[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
RESTRICTING ACCESS TO FINANCIAL ADVICE:
EVALUATING THE COSTS AND CONSEQUENCES
FOR WORKING FAMILIES AND RETIREES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR, AND PENSIONS
COMMITTEE ON EDUCATION
AND THE WORKFORCE
U.S. House of Representatives
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 17, 2015
__________
Serial No. 114-21
__________
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__________
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COMMITTEE ON EDUCATION AND THE WORKFORCE
JOHN KLINE, Minnesota, Chairman
Joe Wilson, South Carolina Robert C. ``Bobby'' Scott,
Virginia Foxx, North Carolina Virginia
Duncan Hunter, California Ranking Member
David P. Roe, Tennessee Ruben Hinojosa, Texas
Glenn Thompson, Pennsylvania Susan A. Davis, California
Tim Walberg, Michigan Raul M. Grijalva, Arizona
Matt Salmon, Arizona Joe Courtney, Connecticut
Brett Guthrie, Kentucky Marcia L. Fudge, Ohio
Todd Rokita, Indiana Jared Polis, Colorado
Lou Barletta, Pennsylvania Gregorio Kilili Camacho Sablan,
Joseph J. Heck, Nevada Northern Mariana Islands
Luke Messer, Indiana Frederica S. Wilson, Florida
Bradley Byrne, Alabama Suzanne Bonamici, Oregon
David Brat, Virginia Mark Pocan, Wisconsin
Buddy Carter, Georgia Mark Takano, California
Michael D. Bishop, Michigan Hakeem S. Jeffries, New York
Glenn Grothman, Wisconsin Katherine M. Clark, Massachusetts
Steve Russell, Oklahoma Alma S. Adams, North Carolina
Carlos Curbelo, Florida Mark DeSaulnier, California
Elise Stefanik, New York
Rick Allen, Georgia
Juliane Sullivan, Staff Director
Denise Forte, Minority Staff Director
------
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR, AND PENSIONS
DAVID P. ROE, Tennessee, Chairman
Joe Wilson, South Carolina Jared Polis, Colorado,
Virginia Foxx, North Carolina Ranking Member
Tim Walberg, Michigan Joe Courtney, Connecticut
Matt Salmon, Arizona Mark Pocan, Wisconsin
Brett Guthrie, Kentucky Ruben Hinojosa, Texas
Lou Barletta, Pennsylvania Gregorio Kilili Camacho Sablan,
Joseph J. Heck, Nevada Northern Mariana Islands
Luke Messer, Indiana Frederica S. Wilson, Florida
Bradley Byrne, Alabama Suzanne Bonamici, Oregon
Buddy Carter, Georgia Mark Takano, California
Glenn Grothman, Wisconsin Hakeem S. Jeffries, New York
Rick Allen, Georgia
C O N T E N T S
----------
Page
Hearing held on June 17, 2015.................................... 1
Statement of Members:
Roe, Hon. David P., Chairman, Subcommittee on Health,
Employment, Labor, and Pensions............................ 1
Prepared statement of.................................... 68
Polis, Hon. Jared, Ranking Member, Subcommittee on Health,
Employment, Labor, and Pensions............................ 69
Prepared statement of.................................... 70
Statement of Witnesses:
Haley, Mr. Jack, Executive Vice President, Fidelity
Investments, Boston, MA.................................... 133
Prepared statement of.................................... 135
Harman, Mr. Dean, CFP, Managing Director, Harman Wealth
Management, The Woodlands, TX.............................. 174
Prepared statement of.................................... 176
Kelleher, Mr. Dennis, Managing Director, Harman Wealth
Management, The Woodlands, Washington, DC.................. 144
Prepared statement of.................................... 146
Mason, Mr. Kent, Partner, Davis and Harman, LLP, Washington,
DC......................................................... 118
Prepared statement of.................................... 120
Perez, Hon. Thomas E., Secretary, U.S. Department of Labor,
Washington, DC............................................. 71
Prepared statement of.................................... 75
Reid, Dr. Brian, PH.D., Chief Economist, Investment Company
Institute, Washington, DC.................................. 159
Prepared statement of.................................... 161
Additional Submissions:
Bonamici, Hon. Suzanne, a Representative in Congress from the
State of Oregon:
Letter dated June 16, 2015, from various organizations... 214
Secretary Perez:
Transcript Inserts....................................... 219
Chairman Roe:
GAO Report: Retirement Security.......................... 3
Report: Locked Out of Retirement......................... 54
Questions submitted for the record 221
Curbelo, Hon. Carlos, a Representative in Congress from the
State of Florida submitted questions for the record to:
Mr. Haley................................................ 222
Mr. Kelleher............................................. 226
Guthrie, Hon. Brett, a Representative in Congress from the
State of Kentucky submitted questions for the record to:
Mr. Haley................................................ 222
Mr. Harman............................................... 224
Mr. Mason................................................ 228
Dr. Reid................................................. 230
Mr. Polis, questions submitted for the record to Secretary
Perez...................................................... 232
Chairman Roe, questions submitted for the record to Secretary
Perez...................................................... 232
Responses to questions submitted for the record by:
Mr. Haley................................................ 240
Mr. Harman............................................... 242
Mr. Kelleher............................................. 244
Mr. Mason................................................ 246
Dr. Reid................................................. 249
Secretary Perez.......................................... 250
RESTRICTING ACCESS TO FINANCIAL ADVICE:
EVALUATING THE COSTS AND CONSEQUENCES FOR
WORKING FAMILIES AND RETIREES
----------
Wednesday, June 17, 2015
House of Representatives
Subcommittee on
Health, Employment, Labor, and Pensions,
Committee on Education and the Workforce
Washington, D.C.
