WASHINGTON, DC — Today, House Ways and Means Oversight Subcommittee Chairman Peter Roskam (R-IL) delivered the following opening statement during a hearing on the Department of Labor’s proposed fiduciary rule.
“Good morning. Welcome to today’s hearing on the Administration’s recent proposal to change how people can get retirement investment advice. I know everyone on this dais agrees that saving for a secure retirement is more important than ever given all of the economic challenges our economy has faced in the last several years.
“Last April, the Department of Labor issued a proposed rule that would drastically expand the definition of a fiduciary. The Administration says this regulation will protect people from bad financial advice. That’s a good thought, and an objective we can all support. But you know what they say, the road to hell is paved with good intentions. The reality is this regulation would prevent many people from getting any investment advice at all.
“The rule would essentially hold anyone giving retirement investment advice of any kind to the standards of a fiduciary, with all of the legal implications and complexity that entails. The reason we don’t have such a standard right now is because it would make it extremely difficult for people to access financial advice without having to pay costly fees. Small businesses, low- and middle-income families, and under-served communities would be hurt by this rule far more than the wealthy. That is because the majority of small investors use financial advisors called broker-dealers, who typically work on a commission basis instead of charging fixed fees up front.
“Brokers are a major provider of retirement investment advice. Although they are not considered fiduciaries, they are held to a high standard which requires them to provide advice that is suitable for their clients’ financial interests. Brokers’ compensation is based on the number of people they enroll, a commission-centric model that the Administration opposes.
“The Administration thinks that a salesperson selling an investment product has an inherent conflict of interest that harms an individual receiving their advice and considering whether or not to buy their product. But commission-based retirement investments can often be the best option for many people. They offer a wide variety of investment choices, and since the brokers are paid a commission, the investors don’t have to pay hefty up-front fees in order to access those products. This type of investment advice is so popular that if you look at individual retirement account investors with less than $25,000 in savings, 98 percent choose to go through a broker-dealer.
“Under the proposed fiduciary rule, commission-based plans would be virtually eliminated. There is an exception if the advisers and their clients enter into a so-called ‘best interest contract,’ but this adds a layer of complexity for individual investors and creates a legal and financial liability for investment advisors that will have serious consequences on access to competent and affordable financial advice.
“If the fiduciary rule is implemented, small investors will have two choices. The first choice, which the Administration is encouraging, is using automated computer programs to invest. Spare me. This may work for some, but many people want to talk to a real person and get individualized advice on how to invest their hard-earned money. A computer program is a poor substitute for a qualified financial adviser who can understand a person’s unique circumstances and personal financial goals and provide in-person advice.
“The second choice for investment advice under the rule would be a fee-based model, where the investor would be responsible for paying set fees for financial advice. These fees can be significant, and even a 1 percent fee adds up quickly if it’s charged every year. But it gets worse: the smaller the account, the higher the fees. And if the rule is implemented, millions of people who currently have commission-based accounts would have to start paying fees to get the same type of financial advice they currently get for free.
“In putting forward this fiduciary rule, the Administration is relying on a study by the White House Council of Economic Advisors, which claims that conflicts of interest in retirement advice result in about 1 percent losses for investors each year, or $17 billion in lost investment earnings annually. But expert review shows this study is fundamentally flawed. For example, the study assumes that broker-sold funds are underperforming, when in fact the data suggest that they outperform similar funds. The White House study also doesn’t consider the fact that retirement advice may actually be helpful and increase the value of an investor’s retirement savings, a severe analytical flaw that runs contrary to plain common sense. For helpful advice, the study calculates no financial benefit. The Investment Company Institute, which will testify today, estimates that the fiduciary rule would actually result in investors losing more than $100 billion over a ten-year period because of increased fees and lower returns on their savings.
“One grave concern I have heard over and over again from my constituents is that the Administration’s objective is to force Americans out of private sector IRAs and 401(k)s, which are generally working very well under current law, and into retirement controlled by the government. This Administration’s own regulations, as well as public comments, have made it clear that they don’t want Americans to have control over how much to invest, which investments to choose, and when to draw down their accounts in retirement.
“In the same speeches and press releases touting the fiduciary rule, the Administration is boasting that it will soon create new Federal rules allowing state and local governments to create so-called ‘secure choice’ pensions run by government officials with a mandate for private sector employers to enroll their employees. I say so-called ‘secure choice’ on purpose, because I’m from Illinois. Under these plans, workers would be promised pensions at retirement, but they would lose them if the government officials running the plan can’t meet the investment returns they promised. That’s not just a hypothetical. After years of unrealistic projections and underfunding, pensions in Illinois are in crisis. The same is true in states all across the country.
“Given the extent of the mismanagement and underfunding in existing public pension plans, which are underfunded by some $4 trillion dollars, I can’t think of a better way to undermine the retirement security of Americans than to push them out of the private sector and into government-run public pension plans that are absolutely failing working families today.
“The Administration claims that the fiduciary rule is necessary to save small businesses and families from bad advice and protect them from the big, bad financial industry. But most people who are saving for their retirement are happy with the choices they have now on how to access investment advice. I would argue instead that the fiduciary rule puts the government in the driver’s seat, allowing bureaucrats to pick and choose how people invest their paychecks. What we should really be focusing on in this whole situation are the Americans who aren’t saving for a secure retirement adequately, or aren’t saving for retirement at all. We should do everything we can to encourage saving for the future, not passing regulations that will make it harder for people to do so.
“Despite the fact that the Department of Labor received almost 3,000 comments during the rule’s notice period, the Administration has decided to move forward without issuing a re-proposal to address those concerns. That doesn’t sound like a good faith effort to me. In fact, literally hundreds of Members of Congress of all ideological bents have gone on the record to express concerns about the rule, and yet the Department of Labor has chosen to move forward with impunity.
“The current rule is unworkable, and the Administration has done nothing to fix that. The American people, through Congress, have delegated rulemaking authorities to the Executive Branch, and we will exercise vigorous oversight, and where necessary, move forward with legislative remedies, to rein in abuses.
“I was reading through the comments the Department of Labor received on the fiduciary rule proposal—from industry, small businesses, and individual investors alike. I’d like to end my statement with one of the comments that stood out to me, submitted by Ms. Dorothy Coleman from Hockley, Texas. She wrote:
It’s my money, I was smart enough to save it, and I am smart enough to know how to spend it or save in my retirement.
“If only the Administration agreed.”