Skip to Content

Saving for Retirement Might Get Even Harder


The U.S. Department of Labor recently announced its intention to release the final version of its controversial “fiduciary rule” as early as next week. The text of the new rule has not been made public, but it is widely expected to adopt stricter regulatory standards for those who provide professional advice in connection with retirement investing. As fiduciaries, advisers would face increased disclosure obligations, extensive and complex compliance obligations, and heightened liability exposure. In addition, they would be prohibited, in most cases, from recommending higher cost investment products to their clients unless they could affirmatively establish that those products are in the client’s best interest – a daunting legal standard that could leave an adviser vulnerable to litigation.

The Department of Labor has claimed that the fiduciary rule will save Americans $17 billion a year, a number that the White House Council of Economic Advisers states is the “aggregate annual cost of conflicted advice.” These savings are likely overstated, as the Labor Department’s estimates are overly simplistic, in part because they are compensated through commissions as opposed to flat fees. At the same time, the agency has failed to examine the extent to which the rule may exacerbate the already-substantial knowledge gap that has undermined the success of saving for retirement through employer-provided 401(k) plans. As numerous studies have shown, the average American is woefully unprepared for retirement. For example, a recent U.S. Government Accountability Office report found that approximately half of American households age 55 and over have no retirement savings. The fiduciary rule is likely to make things worse.

See also: Private Equity Managers Could Run Your 401(k) Someday

The problem is that most Americans are ill-equipped to make appropriate decisions with respect to retirement investing. Simply put, ordinary investors — such as the typical worker who has have limited experience with the financial markets but is asked to make financial decisions in connection with his or her employer-provided retirement plan — have limited financial literacy. Most of these people often do not know the difference between debt and equity, have a sense of which types of investments are most suitable for long-term investing, or understand the relationship between risk and return. As a result, they make naïve investment decisions that reduce the value of their retirement portfolios such as investing in complex products, paying excessive fees, or keeping too much money in cash. This so called “ knowledge gap” can be extremely costly.

Furthermore, studies have shown that access to professional advisers also generates greater participation in retirement plans and increases the quality of the participants’ investment decisions. In one such study, Vanguard reported six out of 10 investors increased their retirement savings over a 10-year-period by an average of 30% when using a professional adviser. Similarly, small businesses that lack the expertise to design an appropriate retirement plan benefit from the advice of professional advisers. However, these benefits may be sacrificed under a fiduciary rule that focuses exclusively on minimizing advisors’ fees.

Critics of the fiduciary rule warn that the increased compliance costs and restrictions on permissible fee structures are likely to transform the structure of the industry. In particular, the rule is likely to lead more advisors to charge fees based on the size of an investor’s account, a move that will make the provision of personalized investment advice to mass market clients cost-prohibitive. Millions of investors with small accounts may lose access to professional advice entirely or, at best, be relegated to robo-advisers that rely on computer algorithms to provide recommendations. In the United Kingdom, which recently adopted a regulatory change similar to the fiduciary rule, there is evidence that higher costs and liability concerns may have created an “advice gap” for the ordinary investor.

Federal agencies are required to conduct a rigorous cost-benefit analysis in order to document the expected consequences from regulatory reform. Despite this requirement, the Department of Labor seems to have made little effort to conduct a meaningful assessment of the value of professional advice to retirement investors and employers or to estimate the potential costs of its efforts to restructure the financial services industry. Ordinary investors face a difficult task of making prudent financial decisions to save for their own retirement. And so, reducing access to professional advice in the name of eliminating conflicts of interest may cause more harm than good.

Jill E. Fisch is a professor of law and co-director of the Institute for Law and Economics at the University of Pennsylvania.