----------
The Subcommittee met, pursuant to call, at 10:03 a.m., in
Room 2175, Rayburn House Office Building, Hon. David P. Roe
[chairman of the subcommittee] presiding.
Present: Representatives Roe, Wilson of South Carolina,
Foxx, Walberg, Salmon, Guthrie, Heck, Messer, Carter, Grothman,
Allen, Polis, Courtney, Pocan, Hinojosa, Sablan, Wilson of
Florida, Bonamici, Takano, and Jeffries.
Also present: Representatives Kline and Scott.
Staff present: Andrew Banducci, Professional Staff Member;
Janelle Belland, Coalitions and Members Services Coordinator;
Martha Davis, Staff Assistant; Ed Gilroy, Director of Workforce
Policy; Callie Harman, Staff Assistant; Tyler Hernandez, Press
Secretary; Marvin Kaplan, Workforce Policy Counsel; Nancy
Locke, Chief Clerk; Zachary McHenry, Legislative Assistant;
Daniel Murner, Deputy Press Secretary; Michelle Neblett,
Professional Staff Member; Brian Newell, Communications
Director; Krisann Pearce, General Counsel; Lauren Reddington,
Deputy Press Secretary; Alissa Strawcutter, Deputy Clerk; Alexa
Turner, Legislative Assistant; Joseph Wheeler, Professional
Staff Member; Tylease Alli, Minority Clerk/Intern and Fellow
Coordinator; Denise Forte, Minority Staff Director; Christine
Godinez, Minority Staff Assistant; Carolyn Hughes, Minority
Senior Labor Policy Advisor; Eunice Ikene, Minority Labor
Policy Associate; Kendra Isaacson, Minority Labor Detailee;
Brian Kennedy, Minority General Counsel; Kevin McDermott,
Minority Senior Labor Policy Advisor; Richard Miller, Minority
Senior Labor Policy Advisor; Amy Peake, Minority Labor Policy
Advisor; and Dillon Taylor, Minority Labor Policy Fellow.
Chairman Roe. A quorum being present, the Subcommittee on
Health, Employment, Labor, and Pensions will come to order.
Good morning. I would like to begin by extending a special
welcome to Secretary Perez. And we appreciate your willingness
to engage in open and frank conversations about important
issues facing working families and job creators.
I know there are areas where we will disagree, but we will
always welcome the opportunity to raise our concerns and lay
out what we believe are more positive alternatives.
I wish we were here to discuss a proposal that enjoyed
broad bipartisan support, one that would help strengthen our
economy and improve the lives of hardworking men and women.
Unfortunately, that is not the case.
Instead, we are here to address a regulatory scheme that
will hurt a lot of families, retirees, and small-business
owners. And it could not come at a worse-possible time.
One of the most difficult challenges we face as a country
is a lack of real retirement security for America's families.
The defined benefit pension system continues to experience a
decades-long decline while many workers are still rebuilding
the savings they lost in the recent recession.
Due to these and other challenges, including a persistently
weak economy, too many workers are retiring without the means
necessary to ensure their financial security.
And just a moment. I found some information about
retirement security by a GAO report, Mr. Secretary, that shows
that 29 percent of households 55 and older have no retirement
savings and 23 percent have a defined benefit plan, but no
retirement savings. So it is a real issue.
