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‘Significant Unintended Consequences’ Cited in Fiduciary Proposal

A new evaluation paints a gloomy picture of the aftermath of the Labor Department’s fiduciary proposal.

The comment letter, submitted on behalf of a number of financial services firms and broker dealers, notes that “…the undersigned firms have independently concluded that the proposed rule contains problematic prohibitions that would limit the ability of investors to work with a financial advisor, even if that advisor is committed to working in his or her clients’ best interest,” and that “Despite the changes from the 2010 proposal, we are concerned that if the proposed rule is approved substantially as written, it will result in significant unintended consequences.”

The comment letter was submitted on behalf of Ameriprise Financial, Edward Jones, Primerica, Stephens, Inc., Charles Schwab, LPL Financial, Raymond James and Stifel.

The report attached to the comment letter, prepared by Oliver Wyman, says that the proposed rule change is likely to have “significant consequences that will adversely impact individual investors saving for retirement,” notably by reducing assistance to small businesses, “fewer new plans will be established and more plans will likely close.”

This, in turn, would “directly impact the 19 MM individuals who work for small businesses with fewer than 50 employees, who do not currently have access to a workplace retirement plan and reduce the likelihood of their gaining access to a retirement plan in the future,” according to the report.

The Oliver Wyman report synthesizes the findings of two surveys: one of approximately 1,200 small businesses, and the other of nearly 4,400 non-retired retail investors with investments or retirement accounts, as well as datasets from IXI Services (a division of Equifax), representing approximately 20% of U.S. consumer-invested assets on a household level and approximately 30% of U.S. consumer-invested assets on an account level, and other publicly available data.

Small Business

The report notes that, under the fiduciary rule as proposed, financial advisors would be forced to withdraw workplace retirement plan set-up and support services from small businesses, due to the lack of an exception allowing providers to market to plans with fewer than 100 participants that are self-directed — and, according to the report, many small businesses are likely to close or not open plans due to the additional administrative burden that would result.

Of the 32 million private sector workers without access, nearly two-thirds, or 19 million, are employed by small businesses with fewer than 50 employees.

The report notes that 41% of small businesses with 100 or fewer employees work with a financial advisor, and that these firms are significantly more likely to set up a retirement plan. Specifically, businesses that have 1-9 employees and work with a financial advisor are almost twice as likely to set up a retirement plan as are businesses that don’t work with a financial advisor (51% vs. 26%). Businesses that have 10-49 employees and work with a financial advisor are 48% more likely (77% vs. 52%), and businesses that have 50-100 employees are 19% more likely (89% vs. 75%) to set up a plan.

Additionally, the report notes that micro businesses (1-9 employees) with financial advisors are 18% more likely to offer employer matching with a financial advisor (85%) than without (72%).

When asked to select their reasons for not offering a plan, survey respondents cited:


  • cost (47% of small business survey respondents);

  • prioritization of other employee benefits (24%); and

  • significant use of temporary labor (20%).


Individual Impacts

The survey also found that individuals who use the services of a financial advisor have more savings, are more likely to have an IRA in addition to a workplace savings account, and have more diversified portfolios, even after controlling for age, income and wealth. Moreover, Individuals with financial advisors are 44% more likely to rebalance their portfolios at least every two years, according to the report.

More than 80% of retail investors surveyed began saving for retirement through workplace retirement plans, according to the report.

The report claims that individuals with small balance accounts are likely to lose access to retirement “help and support with selecting appropriate products.” A previous Oliver Wyman analysis estimated that 7 million current IRAs would not qualify for an advisory account due to low balances, and that almost all retail investors would face increased costs (73% to 196% on average) as a result of providers shifting clients to a fee-based advisory model. (Their 2011 study found that nearly 90% of the 23 million IRAs analyzed were held in brokerage accounts.)

The report also claims that unadvised individuals are less likely to open an IRA, leading to lower savings rates and increased cash-outs when changing jobs, and that they are likely to carry excess portfolio risk due to less diversification and less frequent rebalancing compared with advised individuals.

At present, approximately 300 comments have been filed on the Labor Department proposal. They can be accessed here.

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