savings	

education	 and	 assistance	 that	 I	 and	 many	 thousands	 of	 other	 registered	 representatives	

provide.	It	is	my	hope	that	my	comments	are	helpful	to	the	Department.	

I	have	been	a	 registered	 representative	with	PFS	Investments	Inc.	since	1983.		My	office	is	in	

Fort	Washington,	Pennsylvania.		My	clients	come	from	the	community	in	which	I	live	and	work.		

They	are	hard-working,	very	busy	people,	and,	quite	typically,	before	they	meet	me,	no	one	has	

ever	 taken	 the	 time	 to	 sit	 down	with	 them	 to	assess	 their	 financial	 picture	and	 discuss	 basic	

financial	 concepts	with	 them,	 such	as	 the	 power	 of	 saving	 for	 retirement	 through	 systematic	

investing	 and	 what	 investment	 options	 are	 available	 to	 them.	 	 They,	 like	 so	 many	 people	 in	

Middle	America,	do	what	they	do	daily	very	well,	but	the	reality	of	life	is	that	there	is	no	time	

left	 in	 the	 day	 after	 their	 work	 day	 and	 evening	 family	 commitments	 end	 for	 them	 to	

proactively	seek	out	education	and	advice	on	saving	and	investing.		What	some	view	as	basic	

saving	 and	 investing	 concepts	 that	 everyone	 already	 knows,	 is	 typically	 not	 information	 they	

know.		They	are	starting	from	a	different	baseline,	and	it	takes	a	substantial	time	commitment	

to	understand	these	concepts	well	enough	to	make	actual	investment	decisions	independently.		

While	it	may	appear	that	they	have access to	this	information	if	they	have	computers	or	other	

mobile	devices	from	which	they	can	search	the	internet,	they	do	not,	in	my	experience,	access

this	information	on	their	own.		It	is	time-consuming	and	overwhelming.			They	are	much	more	

comfortable	working	with	a	live	person,	and	more	successful	when	 they	do	so,	both	of	which	
studies	have	demonstrated.1 And	with	retirement	savings	and	retirement	plan	participation	at	

such	low	levels,	it	is	imperative	 that	we	help	Middle-Income	Americans	in	every	way	possible	

get	on	track	toward	ensuring	better	futures	for	themselves	and	their	families.		

Working	with	Middle-Income	Americans	to	achieve	their	financial	goals	is	what	I	have	done	my	

entire	career	in	the	financial	services	industry.			A	story	about	a	particular	client	of	mine	comes	

to	mind.	

About	15	years	ago	I	sat	down	with	a	married	couple	in	their	home	because	the	wife	asked	me	

to	review	their	financial	situation.		The	husband	earned	very	good	money	working	as	a	railroad	

engineer,	 the	wife	worked	in	 the	home,	and	 they	had	one	daughter.		Despite	earning	a	good	

income	on	the	railroad	the	family	had	a	sizeable	amount	of	consumer	debt	and	no	savings.		One	

reason	was	due	to	the	wife	spending	a	lot	of	money	buying	gifts	for	others.		After	introducing	

them	to	basic	financial	concepts	I	was	able	to	help	them	establish	a	financial	game	plan	to	get	

rid	of	 their	 debt	and	 start	 saving	 for	 retirement.		For	example,	I	informed	 the	wife	 she	could	

express	 generosity to	 her	 friends	 and	 family	 by	 writing	 personal	 letters	 or	 providing	 baking	

goods	instead	of	spending	money	she	did	not	have	on	expensive	consumer	items.		They	chose	

to	follow	my	guidance	by	paying	down	their	debts,	opening	an	emergency	account,	and	an	IRA	

in	which	they	invested	$50	per	month.	The	financial	knowledge	I	gave	them	empowered	them	

to	learn	more	on	their	own	which	led	to	more	questions.		Since	I	do	not	charge	by	the	hour	like	

fee-based	 advisers	 do	 it	 freed	 them	 to	 ask	 as	 many	 questions	 as	 they	 would	 like.	 	 We	 had	

several	conversations	about	 the	 fees	involved	in	 their	investment	 transactions.	After	a	 five	 to	

seven	year	process	they	had	erased	all	their	debt	and	increased	their	retirement	savings	along	

the	way.		One	day	the	wife	left	a	message	on	my	answering	machine	thanking	me	 for	turning	

her	 whole	 life	 around.	 	 She	 had	 no	 debt,	 and	 she	 had	 emergency	 savings	 and	 retirement	

savings.

It	 is	 my	 belief	 that	 the	 Proposed	 Rule	 and	 the	 BIC	 Exemption	 as	 drafted	 will	 eliminate	 or	

substantially	reduce	people	like	this	couple’s	access	to	education	and	advice,	at	the	exact	time	

and	for	the	exact	purpose	they	need	it	most	– saving	for	retirement.		I	fear	that	the	translation	

of	education	into	advice,	the	imposition	of	the	new	BIC	contract,	the	uncertainties	created	by	

the	 Impartial	 Conduct	 Standards	 which	 substantially	 increase	 liability	 costs	 and	 effectively	

disqualify	 the	 commission	model, and	 the	 costs	 of	 complying	 with	all	 of	 the	many	 disclosure	

requirements will	 cause	 firms	 such	 as	 PFS	 Investments	 Inc.	 to	 conclude	 that	 it	 simply	 is	 not	

feasible	to	open	smaller	accounts.		If	a	decision	like	this	is	made,	my	clients	will	lose	access	to	

the	 education	 and	 advice	 they	 so	 badly	 need,	 and	 their	 futures	 will	 be	 severely	 negatively	

impacted	as	a	result.		