And I would like, without objection, to have this report
submitted for the record; and also another report submitted for
the record, the U.S. Chamber finds that the DOL-proposed
fiduciary rule could impact 9 million small-business
households. And I would like to have that introduced for the
record also.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Roe. Our goal as policymakers should be to advance
bold bipartisan solutions that will help more Americans plan,
invest, and save for retirement. Regrettably, the Department's
fiduciary regulation would move our country in the opposite
direction. It would cut off a vital source of support too that
many low- and middle-income families and small-business owners
rely on, and that is the help of a trusted financial adviser.
Four years ago, the Subcommittee examined a similar
proposal that was later withdrawn under intense bipartisan
opposition. I said at the time that anyone who provides
investment assistance should be well-trained, committed to high
ethical and professional standards, and devoted to the best
interests of those they are serving.
That is why financial advisers have long been subject to a
host of securities, tax, and disclosure requirements. It is a
complex system of rules and regulations, but it is an important
one that has worked well for decades.
That doesn't mean we shouldn't look for opportunities to
improve current standards, but we cannot in any way make it
harder for workers, retirees, and small-business owners to
receive the financial advice they need.
Yet that is precisely what this regulatory proposal would
do. Offering some of the most basic assistance would be
prohibited, such as advice on rolling over funds from a 401(k)
to an IRA. Financial advisers would no longer be able to assist
individuals on how to manage their funds on retirement. And
small-business owners would be denied help in selecting the
right investment options for their workforce, which would lead
to fewer employees enrolled in a retirement plan.
It has been suggested on numerous occasions that this
proposal will simply apply to financial advisers the same
standard recognized in the medical profession.
Mr. Secretary, I believe you have drawn that comparison
from time to time and it is a clever talking point, but one
that couldn't be more flawed.
As a physician with more than 30 years of experience in
treating patients, let me just say that the approach reflected
in this proposal would destroy what is left of our health care
system. Imagine what would happen if doctors were prohibited
from receiving compensation or were required to sign a contract
with each patient before delivering services or were forced to
publish online each and every treatment that had been
prescribed the following year.
No doctor could run a successful practice under this type
of regulatory regime and no responsible financial adviser will
be able to, either.
Make no mistake. If this rule goes into effect, a lot of
people will quickly learn that their financial adviser, someone
they have known and trusted for years, will no longer be able
to take their call.
And it is important to note that low- and middle-income
families are the ones who will bear the brunt of this misguided
proposal. They will lose access to their personal service that
they have relied on and be forced to find suitable advice
online or simply fend for themselves.
As is often the case with big-government schemes, the
wealthiest Americans will do just fine. And those we really
want to help we will hurt the most.
Mr. Secretary, this latest fiduciary proposal will lead to
the same harmful consequences as the first and should suffer
the same fate. Please withdraw this proposal and work with this
committee on a responsible, bipartisan approach that will
strengthen protections for investors and preserve robust access
to financial advice. Our nation's workers and retirees deserve
nothing less.
With that, I will now recognize the ranking member of the
subcommittee, Congressman Polis, for his opening remarks.
[The statement of Chairman Roe follows:]
Prepared Statement of Hon. David P. Roe, Chairman, Subcommittee on
Health, Employment, Labor, and Pensions
Good morning. I'd like to begin by extending a special welcome to
Secretary Perez. We appreciate your willingness to engage in open and
frank conversations about important issues facing working families and
job creators. I know there are areas where we disagree, but we always
welcome the opportunity to raise our concerns and lay out what we
believe are more positive alternatives.
I wish we were here to discuss a proposal that enjoyed broad
bipartisan support, one that would help strengthen our economy and
improve the lives of hardworking men and women. Unfortunately, that's
not the case. Instead, we are here to address a regulatory scheme that
will hurt a lot of families, retirees, and small business owners, and
it could not come at a worse possible time.
One of the most difficult challenges we face as a country is a lack
of real retirement security for America's families. The defined benefit
pension system continues to experience a decades-long decline, while
many workers are still rebuilding the savings they lost in the recent
recession. Due to these and other challenges - including a persistently
weak economy - too many workers are retiring without the means
necessary to ensure their financial security.
Our goal as policymakers should be to advance bold, bipartisan
solutions that will help more Americans plan, invest, and save for
retirement. Regrettably, the department's fiduciary regulation would
move our country in the opposite direction. It would cut off a vital
source of support many low- and middle-income families and small
business owners rely on, and that is the help of a trusted financial
advisor.
