Page 2 of 16

to reach out to many middle-income families, as revenue from accounts with small account 

balances will not generate sufficient fees to cover the costs associated with providing outreach 

and account services. Significantly, as evidenced by submissions from the Chairs of the 

Primerica Hispanic American Leadership Council and African American Leadership Council and 

thousands of African American Primerica representatives, these effects are likely to be 

particularly severe for minority communities and representatives. 

In the face of these potentially significant consequences of the proposed rule, Primerica 

believes that the record does not adequately justify application of the proposed rule to IRAs. 

Indeed, the discussion and evidence provided in the Department’s Notice of Proposed 

Rulemaking (the “NPRM”) do not address the IRA market at all. Moreover, as articulated in the 

Fischel & Kendall Comment, the studies cited in the NPRM do not support the view that there is 

a market problem that justifies regulation, particularly regulation that would effectively eliminate 

commission-based brokerage arrangements3 for IRAs.4 Quite to the contrary, economic and 

empirical evidence shows that IRA holders are served by a competitive market in which expense 

ratios have declined steadily for the past twenty years. In such a market, investors can and do 

make competitive choices among fee structures, with the vast majority of IRA investors choosing 

commission-based broker-dealer accounts over asset-based advisory accounts. There is no basis 

to believe that these clear preferences for commission-based accounts are driven by conflicts of 

interest or that IRA investors are unduly vulnerable, particularly given that the IRA market is 

now heavily regulated and is subject to suitability requirements. The available evidence 

demonstrates that the market operating under the suitability standard has generated higher 

investment returns, lower expenses, more service, and greater choice for IRA investors than 

would be possible under the proposed rule. There is no reasonable basis to override consumer 

choice and effectively eliminate the commission-based model now in use through additional 

incremental regulation, especially when the SEC has stressed that its regulation of the brokerdealer market will be business-model neutral. 

Primerica respectfully proposes that the Department should except IRAs from the 

proposed rule. That is the simplest and most efficient solution and is the solution that effectuates 

the President’s recent directive that agencies take account of costs in their rulemakings and 

“identify and use the best ... and least burdensome tools for achieving regulatory ends.”5 Clarity 

is particularly important in a market including millions of small accounts because regulatory 

uncertainty raises transaction costs that are inevitably passed along to individual investors. 

Absent that straightforward solution, Primerica requests that the Department modify the “seller” 

exception in the proposed rule to make it clear that it applies to broker-dealers and does not 

require broker-dealers to take action that would unnecessarily inhibit investors from using their 

services and obtaining assistance. In all events, the Department should ensure that its laudable 

efforts to assist American families with retirement savings do not have the unintended effect of 

harming the very constituencies the rule was designed to protect. 

 

3

 The term “commission-based” model or arrangement is used broadly in this letter to include an arrangement 

whereby a firm receives a commission, 12(b)-1 fees, and support and servicing fees from fund providers or their 

affiliates. 

4

 Fischel & Kendall Comment at ¶¶ 35-48. 

5

 Improving Regulation & Regulatory Review, Exec. Order No. 13563, 76 Fed. Reg. 3821 (Jan. 18, 2011). 
Page 3 of 16

How Primerica Works

Primerica is a leading distributor of basic savings and investment products to middleincome 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 structured in the interests of the middle-income 

clients we serve. 

Because Primerica offers only limited categories of investment products (mutual funds, 

variable annuities and college savings plans), our representatives are required to hold only Series 

6 and 63 FINRA registrations.6 Primerica allows its representatives to be part-time, which 

permits them to earn supplemental income by concentrating on the smaller-sized transactions 

typical of middle-income consumers. Primerica representatives are independent contractors paid 

only by commissions resulting from product sales. 

Primerica’s investment philosophy is geared toward the middle-income market. We 

teach the long-term benefits of dollar cost averaging through systematic investing into a 

diversified investment portfolio. To help our customers adopt this approach, our affiliated 

shareholder servicing entity, Primerica Shareholder Services (“PSS”), facilitates monthly 

investments into mutual fund accounts on its platform by processing periodic bank drafts against 

customer checking accounts. In addition to the benefits of dollar-cost averaging, Primerica 

emphasizes the need to begin saving for retirement as soon as reasonably practicable. As a 

result, in just about any given year, approximately half of all accounts opened by Primerica are 

IRAs through which our customers begin or continue the important task of saving for retirement. 

To help defray the relatively large account servicing and marketing costs associated with 

holding smaller-sized accounts typical of middle-income consumers, Primerica receives 

compensation from the mutual fund families that we offer. PFSI receives marketing and support 

payments and PSS receives shareholder servicing fees. Each type of compensation is expressly 

authorized by the mutual fund’s Board of Directors and plainly disclosed in the mutual fund 

information brochure that we deliver to every mutual fund customer at the point-of-sale. 

Representatives are not informed of the terms of Primerica’s agreements with fund companies 

and therefore are unable to promote funds that pay the firm higher amounts of these fees. 

Moreover, Primerica does not pass these payments on to its representatives as additional sales 

compensation. 

 

To the contrary, these payments provide important benefits to consumers because they 

help to cover the costs of providing services to the middle-income market. These payments 

defray, in part, the expense of services such as customers’ 24-7 internet access to their accounts, 

customer-service call centers, portfolio analytical tools to assist representatives, the design of 

asset allocation models, software applications to facilitate trade submission and improve 

 

6

 Virtually all Primerica representatives are also agents of our affiliated life insurance company and hold the 

appropriate state life insurance licenses. 
Page 4 of 16

customer statements, and continual education for our representatives. Moreover, as many fund 

families pay account servicing fees on a per-position basis (i.e. they pay the same fee for each 

position regardless of the size of the account), such fees help subsidize Primerica’s costs of 

carrying large numbers of small balance IRA accounts. Absent such subsidy from the mutual 

fund companies, the actual cost of carrying such accounts would have to be passed directly 

through to the investors, reducing the attractiveness for a customer to open a small value IRA or 

our incentive to offer such products. In short, our current ability to receive these account 

servicing payments encourages smaller account holders—the ones that may be most in need of 

retirement savings—to open and add to IRAs. 

Finally, when guiding a customer through the sales process of mutual fund shares, 

representatives are governed by FINRA’s suitability rule and face regulatory and civil liability if 

they fail to comply with such rules. FINRA’s suitability rule requires that each product we sell 

be suitable for that customer based on her financial situation and needs.7

The Proposed Rule Will Have Harmful Effects on the IRA Market and 

Middle-Income Investors

The Proposed Rule Will Increase Costs and Require Greater Account Minimums

As proposed, the revised definition creates significant uncertainty as to when and how a 

broker-dealer representative, operating in the retail market, becomes subject to the prohibited 

transaction rules affecting fiduciary conduct. In light of such uncertainty, we believe that much 

of retail brokerage business (including ours) will be forced to migrate from a commission-based 

brokerage model to an asset-based advisory model. Thus, this uncertainty and concomitant risk 

will require fundamental changes in the way that market participants such as Primerica structure 

their IRA businesses and compensate their representatives. Under this new model, broker-dealer 

compensation would have to be borne entirely by the IRA account, without any subsidy, as an 

asset-based fee, and fees paid by mutual funds and their advisers would have to be substantially 

restructured, if not eliminated.8 Under this new structure, broker-dealers like Primerica that 

serve the middle-income market would have to raise account minimums, as an asset-based fee 

may not sufficiently compensate Primerica (or its representative) for the upfront costs of opening 

and maintaining the small balance accounts. Over 70% of Primerica’s IRA accounts currently 

maintain an account balance of $10,000 or less. Our initial analysis indicates that Primerica 

would have to raise its minimum account balance to at least $25,000 in order to cover the 

administrative costs associated with an account and a reasonable annual distribution cost.9 Such 

a change would significantly limit the number of middle-income American families that could 

afford to open an IRA account. 

 

7

See generally NASD Rule 2310. 

8

 It might theoretically be possible that broker-dealers could avoid fiduciary conflicts and receive fees from mutual 

funds by insuring that an identical amount of fees is received from every mutual fund provider on every type of fund 

that could be sold to an IRA investor. But it is very doubtful that such arrangements are practical, or that mutual 

fund providers will cooperate with the effort. Mandating such arrangements would create uncertainty and potential 

liability that would unnecessarily raise administrative costs. 

9

 Oliver Wyman found that investors with less than $25,000 in their account represent approximately half of IRA 

investors and that those with less than $10,000 comprise over a third. Oliver Wyman 2011 Study at 10. 
Page 5 of 16

This effect will be exacerbated under the advisory based model because of increased 

administrative and compliance costs and significant reductions in fees provided by mutual fund 

providers. Oliver Wyman’s study of twelve retail investment advisory firms that constitute 

approximately 40% of the IRAs and 40% of the IRA assets in the United States found that the 

estimated direct costs of maintaining an IRA under an advisory model would rise between 73% 

and 196%.10

The Proposed Rule Will Reduce the Number of Broker-Dealers Willing or Able 

to Open IRA Accounts

As the costs of opening and maintaining an IRA account rise under the advisory model, 

minimum account balances will rise and broker-dealers will have reduced incentives to meet 

with and provide education on saving for retirement to middle-income families. As an initial 

matter, by moving to an advisory fee model, broker-dealer representatives are unlikely to take 

the time to educate families about IRAs and retirement savings if those families will not be able 

to afford the higher minimum account balance. This is because the vast majority of the mutual 

fund shares that Primerica currently sells are Class A shares, which have a one-time up-front 

sales charge on the amount invested.11 This frontloading of compensation incentivizes our 

representatives to open small-balance accounts. Under the advisory fee model, wherein 

compensation is “delayed” or “deferred” over time, the incentive to open small balance accounts 

would be greatly diminished. For this reason alone, we anticipate that many of the smaller IRAs 

that we now open would not get opened under an advisory model. 

Moreover, under the proposed rule, 36% of registered representatives across the United 

States will be disqualified from continuing to offer IRAs, because under an advisory model, 

representatives would be required to obtain FINRA Series 65 licenses and/or register with state 

regulatory agencies.12 Typically, registered representatives of broker-dealers like Primerica that 

sell mutual funds to middle-income families have FINRA Series 6 and 63 licenses. The costs of 

obtaining the Series 65 license are considerable, as the fee for the exam and study courses alone 

total nearly $350 per person.13 Given the limitations on the amount and timing of adviser fees 

that would be charged to smaller account holders, it is unlikely that individual representatives 

will see getting an additional license as worthwhile. Thus, the proposed rule may result in a 

dramatic contraction in the number of individuals available to offer IRAs to middle-income 

Americans and, consequently, may raise costs to investors, cause a significant loss of jobs in the 

financial services industry, or have the unintended consequence of increasing the number of nonretirement accounts opened. 

The reduction in the number of these representatives, who seek to educate middle-income 

investors about the importance of retirement savings, will have significant ramifications. As 

studies have shown, middle-income Americans already lack sufficient access to basic retirement 

planning education. When exposed to the basic concepts of retirement investing, however, a 

near majority of them respond by changing their behavior and saving more money for their 

 

10

 Id. at 21. 

11 Class A shares also include a small, annual 12(b)-1 fee. 

12 Oliver Wyman 2011 Study at 19. 

13

 See also Fischel & Kendall Comment at ¶¶ 13-15. 
Page 6 of 16

future.14 With fewer representatives able to offer IRA investments, the critically-important 

message of saving for retirement will reach fewer American families. And when that message 

goes undelivered, the data shows conclusively that families do not take adequate steps to save for 

retirement.15 In this way, the proposed rule will harm the very people it was intended to protect. 

