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April 17, 2017 Office of Regulations and Interpretations Employee April 17, 2017 Office of Regulations and Interpretations Employee Benefits Security Administration Room N-5655 U.S. Department of Labor 200 Constitution Avenue NW, Washington, D.C. 20210 Re: RIN 1210-AB79, Fiduciary Rule Examination Ladies and Gentlemen: We are writing on behalf of the Consumer Federation of America (CFA)1 in response to the Department of Labor’s request for comment regarding its reconsideration of the conflict of interest (or “fiduciary) rule. This unjustified exercise has unnecessarily disrupted the remarkable progress financial firms have made to comply with the rule just weeks before implementation was set to begin. At best, the new legal and economic assessment will simply reinforce what we already know: that conflicts of interest are pervasive; that they exert a harmful influence on the recommendations financial advisers make to their retirement advice clients; that the retirement savings of workers and retirees are seriously eroded as a result; and that the Department acted well within its legal authority to craft a strong and workable rule to address those harms. If the Department conducts a fair review, it will inevitably conclude that the rule is working even more quickly and more dramatically than anyone could have reasonably expected to rein in the toxic conflicts that have for too long been allowed to bias retirement investment advice. Meanwhile, retirement investors will have suffered billions of dollars in harm because of this needless delay. Indeed, the evidence from the retirement plan market suggests that, if the Department erred, it did so by casting too narrow a net. If the Administration is serious about improving the ability of Americans to save for retirement, it should be looking, not to roll back this essential reform, but to expand the rule’s fiduciary protections to a broader swath of the retirement plan market. As we discuss further below, that one step would ensure that tens of billions of dollars each year remain in the nest eggs of working Americans and retirees instead of being syphoned off to line the pockets of well-heeled financial firms. 1 The Consumer Federation of America is a non-profit association of nearly 300 consumer groups that was established in 1968 to advance the consumer interest through research, advocacy, and education. Unfortunately, little about this process leads us to conclude that the Department will conduct the fair and even-handed review that would support implementation of the rule without further delay. The decision to reconsider the rule was based exclusively on input from the powerful special interest groups opposed to the rule, without any consultation with senior, worker, and consumer advocates supportive of the rule. Administration spokespeople have routinely parroted rule opponents’ criticisms of the rule before any reevaluation has been conducted. The decision to delay the rule was made even though the Department’s own analysis showed that the harm to retirement investors from even a relatively short delay would far outweigh any benefits to industry. And the comment process on the reconsideration itself is being conducted in haste, without adequate time for interested parties to participate fully and thoughtfully. The one positive development we can point to is the commitment in the delay rule to move forward with core provisions of the fiduciary rule in June, without additional delay, pending the Department’s reconsideration. Despite that development, and although we still hope to be proven wrong, the weight of the evidence leads us to conclude that the Department has already predetermined the outcome of this reconsideration and expects to revise or repeal the rule, regardless of what the reconsideration indicates about the effectiveness and workability of the rule. If true, that would be a gross abuse of process and would subject the Department to claims that it had acted in an arbitrary and capricious manner. It would also be a great disservice to American workers and retirees, who have already had to wait far too long for the simple assurance that the financial professionals they rely on for retirement investment advice will act in their best interests and not simply recommend what is most profitable for the adviser and the firm. 2 Table of Contents I. The Premise behind the Reconsideration is Fundamentally Flawed A. Questions regarding the Department’s legal authority have already been laid to rest. B. The Administration appears to have prejudged the outcome of the reconsideration. C. The rule is based on sound logic that must continue to shape reconsideration. II. Investors Cannot Protect Themselves A. Recent research supports the Department’s conclusions. B. Investors’ lack of knowledge makes