Four years ago, the subcommittee examined a similar proposal that
was later withdrawn under intense bipartisan opposition. I said at the
time that anyone who provides investment assistance should be well
trained, committed to high ethical and professional standards, and
devoted to the best interests of those they are serving.
That is why financial advisors have long been subject to a host of
securities, tax, and disclosure requirements. It is a complex system of
rules and regulations, but it is an important one that has worked well
for decades. That does not mean we shouldn't look for opportunities to
improve current standards. But we cannot - in any way - make it harder
for workers, retirees, and small business owners to receive the
financial advice they may need.
Yet that is precisely what this regulatory proposal would do.
Offering some of the most basic assistance would be prohibited, such as
advice on rolling over funds from a 401(k) to an IRA. Financial
advisors would no longer be able to assist individuals in how to manage
their funds upon retirement. And small business owners would be denied
help in selecting the right
investment options for their workforce, which will lead to fewer
employees enrolled in a retirement plan.
It has been suggested on numerous occasions that this proposal will
simply apply to financial advisors the same standard recognized in the
medical profession. Mr. Secretary, I believe you have drawn that
comparison from time to time. It is a clever talking point, but one
that couldn't be more flawed.
As a physician with more than 30 years of experience treating
patients, let me just say that the approach reflected in this proposal
would destroy what's left of our health care system. Imagine what would
happen if doctors were prohibited from receiving compensation, or were
required to sign a contract with each patient before delivering
services, or were forced to publish online each and every treatment
that had been prescribed the following year. No doctor could run a
successful practice under this type of regulatory regime, and no
responsible financial advisor will be able to either.
Make no mistake, if this rule goes into effect, a lot of people
will quickly learn that their financial adviser - someone they may have
known and trusted for years - will no longer be able to take their
call. And it is important to note that low- and middle-income families
are the ones who will bear the brunt of this misguided proposal. They
will lose access to the personal service they rely on and be forced to
find suitable advice online or simply fend for themselves.
As is often the case with big government schemes, the wealthiest
Americans will do just fine and those we want to help will be hurt the
most. Mr. Secretary, this latest fiduciary proposal will lead to the
same harmful consequences as the first and should suffer the same fate:
Please withdraw this proposal and work with this committee on a
responsible, bipartisan approach that will strengthen protections for
investors and preserve robust access to financial advice. Our nation's
workers and retirees deserve nothing less.
With that, I will now recognize the Ranking Member of the
subcommittee, Congressman Polis, for his opening remarks.
______
Mr. Polis. Thank you, Mr. Chairman.
Today we will be discussing an important issue that has
been simmering for several years now after the Department of
Labor chose to modify the first version of this rule several
years ago, they have been working to listen to a broad spectrum
of stakeholders on how best to proceed.
And I think that everybody in the room on all sides of this
issue believes in a best-interest or fiduciary standard because
I think we are all here out of concern that the clients'
interests should be paramount.
But what this comes down to is how to make that happen and
how to implement the rule in a way that makes sense and
benefits consumers.
I truly believe today that most advisers do what is in the
best interest of their clients, and hopefully the final rule
won't be an overwhelming burden on those good actors.
However, providing a standard that those few bad actors
need to abide by is absolutely essential, as well as to improve
transparency in the industry.
As we all know, most Americans are not saving enough for
retirement. It is essential that what little is being invested
should not be biased by conflicted advice. Investors should be
able to trust the person advising them about the money they
need to live after retirement without having to worry about
that adviser's self-interest.
On the other side of the coin, we need to protect
individuals and small businesses to make sure that they have
access to quality advice, because mistakes in investments cost
billions of dollars, and good advice is well worth the price.
I am thankful to all of our witnesses for coming today to
share their experience, and I am particularly glad that we are
beginning with the Secretary of Labor. And I am glad to hear
that he is interested in hearing our feedback about the rule.
And I am thrilled that he has decided to extend the comment
period by an additional 15 days.
I know that he has been working diligently on an overall
goal of expansion of retirement savings as a way to address the
retirement crisis. They have been doing a great deal of work in
the Department of Labor on financial literacy, increasing
effective enforcement by the Employee Benefits Security
Administration, providing technical assistance to employers and
workers and retirees about saving for retirement.
A good, workable rule regarding a best-interest standard
can help increase trust between a client and their adviser, and
that is an important part of expanding retirement savings.
