Potential Economic Effects on Individual Retirement Account Markets and Investors of DOL's Proposed Rule Concerning the Definition of a 'Fiduciary'

by Steven Garber, Jeremy Burke, Angela A. Hung, Eric Talley

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In October 2010, the U.S. Department of Labor, Employee Benefits Security Administration proposed new rule 29 CFR Part 2510, "Definition of the Term 'Fiduciary.'" The primary objective of the Proposed Rule is to protect retirement investors from "self-dealing" — investment advisors acting in their own interests to the detriment of their clients' interests — by financial services firms, such as broker-dealers, and individuals who offer professional advice to retirement investors. This paper reviews and applies microeconomic principles and empirical literature to assess qualitatively predictions contained in two comments to the Proposed Rule concerning potential negative consequences for individuals who save for retirement through traditional and Roth Individual Retirement Accounts (IRAs). These comments argue that — despite financial incentives for advisors to self-deal — advisors rarely, if ever, act on their conflicts of interest because of incentives stemming from competition for clients among broker-dealers and the value to these firms having good reputations. The comments also predict that adoption of the Proposed Rule would harm retail IRA investors because they would receive less advice about what investment products to include in their IRA portfolios, face higher minimum account balances, pay higher fees, receive less help in setting up IRAs, and decrease contributions to their IRAs. The authors then use findings in empirical literature and microeconomic principles to analyze qualitatively how adoption of the Proposed Rule would affect the welfare of IRA investors of different levels of financial capability through effects on four outcomes of concern to them.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Legal and Regulatory Background

  • Chapter Three

    Do Conflicts of Interest Currently Affect the Behavior of Financial Advisors?

  • Chapter Four

    Industry Responses to Adoption of the Proposed Rule

  • Chapter Five

    How Would Adoption of the Proposed Rule Affect the Well-Being of Retail IRA Investors?

  • Chapter Six

    Conclusion

This research was sponsored by the U.S. Department of Labor (DOL) and conducted within the Center for Financial and Economic Decision Making (CFED), a part of RAND RAND Labor and Population.

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