For these and other reasons, the commission-based model, which has been operating for 

decades, has significant advantages over the asset-based advisory model. But to the extent that 

the proposed rule is designed to induce investors to adopt an advisory model—an objective we 

believe is misguided—the evidence indicates that the rule would be ineffective, even for those 

consumers who could afford to open and maintain advisory accounts. Oliver Wyman’s study of 

the IRA market shows that 88% of all IRA investors in its large sample hold commission-based 

brokerage IRAs instead of asset-based advisory accounts and that a staggering 99% of investors 

with assets under $10,000 hold commission-based brokerage accounts.16 As these facts indicate, 

these customers choose not to work with asset-based advisers. The proposed rule will not 

eliminate that preference, particularly where, as described below, a fee-based advisory account 

will yield diminished returns as compared to other accounts. 

The Proposed Rule Will Result in Diminished Returns for Middle-Income IRA Investors

Beyond the effects that the proposed rule would have on IRA costs and the number of 

representatives willing or able to serve middle-income investors, the evidence demonstrates that 

Primerica’s current commission-based compensation model provides superior long-term 

investment returns when compared to an advisory model. The great majority of our retirement 

customers are—to their benefit—long-term, buy-and-hold investors. In its recently published 

Dodd-Frank report, the SEC staff discussed the fact that buy-and-hold investors would incur 

greater expenses under an advisory model. The staff report states: 

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, e.g., fee-based accounts that trade 

so infrequently that they would have incurred lower costs for the investor had the 

accounts been commission-based. This practice is commonly referred to as 

“reverse churning” or “underutilization.” Ultimately, reverse churning reduces 

the profitability of affected accounts to the customers. Between 2004 and 2009, 

 

14 EMPLOYEE BENEFIT RESEARCH INSTITUTE, 2010 EBRI RETIREMENT CONFIDENCE SURVEY, available at 

http://www.ebri.org/pdf/briefspdf/EBRI_IB_03-2010_No340_RCS.pdf, at 25 (noting that 44% of households that 

performed a calculation of how much they needed to save for retirement changed their habits as a result, including, 

most often, by beginning to save or invest in greater amounts). 

15

 See, e.g., id. at 1, 16, 22 (40% of American workers are not saving for retirement, less than half have attempted to 

calculate what they need to retire, and nearly half of those that try to ascertain an amount to save report that they 

determined how much to save for retirement by guessing); see also AARP, AARP BULLETIN SURVEY ON 

RETIREMENT SAVINGS: EXECUTIVE SUMMARY 4 (April 2009), available at http://assets.aarp.org/rgcenter/econ/ 

bulletin_retiresavings.pdf (noting almost half of sample surveyed were not saving for retirement, but that of those 

that were, 50% reduced or ceased contributions in the prior 12 months). 

16 Oliver Wyman 2011 Study at 11-12. 
Page 7 of 16

FINRA disciplined ten firms in connection with reverse churning, imposing over 

$7 million in fines and ordering over $9.5 million be paid in restitution to 

investors.17

To illustrate the staff’s concerns, we refer to Attachment 1 to the Fischel & Kendall 

Comment, which reflects a Morningstar hypothetical illustration of investor performance. In the 

examples, a typical Primerica customer makes an initial investment of $2,000 in a well-known 

balanced mutual fund inside an IRA, and then contributes $100 per month for 20 years. We 

compare our existing retail brokerage model where the investor purchases a Class A share that 

carries a 5.5% up-front one-time sales charge on each investment with an advisory model that 

imposes an annual 1.5% annual advisory fee.18 After 20 years our retail investor has 

significantly more money for retirement. With an initial investment of $2,000, our retail model 

produces an ending balance of $72,791 (or 8.75% annual return) versus $61,860 (or 7.45% 

annual return) for the advisory model.19 The evidence shows that these examples are 

representative of the overall market. Oliver Wyman’s study for SIFMA projects that “small 

investors” would have to pay an average of $460 more per year if they moved to an adviser 

model from a broker-dealer model.20 Accordingly, our existing retail brokerage structure is 

clearly a superior alternative for our middle-income buy-and-hold investors.21

The Proposed Rule Threatens to Create a Significant Decrease in Retirement Savings

In today’s market, broker-dealer representatives selling IRA products are frequently the 

only actors who bring basic retirement savings awareness and education to middle-income 

American working families. Our thousands of registered representatives are uniquely able to do 

this because they are members of the communities they serve. Primerica’s 16,000 registered 

representatives are widely distributed across the United States and our experience is that 

Primerica representatives frequently talk to families who have never before seriously considered 

or acted upon the need to save for retirement. 

We are proud to say that Primerica representatives have played an important part in 

increasing the retirement savings of American families. According to the Investment Company 

Institute’s 2010 Factbook, 39.3% of American households (46.1 million) have IRAs, and these 

IRAs have assets of $4.2 trillion.22 Primerica alone has approximately 1.3 million IRA accounts 

 

17 SEC, STUDY OF INVESTMENT ADVISERS AND BROKER-DEALERS AS REQUIRED BY SECTION 913 OF THE DODDFRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 152-153 (January 2011), available at 

http://www.sec.gov/news/studies/2011/913studyfinal.pdf. 

18 This illustration focuses only on the costs paid directly by the client. 

19

 See Fischel & Kendall Comment, Attachment 1. 

20

 See OLIVER WYMAN, STANDARD OF CARE HARMONIZATION: IMPACT ASSESSMENT FOR SEC 25 (Oct. 2010) 

(“Oliver Wyman 2010 Study”). 

21 This is consistent with FINRA’s guidance to its members that fee-based accounts may not be appropriate for all 

investors, and, in fact, commission-based accounts may be better for investors with a buy-and-hold strategy. See 

FINRA, Fee-Based Compensation: NASD Reminds Members That Fee-Based Compensation Programs Must Be 

Appropriate, Notice to Members 03-68 (Nov. 2003); see also Fischel & Kendall Comment at n. 18 (comparing 

advisory-fee model to Class C shares and noting commentary that Class C shares may not be appropriate for buyand-hold investors). 

22 INVESTMENT COMPANY INSTITUTE, 2010 INVESTMENT COMPANY INSTITUTE FACT BOOK 97, 100, available at

http://www.ici.org/pdf/2010_factbook.pdf (“ICI Fact Book”). 
Page 8 of 16

for its customers, with a total of almost $18 billion in IRA assets under management. Primerica 

representatives opened almost 80,000 new IRA accounts just in the year 2010. 

Eliminating commission-based brokerage for IRAs under the proposed rule—a loss that 

will not be made up by asset-based advisory services—inevitably will result in a significant 

decrease in IRA investments. As noted above, middle-income customers do not currently use 

asset-based advisers: they are expensive in relation to the small buy and hold investor typified by 

middle-income Americans and generally yield smaller returns over time. In light of this fact and 

the substantial costs of obtaining an investment advisory license, many registered representatives 

will be unable or unwilling to keep servicing this already underserved market segment or will 

turn to selling alternative forms of investments, including non-retirement accounts. Oliver 

Wyman estimates that, under the proposed rule, over 8 million accounts would not be opened 

over the next 20 years because of reduced access to investment advice, resulting in potential 

foregone retirement assets of 96 billion dollars.23 That will exacerbate well-documented 

shortfalls in retirement savings, particularly among middle-income24 and minority investors.25

Minority broker-dealer representatives and the communities they serve are likely to be 

hard-hit. That is evidenced in letters from the Chairs of Primerica’s Hispanic American 

Leadership Council and African American Leadership Council submitted to the Department in 

connection with this rulemaking. As those letters conclude, a commission-based IRA model that 

permits investors to create small initial accounts is of tremendous importance in Hispanic and 

African American communities, and a model that will sustain and encourage community 

outreach and education is critical in many minority communities that will otherwise not receive 

the service they need. As stated in a petition signed by over 2,250 Primerica minority 

representatives and sent to the Department in conjunction with this rulemaking, an advisory fee 

model that necessitates higher minimum account balances would not be sustainable in many 

middle-income communities and would dramatically diminish demand for IRAs. As articulated 

by seven of our representatives in videotaped interviews posted for the Department at 

http://www.Primerica.com/public/dol/, our representatives perform a critical function at a critical 

time, and the proposed rule threatens to deprive some of the most underserved communities of 

access to much-needed retirement education and savings. 

The Proposed Rule Will “Orphan” Millions of IRAs

In addition to dramatically reducing the number of new IRAs opened by middle-income 

Americans, the proposed rule would impact those families that have already opened IRAs to save 

for the future. Absent a migration of commission-based brokerage accounts to an asset-based 

 

23 Oliver Wyman 2011 Study at 17-18. 

24

 See, e.g., MCKINSEY, RESTORING AMERICANS’ RETIREMENT SECURITY: A SHARED RESPONSIBILITY, available at

http://www.mckinsey.com/clientservice/Financial_Services/Knowledge_Highlights/Recent_Reports/~/media/Report

s/Financial_Services/Retirement_Security.ashx, at 6-7 (finding that the average American working household will 

face a retirement savings shortfall of nearly $250,000 by the time of retirement, and that shortfalls are greatest 

among younger age segments and middle and lower-middle income segments). 

25

 See ARIEL INVESTMENTS & HEWITT ASSOCIATES, GROUNDBREAKING STUDY REVEALS AFRICAN-AMERICANS AND 

HISPANICS SIGNIFICANTLY LESS PREPARED FOR RETIREMENT THAN THEIR WHITE COUNTERPARTS (July 7, 2009) 

(finding that African American and Hispanic workers are less likely to participate in 401(k) plans, and when they do 

are likely to contribute less than white cohorts). 
Page 9 of 16

advisory model, the uncertainty of fiduciary status under the proposed rule would limit a 

representative’s ability to interact with her customer in the same manner she did previously. As 

a result, existing customers who either do not have an account balance above the account 

minimum for an advisory account or choose not to move to an advisory model may be forced to 

close their accounts or leave them dormant. Even for those investors that have account balances 

that will justify advisory fees, however, these costs will be higher than those formerly imposed 

under the commission-based model, resulting in diminished returns. 

As a result, many IRA investors may be “orphaned,” or left without the support of a 

representative who under the new regime will be willing or able to provide information and 

education, and may withdraw monies from their accounts (likely incurring a tax penalty as a 

result). The loss of this relationship with a broker-dealer representative can have significant 

long-term impacts on investors. Among a sample of nearly half of the IRA market alone, Oliver 

Wyman projects that approximately 10.7 million IRAs will have insufficient assets to switch to 

an advisory account at their current firm and 7.2 million accounts would have insufficient assets 

to move to an advisory account at any firm.26 This would be a tremendous setback for working 

families that are using these accounts to save for retirement. 

The Proposed Seller’s Exception is Insufficient in its Current Form 

 Absent a full exclusion of IRAs from the proposed rule, one approach to preserving the 

commission-based brokerage model and our ability to continue to service the middle-market 

would be to clarify the proposal’s “purchasing and selling” exception. 

 Pursuant to subparagraph (2)(i) of the proposed rule, a person would not be considered an 

investment advice fiduciary if the person “can demonstrate that the recipient of the advice knows 

or, under the circumstances, reasonably should know, that the person is providing the advice or 

making a recommendation in its capacity as a purchaser or seller of a security or other property, 

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

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

provide impartial investment advice.”27 This provision is intended to reflect the Department’s 

understanding that, in the context of selling investments to a purchaser, a seller’s 

communications with the purchaser may involve advice or recommendations that could come 

under the definition in the proposal, but that ordinarily should not result in fiduciary status if the 

purchaser knows that the seller has not undertaken to act as an impartial adviser. 