I don't think anybody thinks that the current rule is
perfect, and that is why I am thrilled we are having this
conversation and that the Secretary has extended the comment
period for 15 more days.
I will be asking some in-depth questions, both at this
hearing as well as for the record, because although I believe
that this process should continue forward to close a loophole
and establish a fiduciary standard that reflects today's
retirement landscape, we also need to understand and fix any
unintended consequences, especially for low- and middle-income
investors and small businesses.
Ensuring that people are receiving good, affordable,
conflict-free advice should be our end goal here. And I look
forward to hearing in-depth answers from the knowledgeable
questions from the members of this committee so that we can
help the Secretary reach an end result that helps those most in
need and improves trust in the client-adviser relationship and
leads to greater retirement savings for Americans.
Thank you, and I yield back the balance of my time.
[The statement of Mr. Polis follows:]
Prepared Statement of Hon. Jared Polis, Ranking Member, Subcommittee on
Health, Employment, Labor, and Pensions
Today we discuss an important issue that has been simmering for the
past five years. After the Department of Labor retracted the first
version of this rule several years ago, they have been working to
listen to a broad spectrum of stakeholders on how to proceed.
I believe that everyone in the room, on every side of this issue,
believes in a ``Best-Interest or Fiduciary Standard'' because the
client's interest should be paramount. What this comes down to is how
to make it happen, and how to implement this rule in a way that makes
sense.
I truly believe that today most advisors do what is in the best
interest of their clients, and the final rule needs to not have an
overwhelming burden on those good actors. However, providing a standard
that those few bad actors need to abide by is absolutely essential.
As we all know, today, most Americans are not saving enough for
retirement. It is essential that what little is being invested must not
be biased by conflicted advice. Investors must be able to trust the
person advising them about the money they need to live after
retirement. On the other side of the coin we must protect individuals
and small businesses access to advice. Because mistakes in investments
cost billions of dollars.
I am thankful to all of our witnesses for coming today in order to
share their expertise. We are all interested in learning why this is
necessary and how this will impact advisors; but more importantly how
it impacts the advice individuals receive.
I am especially glad The Secretary of Labor has joined us. I know
he is glad to be hearing feedback about the rule, and I am especially
pleased that he decided to extend the comment period by an additional
15 days.
I know that he has been working diligently on an overall goal of
``expansion of retirement savings'' as a way to address the retirement
crisis. They have been doing a great deal of work on financial
literacy, they have increased effective enforcement by the Employee
Benefits Security Administration and technical assistance that has been
provided to employers, workers and retirees. A good workable rule
regarding a best-interest standard will increase trust between a client
and their advisor, and I know we all agree that is necessary part of
expanding retirement savings.
I don't think the Secretary or anyone on his staff would say this
rule is perfect, but that is why having this conversation and having a
comment period is so vital.
I will be asking some very in-depth questions now and also for the
record, because although I believe this process needs to continue
forward to close a loophole and establish a fiduciary standard that
reflects the retirement landscape as it looks today, we need to
understand and fix any unintended consequences, especially for low and
middle-income investors and small businesses.
Ensuring that people are receiving good, affordable, conflict-free
advice should be, and I believe is the end-goal for everyone.
______
Chairman Roe. I thank the gentleman for yielding.
Pursuant to committee rule 7(c), all subcommittee members
will be permitted to submit written statements to be included
in the permanent hearing record. And without objection, the
hearing record will remain open for 14 days to allow
statements, questions for the record and other extraneous
material referenced during the hearing to be submitted in the
official hearing record.
It is now my pleasure to introduce our distinguished
witness on the first panel.
The Honorable Thomas E. Perez was sworn in as the 26th U.S.
Secretary of Labor on July 13, 2013. Prior to his confirmation,
he served as Assistant Attorney General for Civil Rights at the
U.S. Department of Justice and as the Secretary of Maryland's
Department of Labor, Licensing and Regulation.
Mr. Secretary, I will ask you to stand and raise your right
hand.
[Witness sworn.]
Let the record reflect the witness answered in the
affirmative.
You may be seated.
Before I recognize you for your testimony, let me briefly
review so you understand the lighting system; you will have
five minutes; we will have some latitude with that with the
Secretary here.
And with that, you are recognized.
TESTIMONY OF HON. THOMAS E. PEREZ, SECRETARY, U.S. DEPARTMENT
OF LABOR, WASHINGTON, D.C.
