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ICYMI: Editorial Lays Out the Stakes in Flawed Fiduciary Proposal

The Borzi Savings Bomb


When it comes to new regulation, the Obama Administration has impeccable timing. Just as Americans are worrying about how much is left in their 401(k)s, the Department of Labor has decided it wants to reduce the plethora of options that we have for retirement accounts.

That's essentially the message Assistant Secretary Phyllis Borzi, who runs the Employee Benefits Security Administration, conveyed to a House committee late last month—to bipartisan horror. She is pushing a proposed rule to broaden the definition of "fiduciary" and submit a large swathe of investment advisers, brokers and others to more regulation and legal liability.

For decades the finance industry has provided investors roughly two kinds of services: the "advisory" model, in which an investment professional makes trading decisions, provides specialized advice and charges savers an annual fee; and the "brokerage" model, in which the saver makes the decisions and pays a fee for each trade and occasional advice. The latter model can be cheaper because the broker is often compensated by the company whose products he's offering.

Ms. Borzi says the brokerage model's compensation structure might result in "biased advice." We say "might" because Ms. Borzi and her bureaucratic minions haven't produced a single, serious economic study that shows widespread fraud or malfeasance in the retirement savings industry.

In an email to us, Ms. Borzi cited "widespread" conflicts of interest in the "marketplace for retirement advisory services," adding: "There is a great deal of evidence that these conflicts have resulted in lower returns and higher fees for retirement investors, as reflected in the Department's own investigations and cases, SEC and GAO reports, published securities cases, academic literature and other sources."

But lower returns don't necessarily mean that investors were systematically cheated. Where's the proof?

The rule would have huge consequences for the retirement savings industry. Brokers would have to weigh the cost of higher regulatory compliance against staying in the business. Investors would pay more for trades and advice and have fewer investment choices. Investment educational seminars would likely halt in many cases, lest organizers think they'll be held liable as a fiduciary for giving general investment advice.

Many firms would raise minimum investment amounts to cover their higher costs, cutting off access to lower-income savers. Consultancy Oliver Wyman surveyed about 40% of the investment retirement account market and estimated the proposed rule could "eliminate access to meaningful investment services for over seven million IRAs." Investors could see "direct costs" rise between 75% and 195%.

Democrat Carolyn McCarthy of New York said during the hearing that the rule is "overbearing and has a potential to hurt our national economy." Phil Roe, Tennessee Republican, says it would "curb investment opportunities, raise the cost of investing and reduce the return on those investments for individuals saving for retirement." The Labor Department says it's working on exceptions to the rule to minimize its impact. But why is this rule in the works at all?

Last year's Dodd-Frank law instructed the Securities and Exchange Commission—not the Labor Department—to examine how brokers, dealers, investment advisers and others are regulated, and whether more regulation is needed or not. The SEC is currently conducting that study.

Someone from the White House needs to step in here before Ms. Borzi's savings bomb falls on the heads of American investors. 

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