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One Major Fiduciary Rule Criticism Doesn’t Hold Up

Research from the Council of Economic Advisers provides insight

401k, fiduciary, DOLSomething doesn't add up.

A major criticism of the Department of Labor’s fiduciary rule is the toll it will take on the average 401k plan participant. The cost of compliance will rise, the theory goes, forcing the 401k advisors to either bear its brunt or pass it along, pricing many participants out of the out of the market, causing them to lose access to products and services.

One major (and consistent) fiduciary rule supporter isn’t buying it—the Economic Policy Institute, a left-leaning D.C. think tank known for its labor and little-guy activism.

EPI economists Heidi Shierholz and Monique Morrissey submitted an official comment in response to a Department of Labor Request for Information on further delaying the rule, and attempt to rebut arguments that the rule will hurt savers.

Shierholz and Morrissey note that there is no evidence (at least yet) that the rule will cause investors to lose access to products or services that “actually benefit them.”

Even if the industry’s prediction that the rule could cause investors to lose access to some investment products is borne out, it doesn’t follow that investors will be harmed since these products are unlikely to be in savers’ best interests, the two argue.

“Affected industries invariably predict dire outcomes from regulations they oppose,” Morrissey said, referring to businesses ability to adapt and incorporate new relation.  “And there are no repercussions when their predictions prove unfounded. People saving for retirement lose millions a year due to bad advice from conflicted financial professions. They need a strong and fully-enforced fiduciary rule.”

People saving for retirement “need and deserve” to receive the protections of the full fiduciary rule, she adds.

The duo points to 20015 research from the Council of Economic Advisers that found conflicted advice tends to be bad advice, steering savers to underperforming funds and encouraging inappropriate investment strategies.

Summarizing the council, it “consistently finds that funds characterized by conflicted payments significantly underperform funds sold directly to savers” and that “it is not merely the cost of paying those intermediaries that lead to underperformance.”

It was reaffirmed recently by a Morningstar report, which noted that small savers would benefit from the fiduciary rule not just because they would pay lower fees or commissions (which may vary depending on how long investments are held) but because conflicted advisors steer savers to underperforming funds and asset classes associated with higher share loads.

“Thus, whether or not most retirement savers who currently rely on a broker’s conflicted ‘advice’ will actually hire financial advisers instead—a doubtful assertion—‘advice’ from brokers is not comparable to advice from disinterested experts,” they conclude. “Similarly, even if the industry’s prediction that the rule could cause investors to lose access to some investment products is borne out, it does not follow that investors will be harmed since these products are unlikely to be in savers’ best interests.”

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