Secretary Perez. Good morning. Thank you, Mr. Chairman. It
is a pleasure to be here, Ranking Member Polis, Chairman Kline,
and other members of the Committee. It is an honor to be here,
and thank you for allowing me to come to discuss the
Department's important efforts to help ensure that your
constituents and all Americans have access to sound investment
advice that a middle-class retirement requires.
Merlin Toffel did everything right. He was a veteran of the
U.S. Navy and an electrician. He and his wife, Elaine, raised
their four kids in Lindenhurst, Illinois, and instilled in them
those middle-class values befitting of their greatest
generation.
They loved to travel. They worked hard and they took care
to save wisely. Over four decades, they built up an impressive
portfolio with Vanguard: Merlin at the helm managing the
account and Elaine, an accountant, keeping the books.
Life took its toll. Merlin was diagnosed with Alzheimer's.
When Merlin could no longer manage their finances, Elaine made
an appointment at the local retail bank. This is the bank they
had been using for years. They trusted them.
The bank's investment broker told her to liquidate the
impressive Vanguard portfolio and sold them variable annuities
to the tune of $650,000. Elaine trusted that advice. It was in
her best interests, she thought.
But those variable annuities charged nearly 4 percent of
the investment per year, or $26,000, the rough cost of buying a
new car each year. And if the Toffel's needed to access the
money right away, as all too many families face when their
loved one is in decline, a 7 percent surrender charge would
cost them more than $45,000.
In the end, the broker's conflicted advice cost a
hardworking, middle-class family more than $50,000.
The Toffel's story is tragic, but regrettably is it not
unique.
Conservative estimates by the Council of Economic Advisers
place the cost of conflicted advice at more than $17 billion
annually. Our economic analysis shows that conservatively the
amount that savers would benefit from our rule, and this is
only based on a slice of the IRA market, would be $40 billion
over 10 years.
For families like the Toffels, families who have done
everything we ask of the American middle class, the stakes
could not be higher.
ERISA is over four decades old. In my parents' generation,
average Americans retired after working their entire life in
the same company. Their retirement was met by with both a
commemorative pen and a concrete pension. Because that pension
was a defined benefit, the only thing at risk of running dry
was the ink in the pen.
But times have changed. Defined benefit plans have given
way to defined contribution plans. Now consumers are in control
of making their own investment decisions through from 401(k)s
and IRAs. We can still count on that commemorative pen, but a
secure retirement is less predictable.
For the majority of Americans without a finance degree, the
market is, at best, a confusing place.
I appreciate the fact that you are a very distinguished
doctor in addition to a member of Congress, Mr. Chairman. I
have four siblings and they are all doctors. And you know, I am
a lawyer, and I promised them I would never be a plaintiff's
personal injury lawyer, and I kept that promise, no disrespect
to any plaintiff's personal injury lawyers around the table.
But you know what? As I said, three of the most important
decisions that people make in their lives are medical, legal,
and financial. And I know my siblings, the doctors, they
understand that they have a very concrete obligation to put
their patients' best interests first, just as I as a lawyer
have an obligation to put my clients' best interests first.
That is clear.
And most people assume that the same holds true for their
financial professionals. But that is not necessarily the case.
Indeed, many of those working in the retirement space are
in fact doing the right thing. Many of them are fiduciaries
already, having taken an oath to serve in the best interests of
their clients.
Yet many more are not fiduciaries, and despite marketing
that might suggest otherwise, they operate under no such
commitment to do what is in the best interests of their
clients.
When seeking advice on retirement, consumers are at an
informational disadvantage. This playing field is not level.
But this is not simply about people who do bad things. I
actually think, and I agree with both the Chairman and the
Ranking Member, that the vast majority of people who provide
advice are trying to do the right thing. I have not heard from
anyone who said that I don't do anything but try to put my
customers' best interests first.
But the challenge is that the system is flawed. They are
operating within a structurally flawed system, a market that
sees the personal financial interests of the adviser and the
firm all too frequently misaligned with the best interests of
the customer.
So the Labor Department's conflict of interest proposal has
a singular goal: to align the best interests of the customer
with those of the adviser and the firm. Simply put, we want to
create an enforceable best-interest standard so that you can
have certainty that your financial adviser is working for you
first and foremost.
This proposed rule is a product of lengthy, exhaustive
outreach. It includes extensive consultation with the SEC,
whose expertise has been invaluable as we have developed this
rule. Our outreach to the SEC was not a box-checking exercise,
it was critical to the rulemaking and it has helped us make a
better proposal.