																																																												 1 Oliver	Wyman:	The	role	of	financial	advisors	in	the	US	retirement	market	(July	6,	2015).		Oliver	Wyman	states	that	

it	“.	.	.	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	non-advised	

individuals.”
It	is	my	hope	that	the	Department	will	take	this	into	consideration	and	withdraw	the	Proposed	

Rule.		Thank	you	again	for	the	opportunity	to	comment.

Sincerely,

Shelly	Rosen

Fort	Washington,	Pennsylvania	
APPENDIX 14
July 20th, 2015

U.S. Department of Labor 

Office of Regulations and Interpretations

Employee Benefits Security Administration

200 Constitution Avenue, NW

Washington, DC 20210 

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice 

(RIN 1210-AB32)

Ladies and Gentlemen: 

Thank you for the opportunity to provide comments regarding the Department of Labor’s 

(“Department”) Proposed Conflict of Interest Rule (“Proposed Rule”) and Best Interest Contract 

Exemption (“BIC Exemption”) under the Employee Retirement Income Security Act of 1974, as 

amended (“ERISA”). I am concerned that the Proposed Rule and BIC Exemption will 

unnecessarily increase barriers for Middle-Income Americans to the valuable retirement savings 

education and assistance that I and many thousands of other registered representatives 

provide. It is my hope that my comments are helpful to the Department. 

I have been a registered representative with PFS Investments Inc. since 1996. My office is in 

Blue Springs, Missouri. My clients come from the community in which I live and work. They are 

hard-working, very busy people, and, quite typically, before they meet me, no one has ever 

taken the time to sit down with them to assess their financial picture and discuss basic financial 

concepts with them, such as the power of saving for retirement through systematic investing 

and what investment options are available to them. They, like so many people in Middle 

America, do what they do daily very well, but the reality of life is that there is no time left in the 

day after their work day and evening family commitments end for them to proactively seek out 

education and advice on saving and investing. What some view as basic saving and investing 

concepts that everyone already knows, is typically not information they know. They are 

starting from a different baseline, and it takes a substantial time commitment to understand 

these concepts well enough to make actual investment decisions independently. 

While it may appear that they have access to this information if they have computers or other 

mobile devices from which they can search the internet, they do not, in my experience, access

this information on their own. It is time-consuming and overwhelming. They are much more 

comfortable working with a live person, and more successful when they do so, both of which 

studies have demonstrated.1And with retirement savings and retirement plan participation at 

 

1

Oliver Wyman: The role of financial advisors in the US retirement market (July 6, 2015). Oliver Wyman states that 

it “. . . was engaged to perform a rigorous investigation of the role of financial advisors in the US retirement 
such low levels, it is imperative that we help Middle-Income Americans in every way possible 

get on track toward ensuring better futures for themselves and their families. 

Working with Middle-Income Americans to achieve their financial goals is what I have done my 

entire career in the financial services industry. A story about a particular client of mine comes 

to mind. 

Fifteen years ago I met a married couple who had two small IRA accounts. The husband was a 

manager at a local retail store and the wife was a hair dresser. They were in their late 40s or 

early 50s, and their IRAs each had about $10,000 conservatively invested. I provided a financial 

needs analysis, and they chose to rollover their IRAs because they saw the benefit of working 

with a licensed financial representative like me. They wanted the education and guidance that I 

could provide them to help them better understand their investment options. Today, there is 

now well over $100,000 in the account, and the client is debt free, including the mortgage, 

because of the guidance I provided. Unfortunately, the wife now has onset Alzheimer’s, but 

she and her husband frequently visit my office just to say “hi.” Her husband has thanked me for 

the help I provided and informed me they are better off financially because of our relationship. 

Main street families need the opportunity to have the human touch I provide. 

It is my belief that the Proposed Rule and the BIC Exemption as drafted will eliminate or 

substantially reduce people like this couple’s access to education and advice, at the exact time 

and for the exact purpose they need it most – saving for retirement. I fear that the translation 

of education into advice, the imposition of the new BIC contract, the uncertainties created by 

the Impartial Conduct Standards which substantially increase liability costs and effectively 

disqualify the commission model, and the costs of complying with all of the many disclosure 

requirements will cause firms such as PFS Investments Inc. to conclude that it simply is not 

feasible to open smaller accounts. If a decision like this is made, my clients will lose access to 

the education and advice they so badly need, and their futures will be severely negatively 

impacted as a result. 

It is my hope that the Department will take this into consideration and withdraw the Proposed 

Rule. Thank you again for the opportunity to comment.

Sincerely,

Jodie Orel

Blue Springs, Missouri

 

market, and quantify differences in investing behavior and outcomes between advised and non-advised 

individuals.”