them vulnerable to conflicted advice. C. Plan sponsors often lack financial knowledge needed to fulfill their fiduciary obligations. III. The Harm from Conflicted Advice Far Exceeds the RIA’s Estimate A. New evidence suggests brokers fail to recommend superior mutual funds. B. Mystery shopper survey confirms inferior quality of non-fiduciary advice. C. Conflicted advice imposes harms on the broader economy. IV. New Evidence Supports RIA Conclusions Regarding Harmful Practices in the Annuity Market A. Annuity Products are Highly Complex. B. Variable and Fixed-indexed annuities are converging. C. Annuities’ complexity makes investors heavily reliant on highly conflicted financial professionals. D. High-pressure sales tactics are used to promote fixed-indexed annuities sales. E. Long surrender periods and high surrender fees can harm annuity investors. F. True costs of fixed-indexed annuities include inferior returns relative to similar alternatives. G. The Department should consider regulating all conflicted annuity sales under the BIC. V. The Fiduciary Rule and the Growing Significance of Alternative Investments A. Alternative investments have qualities that make investors vulnerable to exploitation by conflicted advisers. B. Alternative investments have the potential for numerous conflicts of interest. VI. The Rule Would Help to Address Harms That Are Prevalent in the 401k Market A. Recent research documents the inadequacy of existing protections to discipline costs of 401(k) plan investment options. B. Brightscope data provides additional insights into plan costs, though most small plans are excluded from that data, and data likely understates costs. C. Brightscope data excludes most small plans and likely significantly understates small plan costs. D. New Analysis from RiXtrema finds potential costs savings in the plan market of $17 billion. E. Small plans often pay excessive all-in costs. F. Problem of excessive fees extends to plans of all sizes. 3 G. Requiring financial professionals to act as fiduciaries when advising plans will lower, rather than increase, plan costs. VII. Opponents’ Claims that the Rule is Harming Retirement Investors are Unfounded A. By transforming biased sales recommendations into fiduciary advice, the rule expands access to genuine advice, to the benefit of retirement investors. B. Rule opponents falsely attribute benefits of fiduciary advice to conflicted sales recommendations. C. Predictions that small accounts will lose access to advice are unfounded. D. Advice will continue to be available to small accounts under a variety of business models and at an affordable price. E. Technology makes it possible to serve small accounts affordably. F. Rule opponents’ characterization of the shift to fee accounts as a harmful consequence of the rule are equally unfounded. G. Rule opponents distort U.K. experience, which has been overwhelmingly positive for investors. H. Predictions that small plans would lose access to advice are similarly unfounded. VIII. Retirement Investors are Not Being Harmed by Lack of Access to Investment Products A. Firms are adapting to the BIC requirement to limit differential compensation, preserving access to a wide variety of investment products. B. Annuities, including fixed-indexed annuities, will continue to be available under the rule. C. More fee-based annuities are rapidly being introduced. D. The rule has spurred pro-investor innovations in investment products. E. The rule is discouraging the sale of harmful investment products. IX. Industry Claims that the Rule will Lead to Increased Litigation are Baseless A. The Department has already carefully weighed arguments about the liability provisions. B. Class action lawsuits provide benefits that greatly outweigh their costs. X. The Rule is Not Causing Harmful Disruptions to the Retirement Advice Market A. Companies’ tempered statements to their investors re: the effect of the rule are in stark contrast to the sky-is-falling claims they’re making for advocacy purposes. XI. Technological Innovation Will Ease Compliance with the Rule, Benefitting Firms and Retirement Savers A. A non-exhaustive discussion of DOL fiduciary-related compliance tools. B. Technology makes fiduciary services to even very small plans affordable. C. Technology tools will make firms more efficient and profitable in the long-term. XII. Harms from Conflicted Advice Will Persist Without the Rule XIII. Conclusion 4 I. The Premise behind the Reconsideration is Fundamentally Flawed The Presidential Memorandum directing the Department to reconsider the fiduciary rule relies on pure industry propaganda: that a rule requiring financial professionals to act in their customers’ best interests when providing retirement investment advice is somehow inconsistent with Administration
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