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ICI: Fiduciary Reproposal Relies on ‘Fatally Flawed’ Research

The Investment Company Institute says that research relied upon by the Obama administration in supporting its push for an expansion of the “conflicted advice” rule released April 14 is “fatally flawed,” and that the claim that retirement savers pay “billions of dollars a year” in excess costs “does not stand up to the facts.” 

Those assertions were made in a letter to the editors of The New York Times commenting on an editorial in support of the Department of Labor’s fiduciary reproposal. Additionally, researchers at ICI have called into question the conclusions drawn from the Council of Economic Advisors (CEA) report relied on by the Department of Labor as a basis for establishing the existence of a “compelling public need” warranting its fiduciary reproposal.

Additionally, in a letter to the Office of Management and Budget (OMB), ICI notes that “several claims made in the CEA Report call the reliability of that report into question, in particular as justification for any regulatory expansion.” 

The ICI report notes that the CEA report argues that compensation structures prevalent in the financial services industry incentivize brokers and other financial advisers to encourage workers and retirees to shift assets out of 401(k)s and into higher cost IRAs, and that “If brokers and other advisers were following that practice, one would expect IRA investors to be steered into high-cost mutual funds.” However, ICI said, its data shows that IRA investors tend to concentrate assets in funds whose expense ratios are “far less” than the average expense ratio of all funds; in 2013, the average expense ratio paid by IRA investors on equity funds was 63 basis points, which it said was lower than the average expense ratio for all equity funds, a pattern it says also holds true in hybrid and bond funds. 

The ICI analysis also challenges the CEA report’s illustration of a fee disparity between 401(k)s and IRAs, noting that it “vastly exaggerates” the difference in fund expenses paid by 401(k) investors and IRA holders. ICI notes that the CEA report provides a hypothetical illustration which assumes that typical 401(k) plan investors pay fund expenses of only 20 basis points, but pay 130 basis points when assets are rolled over to an IRA — a differential which ICI says “drives [the CEA report’s] multibillion-dollar estimate of harm to investors.” However, ICI refers to data which indicates that the average fee paid by IRA investors in a stock fund is only 74 basis points, while the average fee for investing in stock funds paid by 401(k) investors is actually 58 basis points — a gap that is about 85% less than that claimed in the CEA report’s “hypothetical.”

ICI acknowledges that 401(k) investors pay lower fees in mutual funds than IRA holders pay, but notes that that reflects economies of scale and the reality that some IRA investors pay through fund fees for services their 401(k) plans do not provide, such as professional investment analysis.  

The ICI analysis notes that the CEA report bases its claim of investor harm on a string of academic studies that, according to ICI, “do not support the CEA Report’s conclusions.” In fact, the ICI analysis notes that none of the academic studies relied on by the CEA report actually compares the costs of investing with a fiduciary advisor versus those of investing via a broker or other advisor that is not a fiduciary, and then offers a brief summary of each of the studies relied on by the CEA and “why they offer little, if any,  support for the CEA Report’s conclusion that investors purchasing funds sold through brokers receive significantly lower returns than do investors using fiduciary advisers.”

In conclusion, the ICI letter says, “there is little in the academic papers cited in the CEA report, or in the extensive data readily available to the Department, to substantiate the conclusion that underperformance of funds sold through brokers is ‘about 1%’ or any other number.”