 This exception should be modified to clearly cover a broker-dealer (and its registered 

representative), when acting as an agent for an IRA (regardless of whether or not the brokerdealer is also an agent to the counterparty in the transaction), in purchase or sale transactions 

where the broker-dealer delivers a plain-English disclosure to the IRA owner that describes the 

 

26 Oliver Wyman 2011 Study at 16. 

27 We note that as currently proposed, the “Seller’s” exception uses the term “adverse.” This term does not 

accurately describe the role of a broker in an agency trade, because the broker is acting as agent for its principal—as 

relevant here, an IRA. To achieve the goal of alerting the IRA holder to a potential conflict of interest on the part of 

its agent, it should be sufficient to require full disclosure of the broker’s financial interest in the transaction (i.e., the 

commission or other fees). This is analogous to the approach the Department took under its Section 408(b)(2) 

regulation, when it determined that financial disclosure obviated the need for conflict of interest disclosure. 
Page 10 of 16

compensation that the broker-dealer will receive in connection with such transactions and 

explains that the broker-dealer is not acting as a “fiduciary” for purposes of IRC section 4975. 

The standards used for such disclosure could be coordinated with any standards that are 

developed by the SEC for broker-dealers, as those would be designed to address the specific 

types of issues that arise in a retail brokerage relationship. This would be consistent with the 

nature of the exception, as a disclosure-based limitation, making clear the nature of the 

relationship between the broker-dealer and the customer and what the IRA owner should 

reasonably expect in its dealings with the broker-dealer. Such a clearly stated exception would 

provide certainty to the financial services industry and permit broker-dealers to continue 

delivering the same level of investment services and support to their middle-income IRA 

customers without raising costs or otherwise pricing such customers out of the retirement market. 

The Department Has Failed Adequately to Justify the Proposed Regulation of IRAs

The evidence proffered by the Department in the NPRM does not justify regulation. 

First, that evidence does not address the IRA market. Though the Department has issued 

summary statements in its March 30, 2011 “Fact Sheet”—which were not published in the 

Federal Register as a part of the NPRM—it has offered no specific evidence of the 

“vulnerability” of IRA investors and offered only general statements regarding the expectations 

of investors in the IRA market. As discussed below and in the Fischel & Kendall Comment, the 

Department’s cost/benefit analysis and its justifications for the proposed rule do not recognize 

compelling economic and empirical evidence that supposed conflicts of interest do not, in fact, 

significantly impact the IRA market. It appears that the Department has failed to make reliable 

quantitative assessments, relying instead on qualitative judgments that do not accord with the 

available evidence. 

The Department’s Analysis of the Costs of the Proposed Rule is Incomplete 

As the Department has acknowledged, there are a considerable number of costs that may 

be imposed on service providers as a result of the proposed rule, but the NPRM merely 

acknowledges uncertainty with respect to those costs.28 Thus, the quantification of costs in the 

NPRM consists entirely of the legal costs the Department predicts will be incurred by certain 

investment services firms (which, notably does not include IRA providers) in reviewing their 

current books of business and totals a maximum of $16.7 million.29 This figure, which we 

believe is far too low, fails to account for significant costs that would be incurred by employees 

of these firms or investors who use these firms’ services and does not quantify the remaining 

costs to service providers. As evidenced by the Fischel & Kendall Comment and the Oliver 

Wyman report, such costs are likely to be very large, far outweighing any benefits of the 

proposed rule. 

As discussed above, a change in the fiduciary status of broker-dealers will require 

representatives to incur significant time and expense in obtaining a Series 65 license. Beyond 

the hundreds of dollars necessary to register and obtain study materials for the exam, the time 

 

28 75 Fed. Reg. 65275. 

29 75 Fed. Reg. 65274. We note that the $119/hour cost estimate for legal fees is likely a significant understatement 

and that, in fact, legal fees could be significantly greater. Compare SEC, Proposed Collection; Comment Request, 

76 Fed. Reg. 15002 (Mar. 18, 2011) (estimating in-house attorney’s fees at $354 per hour). 
Page 11 of 16

costs representatives would incur to prepare for and pass the Series 65 exam would likely be 

significant.30 Moreover, the NPRM does not attempt to quantify the potential loss of broker jobs 

or reduction in broker income that may occur for those representatives that do not or cannot take 

the additional licensing exam. 

In addition, while acknowledging that the proposed rule may result in higher costs, the 

NPRM does not adequately examine the higher investment costs that IRA investors who 

currently use commission-based services would face under the proposed rule, including, for 

example, higher fees paid to investment advisors by buy-and-hold investors and increased fees 

due to the reduction or elimination of third-party fees. With over 31 million households in the 

United States holding investment assets in commission-based accounts, even a small price 

increase for consumers would generate significant costs in aggregate.31 As Oliver Wyman has 

projected, small investors with between $10,000 and $25,000 in IRA assets would see a 73% 

increase in direct costs under a fee-based advisory model.32

Moreover, while broker-dealers like Primerica are currently able to open accounts with 

small minimum balances—as low as $250 at Primerica—the proposed rule would require the 

reduction or elimination of third-party fees and result in significantly higher account 

minimums—initially estimated to be $25,000 at Primerica. These account minimums would not 

only prevent a significant number of new investors from entering the market, however, they 

would also render existing accounts “orphans,” as a broker-dealer would have to impose the 

same revised cost structure upon giving new advice to an existing client and many existing 

investors do not maintain a balance high enough to justify paying such fees. The result would be 

a potentially significant loss not only in potential new retirement investment but in existing 

retirement investment. Oliver Wyman has estimated that these losses in retirement savings could 

prevent over 8 million accounts from being opened and cause investors to lose access to advice 

on approximately 7.2 million existing accounts.33 The consequent losses in retirement savings, 

projected to total more than $96 billion, have not been accounted for in the NPRM.34

To the extent that would-be IRA investors do turn to other investments—and studies 

indicate that approximately half of those required to switch accounts may cash out35—because 

IRAs are tax-advantaged, and because brokerage services provide basic investing information 

and education to their clients, individuals who choose not to invest in IRAs would likely receive 

lower returns on their investments. Because the IRA investment market is so large, even a small 

reduction in returns experienced by investors would generate very large costs, potentially in the 

billions of dollars.36

 

30 See Fischel & Kendall Comment at ¶ 14 (noting that the cost to the industry could exceed $295 million). 

31 Oliver Wyman 2010 Study at 13. 

32 Oliver Wyman 2011 Study at 21. 

33

 Id. at 16-17. 

34

 Id. at 17-18. 

35

 See HEWITT ASSOCIATES, THE EROSION OF RETIREMENT SECURITY FROM CASH OUTS: ANALYSIS &

RECOMMENDATIONS 2 (July 25, 2005). 

36 See Fischel & Kendall Comment at 31 ( “If, because of effects described above, the Proposed Rule led even 1% 

of investment assets to be withdrawn from IRA accounts, and if those assets therefore generated 25 basis points 

lower annual returns (due, e.g., to disadvantaged tax treatment of non-IRA funds or because of the absence of broker 
Page 12 of 16

The Evidence Presented by the Department to Establish the Benefits of the 

Proposed Rule is Not Conclusive

The cost-benefit analysis presented by the Department to justify the proposed rule claims 

benefits that are “not quantified,”37 but which the Department believes could be large.38 The 

only quantification of benefits provided in the NPRM claims that an improvement in the service 

value received by investors might be worth $399 million over ten years.39 This quantification 

appears to be largely, if not entirely, speculative, as there is no cited study indicating that 

investors would in fact receive the amount of benefits assumed in the Department’s calculation. 

The NPRM does cite a Government Accountability Office study and three unpublished 

academic manuscripts that purport to show that conflicts of interest result in underperformance 

or an erosion of value and that the elimination of commission payments under the proposed rule 

would therefore yield some (unspecified) level of benefit to investors.40 The authors of these 

studies indicate, however, that their results are far from conclusive on the relevant issues. The 

authors of the GAO study, for instance, write that their findings “should not be considered proof 

of causality between conflicts and lower rates of return,”41 and that “these results cannot be 

generalized to the population of pension consultants.”42 Similarly, the authors of one of the 

academic manuscripts cited indicate that their results do not prove that conflicts of interest lead 

to investor harm and in fact are consistent with “substantial non-tangible benefits derived by the 

broker distributed sector.”43 Indeed, the authors of these academic studies find evidence that 

investment advisers and brokers provide significant benefits to their clients in the current 

regulatory environment.44 

In any case, however, none of the cited studies specifically analyze IRA investment 

services. The cited academic literature examines assets purchased by many types of investors, 

not only IRA investors, and the cited GAO study analyzes data from investors in defined benefit 

 

services), then the Proposed Rule would generate losses of nearly $790 million in current dollars over ten years 

using a 7% discount rate”). 

37 75 Fed. Reg. 65270. 

38 75 Fed. Reg. 65273 (“the Department is confident that service value improvement could be substantial as a result 

of the proposed rule”). 

39 75 Fed. Reg. 65273 (“If just 10 percent of plans realize a one basis point (0.01 percent of plan assets) service 

value improvement, it would be worth approximately $399 million over ten years using a seven percent discount 

rate and reporting in 2010 dollars”). 

40 75 Fed. Reg. 65272-3, n. 29, 30, and 31. 

41 GAO, “Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans,” GAO-09-503T (March 

24, 2009), at summary page (“GAO Study”). 

42

 Id. at 16. The GAO testimony to Congress cited by the Department summarizes this earlier econometric analysis. 

43 Daniel Bergstresser, John Chalmers, & Peter Tufano, “Assessing the Costs and Benefits of Brokers in the Mutual 

Fund Industry,” Social Science Research Network Abstract 616981, Sept. 2007, at 1. 

44

 See id. (“Brokers may help their clients save more than they would otherwise save, they may help clients more 

efficiently use scarce time, they may help customize portfolios to investors’ risk tolerances, and they may increase 

overall investor comfort with their investment decisions”). See also Xinge Zhao, “The Role of Brokers and 

Financial Advisors Behind Investments into Load Funds,” China Europe International Business School Working 

Paper, Dec. 2005, at 32 (“[W]hile no load fund investors flock into larger funds with more visibility, load fund 

investors are more likely to be directed by brokers and financial advisers into smaller funds, which might experience 

better performance than larger funds exceeding their optimal size”). 
Page 13 of 16

plans, a category which does not include IRAs, and for which financial services needs are very 

different than those demanded by IRA investors.45

Moreover, none of the cited studies directly addresses the impact that the proposed rule, 

or any similar rule, would have. Instead, these studies focus on evidence that, in the current 

regulatory environment, certain investors who employ certain brokers or advisers achieve lower 

returns on their assets than other investors. Even if valid, this evidence would not be sufficient 

to conclude that a change in the regulatory environment, as under the proposed rule, would lead 

to significant benefits, because the proposed rule would change the structure of the industry in a 

variety of ways not considered by these studies. As discussed extensively above and analyzed in 

the Fischel & Kendall Comment46 and by Oliver Wyman,47 and as acknowledged by the 

Department in the NPRM, the proposed rule will have potentially significant effects on the IRA 

market, including increased costs, reduced access, and fewer brokers. The studies cited in the 

NPRM, therefore, are of only limited weight in predicting the actual benefits under the system 

that would be in place under the proposed rule. 