The proposed rule was also following very significant
outreach to representatives of consumer groups, the financial
services industry and members of Congress. And we appreciate
that input that we have gotten throughout the process.
We have established a lengthy comment process of roughly
140 days, which is one of the longest that we have done in a
rule, and for good reason.
Throughout this outreach process, I have been very
heartened by the calls that we have gotten from many in the
industry to establish a best-interest standard.
So for instance, John Thiel, the head of Merrill Lynch
Wealth Management, said, ``Since 2010, we have supported the
notion of a consistent and higher standard for every
professional that deals with the American investor and those
that deal with retirement plans. As an organization, we have
provided input to policymakers in Washington. We believe we
were heard and we will have an additional opportunity to
comment.''
The CEO of Bank of America, Brian Moynihan, said, and I
quote: ``We believe that doing what is in the best interests
for your customers is absolutely the right thing to do. We have
been clear that we see the industry moving and we expect to
help it move there.''
There is an increasing recognition inside and outside the
industry that the best-interest standard is in fact the right
way to go. The debate has shifted unmistakably from what
problem to an acknowledgment of the problem that people
providing investment advice should have an enforceable
obligation to look out for their customers' best interests.
And now the important questions that remain, and I agree
with the Ranking Member, is how do we operationalize this
standard?
And we look forward to the feedback and constructive
dialogue that we continue to have so that we can get ideas on
how best to operationalize this because leaders of large and
small businesses alike have recognized not simply that this is
the right thing to do, but it is the smart thing to do.
Jack Bogle, the founder of Vanguard, said, and I quote:
``For as long as I can remember I have pressed for a federal
standard of fiduciary duty, a simple rule that stresses that
clients come first.''
Mr. Bogle has 64 years in the business and he said, ``I
learned early on that when you put your customers' interests
first it is great for your customer and it is great for
business.''
He has retired, but Vanguard's competitiveness has not.
And while Jack Bogle, who built Vanguard, understands the
importance of acting in the best interests of his clients, so
do many small- and medium-sized companies.
Wealthfront is a relatively small investment adviser just
shy of four years old. And they wrote to us recently to say,
and I quote: ``We were built from the ground up to operate
under the full fiduciary standard despite serving small
accounts and charging incredibly low fees. Thankfully, our
effort to serve the small investor has been rewarded with
unprecedented growth. Wealthfront is living proof that not only
is it possible to provide fiduciary service at low cost to
small investors nationwide, but also that the market greatly
rewards these efforts.''
This is what we are hearing from members of the industry.
And what we are hearing is that the rule is good news for both
American workers and retirees and everyone who is leaving a job
and deciding what to do with their hard-earned money.
But ultimately, it is not about simply the firms, it is
about the people. The middle-class life rests on five pillars:
fair pay, a roof over your head, health care for your family,
education for you and your children, and the ability to save
for you and your family's retirement.
I totally agree with you, Mr. Chairman, that we have a
retirement crisis. We have got to save more. And what we are
trying to do in this rule is to ensure that the hard-earned
money that people have saved throughout their career can go to
them and at the same time making sure that we have an industry
that continues to be able to do good and do well. You can do
both.
And I look forward to hearing your questions and concerns.
And I look forward to continuing the outreach because it has
been a very, very constructive process for the two years, or
roughly two years, I have been in this job. I have appreciated
the input from many members of this Committee who have helped
us frame an even better rule.
So thank you, Mr. Chairman, for your courtesy. And I look
forward to your questions and those of everyone on the
Committee.
[The testimony of Secretary Perez follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Roe. Mr. Secretary, thank you for being here. And
I will start off the questioning.
I know one of the premises that was made is that we have a
crisis and basically there is a $17 billion number. Being a
numbers guy, I went back and sort of dug through how that
number came up, how that actually happened.
And the way that occurred, the Council of Economic
Advisers, the way they put that number together was they took
the total value of loaded mutual funds and IRAs and the total
value of annuities and IRAs, added them together, and somewhere
in the literature found out or determined that there was a 1
percent difference in that advice and other advice, and there
is $1.7 trillion in the total assets when you add those
together. And that is how the $17 billion got there.
The problem with that is there are a lot of assumptions and
extrapolations when you get to that. One assumption was that
when you paid a loaded mutual fund that you did that every year
instead of just going ahead and having the one-time load. I
have got a loaded mutual fund in my own retirement plan that I
haven't changed in 15 years.
