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Regulation and Compliance > Federal Regulation > DOL

3 Big Holes in DOL Fiduciary Proposal, ICI Says

By Melanie Waddell

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Letters of opposition continue flowing into the Office of Management Budget as it reviews the Department of Labor’s rule to change the definition of fiduciary on retirement advice.

The Investment Company Institute on Monday told OMB’s Office of Information and Regulatory Affairs (OIRA) that DOL’s rule must include “significant new data” in its regulatory impact analysis to support DOL’s “massive overhaul of the retirement marketplace” and said there were three major factual holes in the DOL’s proposal.

ICI President and CEO Paul Schott Stevens also asked to meet with OIRA officials to share ICI research and data “in greater detail” as OIRA reviews the final regulation’s impact on American retirement savers and the retirement system as a whole.

ICI, a global trade group for regulated funds, does extensive research on investors and retirement plans in the investment company industry.

But Nancy Leamond, chief lobbyist for AARP, said in a Tuesday blog posting — Tuesday marked the one-year anniversary of President Obama’s public endorsement of DOL’s fiduciary rule — that “after nearly a year of deliberations and thoughtful responses to comments, AARP is hopeful that the proposed rule will be finalized soon.”

Schott Stevens, however, pointed to three areas in DOL’s rule proposal that aren’t true. First, he said, DOL’s claims that broker-sold funds “underperform” are not supported by the very academic studies on which it relies, he said.

Second, DOL “relies on several academic studies to support its claims that investors are harmed by their use of brokers,” Schott Stevens wrote, but “none of these academic studies actually compares the key element that would be necessary for these studies to provide support” for the regulatory impact analysis.

Notably, he continued, the analyses “do not compare outcomes of investing with a financial advisor that is a fiduciary to the outcomes of investing with a broker or other financial advisor that is not a fiduciary. These studies also rely on outdated data that fail to reflect fundamental changes in the market for broker-sold funds in the past 10 years.”

Finally, he writes, the Regulatory Impact Analysis misapplies the findings of a key study, leading to a vast overstatement of the rule’s potential benefits.

Schott Stevens also stated that investors’ actual experience with broker-sold funds “contradicts” DOL’s claims. Publicly available data demonstrate that, contrary to DOL’s claims, “investors who own funds that are sold with front-end loads during the years 2007 to 2013 actually have concentrated their assets in funds that outperform — not underperform — other comparable funds,” according to Schott Stevens.

On a sales-weighted basis, “investors buying front-end load shares in those years outperformed the average for share classes in the same Morningstar category by 27 basis points,” Schott Stevens wrote, while “similarly, publicly available data show that investors concentrate their purchases in front-end load share classes with lower expense ratios and pay brokers lower-than-average loads — further contradicting the Department’s claims of harm to retirement savers.”

DOL’s regulatory impact analysis, Schott Stevens wrote, also “ignores” the cost of investment advice.

“The total annual cost for the services provided by brokers and their firms to investors in front-end load funds is about 50 basis points a year,” he explained. “But retirement savers likely will pay more in a fee-based account.”

He cited a recent study which found that fee-based accounts — the most likely alternative to brokerage accounts — cost investors 111 basis points per year on average, in addition to fund expenses.

– Check out: DOL Fiduciary Rule Will Accelerate Broker-Dealer Closings

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