Commission-Based Conflicts of Interest Do Not Have a Documented Negative 

Impact on the Current IRA Market 

As noted above, over 31 million households in the United States hold investment assets 

in commission-based accounts, which represents 88% of all accounts held with brokers or 

advisers.48 Only 12% of these accounts are with “fee-only” advisers, who do not accept thirdparty product provider compensation.49 This strong customer preference for commission-based 

services in the current regulatory environment is difficult to reconcile with a claim that the 

providers of these services are consistently providing poor service to their customers, or that 

additional regulation could significantly increase value provided to investors. 

Indeed, the market for IRA investment services is a competitive one, with many firms 

competing for client accounts and low costs for investors to switch between firms if they feel 

they are receiving inferior value.50 This competition significantly restrains commission-based 

brokers from behaving opportunistically with respect to potential conflicts of interest because 

such behavior provides competing brokers opportunities to provide higher value, and because 

competitors can provide “second opinions” to customers as a check on the advice and other 

services investors receive. As evidence of this competition, average fees and expenses for 

mutual funds have declined consistently and steadily over time, with an approximately 50% 

 

45 While the GAO testimony to Congress cited by the Department discusses the possibility that conflicts of interest 

may exist in defined contribution plans and may affect investors, the evidence provided in the GAO study focuses 

exclusively on defined benefit plans. See GAO Study at summary page (“Our study focused exclusively on DB 

[defined benefit] plans”). 

46

 See Fischel & Kendall Comment. These comments also indicate that the evidence supplied in the cited studies is 

consistent with the economics of competitive markets without imperfections caused by conflicts of interest. 

47 Oliver Wyman 2010 Study; Oliver Wyman 2011 Study. 

48 Oliver Wyman 2010 Study at 10; Oliver Wyman 2011 Study at 11. 

49 Oliver Wyman 2010 Study at 10. 

50

 See Fischel & Kendall Comment at ¶ 52. 
Page 14 of 16

reduction in fees over the past twenty years,51 and the average investor pays an expense ratio of 

64 basis points less than the average expense ratio charged by mutual funds.52

In addition, the business success achieved by IRA brokerage firms depends strongly on 

the reputation held by the firms and their representatives.53 To the extent that customers feel 

they are receiving low value with their current broker due to conflicts of interest or other factors, 

they will be less likely to continue service with that broker, and less likely to provide referrals of 

other clients to that broker, restricting one of the broker’s major sources of new business. 

Recognizing these constraints, IRA brokerage firms like Primerica impose internal 

controls to insure that their representatives have incentives to provide the highest quality service 

to clients possible and to avoid conflicts of interest. For instance, Primerica’s brokers are not 

informed of how much marketing and support and shareholder fees a mutual fund provides to 

Primerica, and therefore do not take that compensation into account when discussing fund choice 

with investors. 

Given these market observations and not only the voluntary constraints adopted by firms 

like Primerica, but also the numerous constraints imposed under the existing regulatory regime 

and the suitability standard, there is simply insufficient evidence to establish that incremental 

regulation of IRA accounts is necessary to address conflicts of interest caused by commissions to 

broker-dealers. It bears mention, in this context, that the viability of commissions has been 

acknowledged by the instruction by Congress to the SEC to study an approach to standard of 

care harmonization under the Dodd-Frank Act that allows for a commission-based business 

model. 

The Department Should Consider Modifications to the Proposed Rule

Given the problems discussed in this letter, Primerica respectfully proposes that the 

Department modify the proposed rule to preserve the IRA market and consumer choice. First, 

given the extensive and potentially drastic costs to retirement savings documented by Oliver 

Wyman and the lack of evidence justifying incremental regulation of the IRA market at this time, 

we propose that the Department except IRAs from the proposed rule. That is the simplest and 

most efficient solution. As demonstrated by the unprecedented study of more than 40% of the 

United States IRA market, the proposed rule threatens to cause a reduction of IRA investment of 

potentially $96 billion by the year 2030, increasing costs to IRA investors, reducing the number 

of registered investment advisors and IRA accounts, and diminishing returns to IRA investment 

accounts. Such costs are staggering, and would disproportionately affect small investors that 

could not meet increased account minimums, including a substantial number of investors in the 

minority communities that Primerica’s representatives serve. These results are simply not 

justified by the Department’s NPRM, which does not address the IRA market at all and offers 

only speculative and qualitative estimates of the benefit of the proposed regulation. Indeed, as 

described in the Fischel & Kendall Comment, there is no evidence that conflicts of interest 

arising from the receipt of commissions in fact affect the IRA market or work to the detriment of 

 

51 ICI Fact Book at 64. 

52

 Id. at 66. 

53 For evidence on the importance of reputation in this industry, see Fischel & Kendall Comment at ¶¶ 54-56. 
Page 15 of 16

IRA investors, and in fact, prevailing market trends indicate that competition in the IRA market 

is working by reducing average expense ratios and fund costs and fees. In light of these 

substantial costs and in the absence of clearly-established benefits, we respectfully submit that 

the Department except IRAs from the proposed rule. 

Second, absent our preferred approach of a blanket exception for IRAs, we request that 

the Department modify the “seller” exception in the proposed rule to clearly cover a brokerdealer, when acting as an agent for an IRA (regardless of whether or not the broker-dealer is also 

an agent to the counterparty in the transaction), in a purchase or sale transaction where the 

broker-dealer delivers disclosures intended to both describe the compensation that the brokerdealer will receive in connection with such transaction and explains that the broker-dealer is not 

acting as a “fiduciary” for purposes of IRC section 4975. 

In the absence of offering an effective exception from an expanded investment advice 

fiduciary definition, the Department has indicated that it may seek to deal with the issues raised 

by the expanded scope of the definition through its exemption process. We agree that the 

currently-available class exemptions are not sufficient, in scope or clarity, to deal with the issues, 

and would be pleased to discuss these matters further with the Department. However, for the 

reasons discussed above, we believe that the Department’s goal of enhancing retirement security 

will not be met by implementing a rule that will require correction through an exemption 

process, and respectfully submit that the Department should address any problems with the 

proposed rule directly. Nevertheless, if this approach is taken, it is critical that any modified or 

additional exemptions become available prior to the effective date of the expanded definition (at 

least as to IRAs), to avoid a gap in the availability to IRA customers of brokerage and investment 

services. Indeed, we respectfully submit that should the proposed rule go into effect before any 

revised or additional exemptions are in force, the uncertainty facing the IRA market will have 

harmful effects and cause considerable expense for broker-dealers, representatives, and investors 

that will not be reparable with the subsequent enacting of an exemption. 

Conclusion

Primerica appreciates the Department’s continuing efforts to protect the retirement 

savings of American families in ERISA-covered accounts. We respectfully submit, however, 

that the proposed rule to change the definition of “fiduciary” not only under ERISA, but for IRC 

section 4975 IRAs, will have far-reaching and unintended effects on the retirement savings of 

millions of American families. Close examination of the IRA market demonstrates that the 

proposed rule will cause a dramatic shift in the current brokerage model for IRAs and result in 

significantly decreased access and choice for millions of middle-income families who urgently 

need to begin or continue saving for retirement. While this impact will spread across the IRA 

market, raising costs and diminishing returns for investors in IRA accounts of all sizes, perhaps 

the greatest impact will be on small-account investors. With rising account minimums, increased 

licensing requirements for broker-dealers, and decreased incentives for representatives to educate 

potential investors under an advisory model, the proposed rule threatens to immediately and 

irreparably deny millions of middle-income American families that can only afford to save small 

amounts of the retirement education and access to investment that broker-dealers currently 

provide. What’s more, the proposed rule threatens to leave those investors who have opened 

EXHIBIT A 
1

COMMENT TO THE DEPARTMENT OF LABOR ON A  

PROPOSED RULE REGARDING FIDUCIARY STATUS UNDER ERISA

Daniel R. Fischel and Todd D. Kendall

April 12, 2011  
2

I. INTRODUCTION AND SUMMARY

1. I, Daniel R. Fischel, am President of Compass Lexecon, a consulting firm that specializes

in the application of economics to a variety of legal and regulatory issues.  I am also Professor of Law

and Business at Northwestern University School of Law and Kellogg School of Management, as well as

the Lee and Brena Freeman Professor of Law and Business Emeritus at The University of Chicago Law

School.  I served previously as Dean of The University of Chicago Law School, as Director of the Law and

Economics Program at The University of Chicago Law School, and as Professor of Law and Business at

The University of Chicago Graduate School of Business.

2. In the past, I have served as a consultant or adviser on economic issues to, among

others, the United States Department of Labor, the United States Securities and Exchange Commission,

the United States Department of Justice, the National Association of Securities Dealers, the New York

Stock Exchange, the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile

Exchange, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, and the Federal

Trade Commission.

3. Much of my research and teaching have addressed the law and economics of financial

markets, including the proper role of pension plan fiduciaries.1

  I have published approximately fifty

articles in leading legal and economics journals and am coauthor, with Judge Frank Easterbrook of the

Seventh Circuit Court of Appeals, of the book The Economic Structure of Corporate Law (Harvard

University Press).  Courts of all levels, including the Supreme Court of the United States, have cited my

articles as authoritative.

4. I am a member of the American Economic Association and the American Finance

Association.  I am also a former member of the Board of Directors of the Center for the Study of the

                                                           

1. See, e.g., Daniel Fischel and John H. Langbein (1988) “ERISA’s Fundamental Contradiction: The Exclusive

Benefit Rule”, U. Chi. L. Rev. 55:1105‐60, and Frank H. Easterbrook and Daniel R. Fischel (1993) “Contract and

Fiduciary Duty”, Journal of Law & Economics 36:425‐46.
3

Economy and the State at The University of Chicago, and former Chairman of the American Association

of Law Schools’ Section on Law and Economics.

5. I, Todd D. Kendall, am a Senior Economist at the aforementioned firm, Compass

Lexecon.  Previously, I served on the faculty of the economics department at Clemson University.  I have

published approximately a dozen articles in academic economics journals and collected volumes on the

topic of applied economic theory, and which employ statistical and econometric methods.  I have been

employed at Compass Lexecon since 2008, during which time I have consulted on a wide range of

regulatory, litigation, merger and other business matters involving brokerage services, banks, securities

exchanges, and other industries.  I am a member of the American Economic Association and the

Econometric Society.

6. We understand that the Department of Labor (the “DOL”) is currently considering a rule

(the “Proposed Rule”) that would broaden the circumstances under which a person is considered to be a

“fiduciary” under the Employee Retirement Income Security Act and the Internal Revenue Code.

7. For the purposes of our analysis, we have been asked by counsel for Primerica to

consider the consequences if the Proposed Rule led to fiduciary status where none currently exists for

certain companies and their representatives (“commission‐based brokers”) who provide brokerage and

other services to investors regarding individual retirement accounts (“IRAs”), and who receive certain

types of compensation paid by third parties providing financial products in connection with IRAs.2

  We

have also been asked to assume that, if these commission‐based brokers were deemed to be fiduciaries,

they would significantly limit their receipt of this compensation.

8. We have been asked by counsel for Primerica to (a) identify any significant costs or

benefits of the Proposed Rule other than those presented in the cost‐benefit analysis presented by the

                                                           

2. Throughout this report, we focus on financial services provided for IRA investors, although we understand

that the Proposed Rule may also impact service providers with respect to other investment products, such as

Coverdell education savings accounts.  
4

DOL in this matter3

; and (b) evaluate whether the evidence provided by the DOL, or other available

evidence, is sufficient to conclude that the benefits of the Proposed Rule outweigh the costs.

9. Our main conclusions are as follows:

• There are several important costs not quantified in the DOL cost‐benefit analysis that would

likely result from the Proposed Rule, leading to significantly higher costs than estimated by the

DOL.

• The evidence presented by the DOL supporting alleged benefits from the Proposed Rule does

not provide a sufficient basis to conclude that these benefits would be large enough to outweigh

the costs.

• A review of economic theory and available evidence regarding the IRA investment services

industry does not support a conclusion that the Proposed Rule would generate benefits large

enough to outweigh the costs.

We explain the basis on which we came to these conclusions in the following three sections of this

Comment.

10. We understand that Oliver Wyman has also performed a separate analysis of the

Proposed Rule, based on proprietary data from 12 IRA brokerage firms, and came to similar

conclusions.4

II. THERE ARE SEVERAL IMPORTANT COSTS NOT QUANTIFIED IN THE DOL COST‐BENEFIT

ANALYSIS THAT WOULD LIKELY RESULT FROM THE PROPOSED RULE, LEADING TO SIGNIFICANTLY

HIGHER COSTS THAN ESTIMATED BY THE DOL.

11. The DOL cost‐benefit analysis estimates the monetized costs of the Proposed Rule at

between $15.6 million and $16.7 million.5

  This figure is based on an estimate of the legal costs that

financial service providers would incur for a compliance review of their books of business under the

Proposed Rule.  Undoubtedly, financial service providers and their representatives would incur

significant compliance costs in complying with new regulations.  We have not attempted to fully

                                                           

3. 75 Fed. Reg. 62570‐8 (2010‐10‐22) (hereafter, “DOL cost‐benefit analysis”).

4. Oliver Wyman (2011) “Assessment of the Impact of the Department of Labor’s Proposed ‘Fiduciary’

Definition Rule on IRA Consumers”, April 12, 2011.

5. DOL cost‐benefit analysis, supra, at 65274, Table 2.
5

evaluate the accuracy of the monetized cost estimate provided by the DOL with respect to legal

compliance costs; however, we believe it may be understated for at least two reasons.  First, this

estimate does not appear to incorporate the potentially very large additional legal costs financial

services firms would likely incur to defend against litigation associated with their new status as

fiduciaries, even after a full review of their books of business, or to purchase fiduciary liability insurance.  

Second, the DOL estimate is based on an assumption that affected firms would require a certain number

of hours of legal professional time, valued at $119 per hour.6

  We understand that this rate is

substantially lower than the rate assumed by other government agencies.  For instance, using a rate

consistent with that assumed by the Securities and Exchange Commission (“SEC”), which recently valued

legal professional time at $354 per hour7 would increase the DOL’s estimate of the monetized costs of

the Proposed Rule to between $46.5 million and $49.7 million, using the same discount rates employed

by DOL.

12. In any case, the DOL cost estimate does not incorporate several important costs besides

legal services that would likely result as a consequence of the Proposed Rule.  Specifically, the DOL cost‐

benefit analysis does not quantify likely potential costs of the Proposed Rule due to (a) higher

certification requirements for IRA service providers, (b) increased expenses paid by IRA investors, and (c)

lower returns on investors’ retirement funds.  As we discuss below, the potential size of these effects is

large.  In addition, there may be other costs besides those that we describe here; however, we believe

these three illustrate the potential for costs associated with the Proposed Rule significantly higher than

estimated by the DOL.

                                                           

6. DOL cost‐benefit analysis, supra, at 65274.

7. 76 Fed. Reg. 15003.
6

A. Costs Due to Higher Certification Requirements for IRA Service Providers Would Likely Rise

Significantly Due to the Proposed Rule.

13. We understand that many representatives of broker‐dealer firms that currently provide

services to IRA investors do not currently hold the certifications necessary to operate as fee‐based

investment advisers, and that if the Proposed Rule were implemented, these representatives would

need to gain additional certification in order to continue to serve their clients or attract new clients.  The

DOL cost‐benefit analysis does not appear to take into account the significant costs that would be

incurred by investment professionals in studying for and passing the certifying exam.   

14. To illustrate the potential size of these costs, we understand that Primerica currently

has 233 agents who hold a Series 65 license that would qualify them to provide advisory services if the

Proposed Rule was implemented, in comparison with approximately 16,000 agents who do not currently

hold that license.  Based on what we believe is a conservative estimate of 50 hours of study and

preparation time that would be required on average for an individual to prepare for the Series 65 exam,

and valuing that time at the 2009 median hourly wage for personal financial advisers, $32.79,8 if 60% of

Primerica’s agents chose to become investment advisers after the implementation of the Proposed Rule,

the additional cost incurred would be $15.7 million ( = 16,000 X 60% X 50 X $32.79).  Of course, this

calculation is necessarily a rough approximation, but it does indicate that the cost of additional

certifications alone could easily double, if not more than double, the DOL’s estimate of the costs

associated with the Proposed Rule, especially considering that this figure is based on the representatives

of only one company among many in the industry.  Industry‐wide, we understand that there are more

than 300,000 registered representatives in the U.S. which are not licensed to provide advisory services;

                                                           

8. Bureau of Labor Statistics May 2009 National Occupational Employment and Wage Estimates, available

online at http://www.bls.gov/oes/current/oes_nat.htm#13‐0000.
7

therefore, the costs calculated above, extrapolated to the entire industry, would reach over $295

million.9

   

15. This estimate also does not include other potentially large economic losses associated

with the higher certification requirements.  First, faced with the costs of new certification, many

brokerage representatives would likely choose not to acquire the necessary certification and therefore

potentially leave the industry.  Moreover, we understand that brokerage representatives are one of the

only sources of financial information some investors encounter, so even aside from the other effects we

discuss below, fewer professionals employed in the industry could lead to lower levels of retirement

savings and lower (or even no) returns experienced by these investors.

B. Expenses Paid By IRA Investors Would Likely Rise Significantly Due to the Proposed Rule.

16. More importantly, the Proposed Rule would likely significantly increase the expenses

paid by IRA investors for several reasons.  First, under the Proposed Rule, firms that currently do not

have fiduciary status with respect to their IRA customers would become fiduciaries.  This would create

additional costs for these firms to acquire and maintain new client accounts, due to the increased

compliance costs associated with fiduciary status, and more importantly, the heightened risk of litigation

faced by fiduciaries.  Economic principles indicate that at least some of these costs would be passed on

to investors in the form of higher prices to open and/or maintain IRA accounts.  A basic principle of

economics is that prices charged by firms in an industry will rise if firms face an increase in per‐unit or

per‐client costs, such as that the increased costs associated with compliance and litigation risks.10  

                                                           

9. 300,000 X 60% X 50 X $32.79 = $295.1 million.

10. See, e.g., Robert E. Hall and Marc Lieberman, Economics: Principles and Applications, 4

th ed., at 251.  The

key exception to this principle would be in an industry in which consumer demand is infinitely elastic, for instance,

if there is a perfect substitute for the good, such as black pens for blue pens.  It is unlikely consumers perceive any

perfect substitutes for financial services.
8

Therefore, it is likely that IRA investors will incur higher expenses under the Proposed Rule than they do

now.

17. In addition, in the current regulatory environment, commission‐based broker‐dealer

firms share the costs of opening and servicing IRA accounts with third‐party providers of financial

products.  In practice, the way this sharing of costs occurs is that broker‐dealer firms incur all of the

costs up front, and then are partially recompensed by third‐party product providers through

commissions and other payments.  We understand that this cost‐sharing constitutes an important part

of brokerage firms’ business model.

18. Under the Proposed Rule, we understand that broker‐dealers handling IRA accounts

may be substantially restricted from receiving many forms of compensation from third‐party product

providers; in other words, they would no longer be able to share costs, and so would incur all of the

costs of opening and servicing accounts themselves.  Commission‐based brokers would, in essence, face

an increase in the cost of providing IRA investor services.  As noted above, economic principles indicate

that this increase in costs would likely cause prices to rise.  At the same time, it is possible that, in the

absence of commission payments, third‐party product providers would reduce prices charged directly to

investors, potentially offsetting to some degree the higher prices charged by brokers.12  In connection

with the Proposed Rule, the DOL has not presented any study of the overall impact that the elimination

of this form of cost‐sharing would have on total expenses paid by investors (nor are we aware of any

conclusive evidence on this question from other sources), which is a key parameter necessary in order

                                                           

12. While in theory, the decrease in costs faced by third‐party product providers could be fully passed on to

IRA investors, there are several industry‐specific reasons why this effect would be unlikely to fully offset the

increase in fees charged by financial services firms.  First, investors who purchase through commission‐based

services represent only a fraction of total demand for these products, and costs faced by product providers from

other distribution channels would not fall due to the Proposed Rule; in other words, to the extent that product

providers experience decreases in costs due to the Proposed Rule, those savings would be spread out across all

purchasers of the product, not only those who buy through commission‐based services.  Second, in the absence of

payments to brokers, product providers may invest more in direct‐to‐consumer advertising or other methods of

marketing.   
9

to assess the full costs of the Proposed Rule.  Nevertheless, this effect provides an additional reason,

besides those mentioned above, why investors would likely face higher expenses in opening and/or

maintaining IRA accounts under the Proposed Rule.

19. Available evidence is consistent with the premise that prices will be higher under the

Proposed Rule.  In the current regulatory environment, IRA investors can choose between broker‐dealer

firms offering commission‐based service and certain other firms that provide “fee‐only” service, in which

advisers act as fiduciaries and forego most or all third‐party commissions.  While the fees any given

investor pays usually depend somewhat on the details of his investments, as a general matter, a

comparison of typical fees charged by the two types of service providers suggests that most IRA

investors would incur higher expenses at fee‐only firms than at commission‐based firms, consistent with

the notion that fiduciary status and the absence of third‐party compensation result in higher expenses

to investors.13   

20. Primerica’s fee structure, which we understand is typical for commission‐based firms,

charges investors a front load that is a percentage of assets purchased, with 5.5% being a typical rate,

and then a custodial fee of $20 each year the account remains open.14  By comparison, we understand

that a typical fee‐only adviser charges investors an annual fee calculated as a percentage of assets under

management, with 1.5% being a typical rate, as well as an additional custodial fee similar to that

charged by commission‐based firms.  While investors who make frequent trades or who have very short

investment horizons may save through the use of fee‐only services, investors who buy and hold

                                                           

13. We understand that fee‐based advisors typically provide additional services to investors not provided by

commission‐based brokers, and a full analysis would account for added value received by investors from these

additional services; however, IRA investors, who primarily employ “buy‐and‐hold” strategies, typically have

relatively few ongoing needs and so would be unlikely to benefit greatly from these services.  Moreover, it is

presumably the case that the additional benefits most commission‐based account holders would receive with fee‐

based service would be lower than the additional expenses they would pay; otherwise, they would be employing

fee‐based advisers currently.

14. We understand that the size of the front load often declines when accounts reach a certain size.
10

investment assets for long periods, as IRA investors generally do, will typically pay lower fees with a

commission‐based service.16  This is because, on a continuing basis, they pay only a low custodial fee

every year instead of a percentage of an account which continues to grow in value (along with a similar‐

sized custodial fee).   

21. For instance, consider an investor who opens a $2,000 IRA account invested in a typical

balanced equity and mutual fund, and adds $100 per month to the account.  Attachment 1 shows how

the value of this investment, made in March 1991, would have grown over the following 20 years, with

(a) a typical commission‐based brokerage service charging a 5.5% front‐load, and (b) a typical fee‐only

advisory service charging 1.5% annual fees.17  In this example, the value of the investment would be

higher under the commission‐based service by June 1996, or in other words, so long as the investor held

the IRA for more than five years and two months.  As shown in the bottom panel of Attachment 1, by

March 2011, the value of the investment under the commission‐based expense schedule would be

$10,931 higher than under the fee‐only expense schedule.

22. Consistent with this analysis, a 2010 Oliver Wyman analysis performed for SIFMA found

that, based on actual fees charged by 17 retail brokerage firms, typical investors would pay between 23

and 37 basis points more with fee‐only accounts than with commission‐based accounts under the

current fee structure annually.18   

                                                           

16. The findings of the SEC’s recent study of investment advisers and broker‐dealers is consistent with this

argument.  See Securities Exchange Commission, “Study on Investment Advisers and Broker‐Dealers”, January

2011, at 152 (stating “[i]f, 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”).

17. The underlying data from Morningstar used in this summary table is also attached.  This analysis is based

on an investment in Invesco Van Kampen Equity and Income Fund, Class A shares, and assumes all dividends and

capital gains are re‐invested in the fund.  Since annual custodial fees are typically similar between commission‐

based and fee‐only services, we ignore these here.

18. Oliver Wyman (2010), “Standard of Care Harmonization: Impact Assessment for SEC”, October 2010.
11

23. The comparison between investor expenses under a commission‐based brokerage

service and expenses under a fee‐only adviser service is analogous to a widely‐accepted difference

between investor expenses associated with the purchase of “class A” and “class C” mutual fund shares.  

Many funds offer multiple classes of shares, which differ only in the structure of the fund’s expenses

charged to investors.  Typically, with “class A” shares, funds charge investors a front load fee, but then

low annual fees on a continuing basis, while with “class C” shares, funds charge little or no front load,

but higher annual expenses while holding the fund.  It is widely noted that long‐term “buy‐and‐hold”

investors, which includes most IRA investors, pay lower fees by purchasing class A shares than they

would with class C shares.20  Analogously, most IRA investors pay lower fees with commission‐based

brokerage services than with fee‐based advisory services.

24. Since IRAs are one of the primary means by which Americans save for retirement (38%

of those saving for retirement hold IRAs)21, even a small increase in fees on these accounts would impact

a significant number of investors and lead to a large increase in costs in aggregate.  In 2009, there was

$4.2 trillion held in IRAs.22  We understand that, based on the industry data analyzed by Oliver Wyman,

they concluded that 66% of even the largest IRAs (those with more than $250,000 in assets) are held in

accounts with commission‐based brokerages, with this share much higher for smaller IRAs.23  Even

applying the low 66% figure to all IRA assets, if the Proposed Rule led to even a 1 basis point increase in

annual costs relative to assets for these investors, it would generate $277 million ( = 4.2 trillion X 66% X

0.01%) in additional expenses for investors annually, or over $2 billion over 10 years in current dollars,

                                                           

20. See, e.g., FINRA, “Investor Alert: Understanding Mutual Fund Classes”, Oct. 6, 2008, available at

http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/p006022 (stating that for purchasers

of class C shares, “in most cases, your total cost would be higher than with Class A shares, and even class B shares,

if you hold for a long time”).  See also Brian K. Reid and John D. Rea, “Mutual Fund Distribution Channels and

Distribution Costs”, Perspective 9(3), July 2003, at 13 (stating, “... investors subject to the maximum front‐end sales

load would prefer C shares for short and intermediate holding periods. Investors with a long investment horizon

would choose A shares”).

21. AARP, “AARP Bulletin Survey on Retirement Savings: Executive Summary”, April 2009, at 4.

22. Investment Company Institute, “The U.S. Retirement Market, 2009”, at 2.

23. Oliver Wyman (2011), supra, at 11.
12

using a discount rate of 7%.  This illustrative calculation clearly indicates the potential for much higher

costs from the Proposed Rule than estimated by DOL.

C. Returns on Investors’ Retirement Funds Would Likely Decline Due to the Proposed Rule.

25. For several reasons, under the Proposed Rule, investors would likely reduce their usage

of IRAs, as well as brokerage services associated with IRAs.  First, because, as described above, prices for

financial services would likely rise, the Proposed Rule would be likely to cause some individuals to

choose not to open IRA accounts or to invest less in them.  In addition, under the Proposed Rule,

investors would likely face higher minimum account balance requirements to open an IRA.  Firms

impose minimum account balance requirements because for relatively small accounts, the cost incurred

by a firm in opening or servicing the account may be higher than the revenue received.  As discussed

above, under the Proposed Rule, per‐account costs incurred by commission‐based brokerage firms

would likely increase.  Because the revenue generated by low balance accounts is small, an increase in

costs would likely mean that these firms would increase minimum account balance requirements for IRA

investors.

26. Available evidence is consistent with increases in minimum required account balances

under the Proposed Rule.  Minimum account sizes generally appear to be substantially higher among

fee‐based advisers, who incur the expense of fiduciary status and forego most third‐party

compensation, than among commission‐based advisers.  Primerica, for instance, allows investors to

open IRA accounts with as little as $250, while we understand that minimum account sizes for fee‐based

advisers are typically more than $10,000, and often $50,000 or more.  We have been informed that

Primerica believes it would need to raise its minimum IRA account size to around $25,000 if it were

forced by the Proposed Rule to forego third‐party commissions.
13

27. Small investors constitute the bulk of IRA investors.  We understand that, based on the

industry data analyzed by Oliver Wyman they concluded that 51% of IRA accounts include less than

$25,000 in assets, and more than 30% of IRA accounts have asset values below the current minimum

balance requirement for fee‐based advisory services at any of the firms providing data for their

sample.24  Unless advisory firms substantially reduced these minimum requirements, investors would

need to either move their funds to self‐directed brokerage accounts and forego the services they

currently receive, or else move their funds out of IRAs altogether.  In some cases, investors could add

funds to their accounts to reach the new, higher, minimum account balances, although because the IRS

limits annual contributions to IRAs, only investors who hold amounts relatively close the new minimum

account balance requirements would have this option.25  Therefore, the Proposed Rule could lead to a

reduction in the rate at which individuals invest in IRAs and receive financial services in connection with

IRAs.

28. Besides forcing changes for some current IRA investors, increases in minimum account

balances would also impact investors seeking to open new IRAs, particularly since new accounts often

start with low balances.  Because, in the absence of the Proposed Rule, these accounts would be

expected to grow over time, the long‐run impact in reducing the amount of funds held in IRAs could be

even larger than the immediate impact.

29. Consistent with the implications of higher prices and lower investment participation

from the Proposed Rule, analysts predict that a similar regulation reducing sales commissions paid to

investment advisers in the United Kingdom will raise fees to investors and lead to a dramatic reduction

in the size of the financial adviser industry.  As reported by analysts at Ernst & Young, under the new

                                                           

24. Oliver Wyman (2011), supra, at 10 and 17 (showing 22 million total accounts analyzed and 7.2 million

accounts with insufficient assets to access the advisory channel at any firm).

25. For 2010, the IRS limits IRA contributions below $5,000 for individuals under age 50, and $6,000 for

individuals above age 50.  See Internal Revenue Service, Publication 590: Individual Retirement Accounts (IRAs), at

6.
14

rules, “[f]irst, it seems likely that the mass market and the typical bank customer will not be enthusiastic

about paying the sort of fees that make offering the advice attractive.  Second, simplified advice

becomes a major economic challenge, requiring a radically reduced cost base if it is to present a solution

for the mass market ... There is a real possibility that the independent advisory sector, as we know it, will

shrink significantly.”28  

30. As individuals reduce their holdings of assets in IRAs, they may choose to invest in other,

less tax‐privileged vehicles, they may choose to invest without the financial services they previously

employed, or they may simply choose to invest less overall.  Any of these effects would lead to lower

investment returns to individual investors, exacerbating the prevailing retirement savings shortages in

the U.S.29   

31. As noted above, IRA investments in the U.S. totaled $4.2 trillion in 2009, constituting

26% of all retirement assets.30  If, because of the effects described above, the Proposed Rule led even

1% of investment assets to be withdrawn from IRA accounts, and if those assets therefore generated 25

basis points lower annual returns (due, e.g., to disadvantaged tax treatment of non‐IRA funds or

because of the absence of broker services), then the Proposed Rule would generate losses of nearly

$790 million in current dollars over ten years using a 7% discount rate.  This would dramatically increase

the costs of the Proposed Rule far beyond the level anticipated by the DOL.  In addition, investors who

withdraw funds from IRAs typically pay tax penalties for early withdrawal, further adding to the costs of

the Proposed Rule.   

                                                           

28. Ernst & Young, “RaDaR: Life and Pensions Outlook for 2011”, January 2011, at 7 and 9.

29. According to a 2009 study, the average American family faces a 37% shortfall in the income they will need

for retirement.  (See McKinsey & Co., “Restoring Americans’ Retirement Security: A Shared Responsibility”, 2009,

at 2.)

30. Investment Company Institute, “The U.S. Retirement Market, 2009”, at 2.
15

III. THE EVIDENCE PRESENTED BY THE DOL SUPPORTING ALLEGED BENEFITS FROM THE

PROPOSED RULE DOES NOT PROVIDE A SUFFICIENT BASIS TO CONCLUDE THAT THESE BENEFITS

WOULD BE LARGE ENOUGH TO OUTWEIGH THE COSTS.

32. The DOL cost‐benefit analysis claims three specific benefits would follow from

implementation of the Proposed Rule: (a) discouraging harmful conflicts of interest in which “... service

providers  strike deals that profit one another at the plan’s expense or subordinate the plan’s interest to

someone else”31

;  (b) providing pension plans with “better value for the service fees they pay”, along

with “the ancillary benefit of improved returns on plan assets”32

;  and (c) enhancing “the Department’s

ability to redress service provider abuses that currently exist in the market”33.

33. We understand that IRAs are outside the scope of the DOL’s enforcement authority.  

Therefore, the potential benefit from the Proposed Rule in enhancing the effectiveness of DOL’s

enforcement initiatives, while potentially relevant in other segments of the financial services industry,

would not by itself provide a basis for supporting an extension of fiduciary status to broker‐dealers

providing services to IRA investors.  For that reason, we will focus our attention on evaluating the

evidence presented by the DOL to support the other two claimed benefits.

34. The only quantification of benefits provided in the DOL cost‐benefit analysis is the

following statement: “If just 10 percent of plans realize a one basis point (0.01 percent of plan assets)

service value improvement, it would be worth approximately $399 million over ten years ...”34.  In

preparing this Comment, we reviewed the literature cited by the DOL, as well as the broader economic

and financial literature related to these issues, and did not find any statistical study which concludes

that the Proposed Rule or any similar regulation would generate a one basis point improvement (or any

size improvement) in pension plan service value.

                                                           

31. DOL cost‐benefit analysis, supra, at 65272, section 5(a).

32. DOL cost‐benefit analysis, supra, at 65273, section 5(b).

33. DOL cost‐benefit analysis, supra, at 65273, section 5(c).

34. DOL cost‐benefit analysis, supra, at 65273, section 5(b).
16

A. The Cited Studies Do Not Provide a Basis to Conclude that Benefits from the Proposed Rule

Would Be Large Enough to Outweigh the Costs.

35. The DOL argues, qualitatively, that benefits of some size may accrue from the Proposed

Rule by citing four statistical studies that the DOL claims support the hypothesis that potential conflicts

of interest faced by financial service providers harm investors.  Specifically, the DOL cites a study

performed by the U.S. Government Accountability Office (“GAO”) and three other studies presented in

unpublished academic manuscripts.  A review of these four studies indicates that none of them focus

specifically on IRA investments, nor does any claim to provide direct evidence regarding the Proposed

Rule or any similar rule.

36. As we discussed above, the Proposed Rule would likely change the market for IRA

investment services significantly.  However, each of the studies cited by the DOL analyze investor

behavior in the current regulatory environment and under the current industry structure.  Therefore,

even interpreting the findings of these studies in ways favorable to the DOL’s claims, these findings

would not be sufficient to conclude that a major change in the regulatory environment, as under the

Proposed Rule, would lead to significant benefits because the Proposed Rule could change the structure

of the industry in a variety of ways not considered by these studies.  In order to understand the full

impact of the Proposed Rule, the DOL would need to study carefully how the Proposed Rule would

impact investor behavior under the significantly changed industry that the Proposed Rule would impose.

37. In any case, the cited studies do not in fact provide strong evidence that potential

conflicts of interest faced by investment advisers lead to significant reductions in investor value, as some

of the authors of the studies themselves indicate.  Moreover, the results of these studies are consistent

with significant benefits received by investors from financial service providers in the current regulatory

environment.  We first discuss the referenced GAO study and then the three referenced academic

studies.
17

(i)   The cited GAO study does not provide a basis to conclude that the benefits from the

Proposed Rule would be large enough to outweigh the costs.

38. According to the DOL, the GAO study “links undisclosed conflicts with 130 basis points of

underperformance in defined benefit pension plans”.

35  Clearly, then, this study’s results would not

directly apply to IRA investment advisers, since IRAs are not defined benefit plans.36  Defined benefit

plans typically cover aggregate retirement benefits for most or all employees of a large corporation or

other institution, while defined contribution plans like IRAs are held by individual investors saving for

their own retirement.  The advisory needs of defined benefit plan managers are therefore very different

from those of IRA investors.  Moreover, as recognized in the referenced quote from the DOL, the GAO

study would only show, at most, that disclosure of potential conflicts of interest could lead to the

claimed benefits, not that eliminating the source of these potential conflicts is necessary to achieve such

benefits.

39. Moreover, the authors of the GAO study, as well as the individuals who collected the

data employed in the GAO study, clearly indicate that their results cannot support a conclusion that

conflicts of interest generate investor harms.  The first paragraph of the GAO study indicates, “[b]ecause

many factors can affect returns, and data as well as modeling limitations limit the ability to generalize

and interpret the results, this finding should not be considered proof of causality between conflicts and

                                                           

35. DOL cost‐benefit analysis, supra, at 65272, section 5(a).  The GAO study is described in two separate

documents, which we will refer to interchangeably as “the GAO study”, but separately as “GAO (2009)” and ”GAO

(2007)”: (1) congressional testimony summarizing the study (GAO, “Conflicts of Interest Can Affect Defined Benefit

and Defined Contribution Plans”, GAO‐09‐503T, March 24, 2009); and (2) the details of the statistical analysis

performed by GAO (GAO, “Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement

Challenges”, GAO‐07‐703, June 2007).

36. In congressional testimony summarizing the study (GAO 2009), the GAO’s Acting Director discussed the

possibility that conflicts of interest could also affect defined contribution plans, and cited some evidence that

defined contribution plan sponsors and participants may not be fully aware of potential conflicts of interest faced

by their pension consultants, but he nevertheless emphasized that the GAO only specifically studied the impact of

conflicts of interest on defined benefit plans, noting “[o]ur study focused exclusively on DB [defined benefit] plans

and less information exists on the extent of nature of conflicts of interest in the DC [defined contribution] plan

environment” (GAO 2009, supra, at summary page).
18

lower rates of return”.37  The GAO also recognizes that, even if harm due to conflicts of interest could be

shown with respect to the specific pension plan consultants they studied, such results would not imply

harm to retirement investors generally: “... these results cannot be generalized to the population of

pension consultants since the consultants examined by the SEC were not selected randomly”,38 and “the

plans included in the analysis should not be considered as representative of the population of defined

benefit pension plans”.39

40. As suggested by the quotation above, the sample of pension plan service providers

studied by the GAO was collected, and potential conflicts of interest identified, in an earlier analysis by

the Securities and Exchange Commission (“SEC”) in 2002 and 2003.  In their analysis of these providers’

behavior, however, the SEC did not conclude that any of them actually acted on undisclosed potential

conflicts of interest to the detriment of clients, in fact stating that “[w]e could not fully analyze whether

pension consultants ‘skewed’ their recommendations to favor certain money managers”40.  As noted

above, nothing in the SEC’s study showed that firms providing financial services to IRA investors had, or

acted on, conflicts of interest, because none of the plans analyzed by the SEC were IRAs, or defined

contribution plans of any sort.

(ii)   Academic studies cited by DOL do not support a conclusion that the alleged benefits

from the Proposed Rule would be large enough to outweigh the costs.

41. Turning next to the academic studies cited in the DOL cost‐benefit analysis, the results

presented in these papers also provide little evidence supporting the DOL’s claimed benefits, and in fact

are generally consistent with significant benefits accruing to investors from financial services in the

current regulatory environment.  The first two of the cited studies are similar.  Bergstresser, et al. (2007)

and Bullard, et al. (2007) both compare returns achieved by “no‐load” mutual funds, which are

                                                           

37. GAO (2009), supra, at summary page.

38. GAO (2007), supra, at 16.

39. GAO (2007), supra, at 43.

40. SEC (2005) “Staff Report Concerning Examinations of Select Pension Consultants”, Office of Compliance

Inspections and Examinations, May 16, 2005, at 5.
19

commonly sold directly to investors, and “load” mutual funds, which are more commonly sold through

brokers or other intermediaries.41   Bergstresser, et al. (2007) argue that load funds underperform, on

average, no‐load funds.  Bullard, et al. (2007) argue that investors in both load and no‐load funds tend to

mis‐time market transactions and so underperform a simple “buy‐and‐hold” strategy, but that investors

in load funds underperform by a greater degree.

42. A key issue in interpreting these results is potential differences between individuals who

make use of financial services and those who do not.  For instance, investors who make use of these

services may make poorer financial decisions than others who do not use these services.  Providing

support and information to individuals who might otherwise make poor decisions is, after all, the

purpose of these services.  If investors who make use of these services have poorer financial decision‐

making skills, a broker or adviser may provide value by supporting better decisions, even if they cannot

fully eliminate investors’ tendencies to make poor financial decisions.  In this case, investors who make

use of financial services may still achieve lower returns than those who do not, yet they would earn

even lower returns in the absence of the broker or adviser’s help.

43. This issue is explicitly recognized by Bullard, et al. (2007), who indicate that their results

could be explained by the “well‐documented psychological tendency of investors to overweight recent

performance.  Although investment professionals presumably are more aware of, and less susceptible

to, a short‐term performance bias, their clients might be more susceptible to this bias than self‐directed

investors.  Those who seek out professional guidance may be less knowledgeable about investing and

more inclined to expect or pressure their advisors to trade on short‐term performance.”42

                                                           

41. Daniel Bergstresser, John Chalmers, and Peter Tufano (2007) “Assessing the Costs and Benefits of Brokers

in the Mutual Fund Industry”, Social Science Research Network Abstract 616981, Sept. 2007; Mercer Bullard, Geoff

Friesen, and Travis Sapp (2007) “Investor Timing and Fund Distribution Channels”, Social Science Research Network

Abstract 1070545, Dec. 2007.  Begstresser, et al. (2007) has since been published in an academic journal (The

Review of Financial Studies) in a form similar to the earlier working paper; because the DOL cost‐benefit analysis

relied on the working paper, we will refer to that version of the manuscript here as well.

42. Bullard, et al. (2007), supra, at 11.
20

44. Bergstresser, et al. (2007) also recognize that their results do not prove that conflicts of

interest cause investor losses, and in fact they state that their results could also be evidence of

significant benefits to investors from investment brokers, writing “[o]ur results are consistent either

with substantial non‐tangible benefits delivered by the broker‐distributed sector or with conflicts of

interest between brokers and their clients.”43   

45. Unlike the two academic studies discussed above, the third study cited in the DOL cost‐

benefit analysis, Zhao (2005), does not examine investment returns, but focuses instead on which funds

investors purchase.44  Specifically, the author compares the inflow of investor dollars into load funds

with different fees, finding that funds with higher fees receive greater inflows of investor dollars on

average.  In the absence of specific information on how fees for the funds studied by Zhao translate into

compensation for brokers or advisers, this result does not provide strong evidence on the specific

impact of conflicts of interest.   

46. Moreover, this result may be equally consistent with the result predicted by basic

economic theory in the absence of conflicts of interest or other market failures.  Specifically, Zhao’s

result that more popular funds, which receive larger inflows, charge higher loads to investors, is not

necessarily surprising, since this is an effect that is common to popular products of all types.  The fact

that more expensive restaurants are often more popular than less expensive restaurants does not

necessarily imply that restaurants are exploiting diner ignorance of meal prices; instead, more popular

restaurants can simply charge higher prices because the demand for their meals is higher.  Zhao’s study

cannot determine whether investors are purchasing certain funds because opportunistic brokers are

pushing investors to buy those funds, or whether investors simply prefer those funds for some other

reason.

                                                           

43. Bergstresser, et al. (2007), supra, at 1.

44. Xinge Zhao (2005) “The Role of Brokers and Financial Advisors Behind Investments into Load Funds”,

China Europe International Business School Working Paper, Dec. 2005.   
21

47. These three academic studies also uncovered evidence that financial services firms

provide significant benefits to investors.  Bergstresser, et al. (2007) found supporting evidence for the

hypothesis that “brokers specialize in unique products, especially ones that individual investors would

have difficulty in evaluating on their own”,45  and they further acknowledge that “[b]rokers may help

their clients save more than they would otherwise save, they may help clients more efficiently use

scarce time, they may help customize portfolios to investors’ risk tolerances, and they may increase

overall investor comfort with their investment decisions”46.  Zhao (2005) similarly found evidence

consistent with the notion that investment advisers provide valuable services to their clients, stating “...

while no load fund investors flock into larger funds with more visibility, load fund investors are more

likely to be directed by brokers and financial advisers into smaller funds, which might experience better

performance than larger funds exceeding their optimal size.”47  These studies do not attempt to quantify

the value of these benefits, which may be large.   

48. Moreover, these studies do not attempt to calculate other value provided by brokerage

services unrelated to the returns achieved by plan assets, such as the provision of information regarding

the appropriate amount of current investment needed to meet retirement goals or the tax

consequences of taking a distribution from an IRA after a rollover event.

IV. A REVIEW OF ECONOMIC THEORY AND AVAILABLE EVIDENCE REGARDING THE IRA

INVESTMENT SERVICES INDUSTRY DOES NOT SUPPORT A CONCLUSION THAT THE PROPOSED RULE

WOULD GENERATE BENEFITS LARGE ENOUGH TO OUTWEIGH THE COSTS.

49. It may be true that certain brokers providing services to investors face potential conflicts

of interest; nevertheless, there are two key economic factors that economic theory and available

evidence indicate constrain firms from acting on these conflicts to the detriment of customers:

                                                           

45. Bergstresser, et al. (2007), supra, at 13.

46. Bergstresser, et al. (2007), supra, at 2‐3.

47. Zhao (2005), supra, at 32.
22

competition and reputational concerns.  In addition, we understand that broker‐dealers currently face a

range of regulations that further diminish the impact of potential conflicts of interest.  Because these

constraints already exist in the current market environment, we see no basis to conclude that

implementation of the Proposed Rule would produce significant additional benefits beyond what

investors currently receive.  Therefore whatever benefits may result from the Proposed Rule would be

unlikely to be large enough to outweigh the costs we identified above.

50. The revealed preference of investors themselves for commission‐based investment

services with respect to IRAs provides perhaps the most powerful evidence that, even in the presence of

potential incentives for broker‐dealers to behave opportunistically with respect to their clients, market

discipline protects investors.  We understand that, based on the industry data analyzed by Oliver

Wyman, they concluded that 88% of all IRA accounts are held with commission‐based brokerage firms.48  

According to the Investment Company Institute, “80 percent of [households] that owned funds outside a

workplace retirement plan held funds purchased through a professional adviser.”49  Moreover, “[h]alf of

all mutual fund shareholders indicated they had ongoing relationships with financial advisers”,50

illustrating the continuing value investors perceive in their relationships with financial service providers.

51. Basic economic principles indicate that competition among firms places a constraint on

the ability of these firms to behave in ways detrimental to their clients because, to the extent they do

so, their clients will experience low benefits from the services provided and create opportunities for

competing firms, which can earn sales by pointing out the low benefits a customer is currently receiving

and offering to provide higher benefits.  In addition, competition in the market for expert advice creates

opportunities for investors to readily seek “second opinions”, which provide an additional check on

advisers’ ability to exploit informational advantages they may have with respect to their customers.   

                                                           

48. Oliver Wyman (2011),supra, at 11.

49. Investment Company Institute, 2010 Investment Company Fact Book, at 85.

50. Investment Company Institute, 2010 Investment Company Fact Book, at 86.
23

52. In fact, the market for IRA investment services appears to be highly competitive, as a

wide range of evidence indicates.   

• Recent industry reports indicate that there are around 25,000 companies in the U.S. competing

to provide financial planning and investment advice to individuals and businesses.51

• Public financial filings by companies in the industry consistently indicate a high degree of

competition: “We operate in a highly competitive environment with respect to the sale of

financial products” (Primerica)52

; “We operate in a highly competitive industry” (Ameriprise

Financial)53

; “We are subject to competition in all aspects of our business” (LPL)54; “All aspects of

the Partnership’s business are highly competitive” (Edward Jones)55.

• Average fees for mutual funds, one of the major products purchased through commission‐based

brokers, have declined consistently and dramatically over time.  As noted by the Investment

Company Institute in 2010, “[f]ees and expenses incurred by stock and bond mutual fund

investors have declined by half since 1990”.56  Declining prices are typical of competitive

industries, and accordingly, this industry publication attributes the noted decline in fees at least

partially to competition.57    

• Investors are increasingly moving towards lower‐cost mutual funds and other investments,

providing incentives for brokers to keep the fees they charge low in order to remain

competitive.  One way to see investors’ competitive pressure with respect to costs is to compare

the average expense ratio on all mutual funds offered in the marketplace with the average

                                                           

51. First Research “Industry Profile: Financial Planners and Investment Advisors”, Oct. 26, 2009.

52. Primerica Inc. 10‐K for the fiscal year ended December 31, 2010, at 35.

53. Ameriprise Financial, Inc. 10‐K for the fiscal year ended December 31, 2010, at 17.

54. LPL Investment Holdings Inc. 10‐K for the fiscal year ended December 31, 2010, at 19.

55. The Jones Financial Companies LLLP 10‐K for the fiscal year ended December 31, 2010, at 18.

56. Investment Company Institute, 2010 Investment Company Fact Book, at 64.  These findings are broadly

consistent with trends in expense ratios studied previously by the GAO (“Information on Trends in Fees and Their

Related Disclosure”, GAO‐03‐551T, Testimony Before the Subcommittee on Capital Markets, Insurance and

Government Sponsored Enterprises, Committee on Financial Services, House of Representatives, March 12, 2003,

at summary page).

57. Investment Company Institute, 2010 Investment Company Fact Book, at 66.
24

expense ratio actually paid by investors.  To the extent that shareholders invest more in lower‐

cost funds, they will pay lower expenses than charged by the average fund.  In 1995, the average

fund charged an expense ratio of 1.52%, while investors actually paid an average expense ratio

of 1.04%, a difference of 48 basis points.58  By 2009, the average fund charged an expense ratio

of 1.50%, while investors paid an average of 0.86%, a difference of 64 basis points.

53. Several academic studies of markets for expert advice support the hypothesis that

competition is effective in constraining conflicts of interest specifically in the market for expert advisers:

• Bolton, et al. (2005) developed a model of the provision of information by sellers of financial

services to customers, as takes place in the IRA investment broker industry.  They conclude that

“competition both reduces the gains from lying and induces financial institutions to disclose

information”.59  They further write that their results “... directly challenge the conventional

wisdom that information is only credible if it is provided by an independent institution that has

no such conflicts of interest.”60

• Krausz and Paroush (2002) analyze conflicts of interest in financial advising, and argue that “...

competition reduces transactions cost and it is easier for dissatisfied investors to transfer from

one financial advisor to another.  Furthermore, if deception is very severe, competition from

other financial advisors and institutions will erode the financial advisor’s returns, yet again

reducing the incentive to deceive.”61

                                                           

58. Investment Company Institute, 2010 Investment Company Fact Book, at 66.

59. Patrick Bolton, Xavier Freixas, and Joel Shapiro (2007) “Conflicts of Interest, Information Provision, and

Competition in the Financial Services Industry”, Journal of Financial Economics 85(2), at 298.

60. Bolton, et al. (2007), supra, at 298.

61. Miriam Krausz and Jacob Paroush, “Financial Advising in the Presence of Conflict of Interests”, 54 Journal

of Economics and Business, at 57.
25

• Patron and Roskelley (2007) analyze the analogous case of conflicts of interest in markets for

expert real estate advice, and conclude that “agents are less likely to suggest aggressive

bargaining strategies [for their clients] when there is little market competition.”62

As on most topics, there are a wide variety of different opinions expressed by academic authors

depending on the assumptions they make and the methodologies they employ; however, at the very

least these articles indicate that, without further detailed study of the IRA investment brokerage

industry, it is highly premature to conclude that the Proposed Rule will result in significant benefits to

investors or others large enough to outweigh its costs.

54. A second key factor that constrains investment brokers from acting on potential

conflicts of interest to the detriment of their clients is the need to maintain a positive reputation among

clients and potential clients.  Economic principles indicate that if a firm develops a reputation for low‐

quality service, its clients will be less likely to use that firm’s services in the future, and will be less willing

to recommend the firm’s services to others.  In the context of financial services firms, this provides an

incentive for those firms to provide high‐quality service to their clients, even in the presence of potential

conflicts of interest.

55. Reputation as a factor limiting opportunistic behavior by firms has been repeatedly

identified as important in the academic literature.  In an extensive survey, MacLeod (2007) summarizes

the substantial literature on this issue, which he describes as based on the premise that, “in a free

market, sellers of high quality goods treat their reputation as an asset that loses its value should they

choose to supply goods of low quality”,63 and that “reputation is an asset whose value is destroyed  

                                                           

62. Hilde E. Patron and Kenneth D. Roskelley, “The Effect of Reputation and Competition on the Advice of

Real Estate Agents”, 37 Journal of Real Estate Financial Economics, at 387.

63. W. Bentley MacLeod (2007) “Reputations, Relationships, and Contract Enforcement”, Journal of Economic

Literature XLV:595‐628, at 596.
26

when a seller or buyer breaches their obligation.”64  Other standard and well‐cited economic articles

based on this concept are Klein and Leffler (1981)65 and Rogerson (1983)66.

56. Available evidence also indicates that reputation is an important factor specifically in the

market for IRA investment services.

• Public financial filings by companies in the industry indicate that reputation is a key element in

their business success: “Our reputation is one of our most important assets ... Damage to our

reputation could cause significant harm to our business and prospects ... Our reputation is also

dependent on our continued identification of and mitigation against conflicts of interest ... our

reputation could be damaged if we fail, or appear to fail, to deal appropriately with conflicts of

interest” (Ameriprise Financial)67

; “We have spent many years developing our reputation for

integrity and superior client service ... Damage to our reputation could cause significant harm to

our business and prospects” (LPL)68.

• Firms in the IRA investment services industry rely to a significant degree on referrals from clients

to attract new business.69  Referrals are only an effective source of sales leads when a firm holds

a good reputation with its client base.

57. In summary, economic theory and available evidence indicate that factors in the current

market environment likely serve to substantially constrain the ability of IRA investment brokers to act on

                                                           

64. MacLeod (2007), supra, at 603.

65. Benjamin Klein and Keith B. Leffler (1981) “The Role of Market Forces in Assuring Contractual

Performance”, Journal of Political Economy 89(4):615‐41.

66. William P. Rogerson (1983) “Reputation and Product Quality”, Bell Journal of Economics 14(2):508‐16.

67. Ameriprise Financial, Inc. 10‐K for the fiscal year ended December 31, 2010, at 47.

68. LPL Investment Holdings Inc. 10‐K for the fiscal year ended December 31, 2010, at 29.

69. First Research, “Industry Profile: Financial Planners and Investment Advisors”, Oct. 26, 2009

(stating, “[i]nvestment advisers depend heavily on referrals for new customers”); see also Dow Jones News Service,

“Wealth Adviser: Facing the Competition – Whatever it May Be”, June 8, 2010 (stating, “[i]n the end, many

advisers find the most productive approach is to focus on doing the best they can for the clients they have and

counting on that to bring in referrals”).
27

potential conflicts of interest.  Therefore, we see no basis to conclude that the Proposed Rule would

generate benefits large enough to outweigh the costs.

        

$72,791

$61,860

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

Mar-1991Mar-1992Mar-1993Mar-1994Mar-1995Mar-1996Mar-1997Mar-1998Mar-1999Mar-2000Mar-2001Mar-2002Mar-2003Mar-2004Mar-2005Mar-2006Mar-2007Mar-2008Mar-2009Mar-2010

Mar-2011

Value of Investment (Contemporaneous $)

Commission-Based Account Fee-Only Account

$10,931

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$13,000

Mar-1991Mar-1992Mar-1993Mar-1994Mar-1995Mar-1996Mar-1997Mar-1998Mar-1999Mar-2000Mar-2001Mar-2002Mar-2003Mar-2004Mar-2005Mar-2006Mar-2007Mar-2008Mar-2009Mar-2010

Mar-2011

Diifference (Contemporaneous $)

Difference in Value of Investment

Value of IRA Mutual Fund Investment 

Under Commission-Based and Fee-Only Expense Schedule 

($2,000 Initial Investment and $100 Monthly Contributions) 

March 31, 1991 through March 31, 2011 

Source: Morningstar analyses of Invesco Van Kampen Equity and Income Fund, Class A shares. 

Notes: Commission-based expense schedule includes 5.5% front load on initial investment and contributions until asset value 

reaches $50,000, when front load on additional contributions declines. 

 Fee-only expense schedule includes 1.5% annual fee charged on assets under management. 

 Investment value assumes all dividends and capital gains are reinvested in the specified fund. 

 Value calculations do not incorporate taxes. 

Difference in Value of Investment