And it was a terrible example that you gave. I really feel
badly for that family that had a 4 percent annuity and a 7
percent surrender. I agree with that, that is very bad advice
that they got. But making them a fiduciary, Bernie Madoff was a
fiduciary and look what happened there.
So making a fiduciary and more rules, I guess the first
question I have for you is, do you think all this rulemaking--
we have got 29 percent of the people that don't have retirement
savings--will make it easier for people? Will it make it
simpler and easier for me as a small-business person to provide
retirement benefits for every employee I had from the day I
started my medical practice?
Will this rule make it easier for me to set that up and
provide for those retirement savings for people, or will it
make it harder?
Secretary Perez. I think it makes it easier for both
workers and for employers. And let me talk about workers first.
It is a very confusing world for people who want to get
advice, because some people that give advice have taken an oath
to have a fiduciary obligation, some people are broker dealers
and they are under a suitability standard, and some are
actually dual-hatted. So depending on where you are in the
conversation, they are a fiduciary one minute and they are not
a fiduciary the next minute.
That is remarkably confusing for consumers. And that is not
the case for a doctor or a lawyer. When you go in there, your
doctor is always looking out for your best interests and your
lawyer is looking out for your best interests.
So, this rule makes it simpler by making sure we have one
standard.
As it relates to businesses, businesses are often victims.
And I have spoken to a lot of small businesses who, you know,
they know how to make widgets, they are not experts in
investing. And what they are often getting is advice that also
has the same structural flaws.
So when small businesses who are trying to do well by their
employees are looking for that advice, this rule is going to
ensure that businesses and consumers alike are going to have
access to that same non-conflicting advice.
Chairman Roe. My time is limited, Mr. Secretary. Why would
the NFIB and the Chamber, who represent small businesses,
object to this rule the way it is proposed?
Secretary Perez. Well, I can tell you that we have also
spoken to a lot of small businesses as well. And one
interesting one--
Chairman Roe. No. I asked why would they oppose. And then
to make it easier, these are the rules right here. This is
yours right here, this big, whole, thick thing you have to read
through. And let me just go through a couple of things.
This is what someone has to do now with a BIC exemption, to
get an exemption, which you provided in there, you did provide
a way to exempt the broker dealers. A total cost of disclosure
must be provided to the investor before executing any
investment transaction. Disclosure must be provided and all the
end costs and anticipated future costs, recommended assets over
one-, five-, and 10-year periods, making reasonable assumptions
about investment performance. And the all-in inclusion includes
acquisition ongoing, deposition, and any other costs that
reduce the asset's rate of return.
I mean, it is very simple. I looked up mine this morning.
And it is very simple with the account I have to be able to
tell exactly what my returns are net of fees.
I mean, I see some things right here. A public website must
be maintained and updated quarterly showing the direct and
indirect material compensation paid to the adviser, financial
institution, and any affiliate of a financial institution with
respect to any asset that the investor is able to purchase,
hold, or sell through the adviser or financial institution over
the last 365 days.
This is going to be thousands of things that you have to
do. Does that sound like it makes it easier?
Secretary Perez. I think, sir, this rule is very
straightforward. You have an obligation, if you are providing
advice, to look out for your customers' best interests.
Chairman Roe. Totally agree with that.
Secretary Perez. Well, that is what the rule says. And that
is what the proposal says. And what we heard in our feedback
was we don't want a straitjacket. We want to make sure that we
don't have to ban commissions, for instance. And the rule
doesn't ban commissions. We want a flexible road map for
compliance that enables us to design what works best for our
business, and the best-interest contract is exactly responsive
to that.
Now, if there are questions about how to operationalize it,
as the Ranking Member said, we are having that conversation
right now. And we are having very productive conversations
about how to make it work.
The issue you said about publishing fees, I believe in
transparency, the problem right now is that the system is
really, really opaque. You don't know what your fees are
because there are a lot of hidden fees. And when you publish
these and have that sunshine, there will be, I predict, third
parties that are going to emerge that are going to start the
consumer reports of financial advice. And so consumers are
going to be more empowered when you have that transparency.
Chairman Roe. Permit me to interrupt. My time is expired.
Mr. Polis, you are recognized.
Mr. Polis. Thank you, Mr. Chairman.
Secretary Perez, I want to thank you for your Department's
work on the lifetime income disclosure regulation. As you know,
I am an original sponsor of that bill and I strongly believe
all workers should have access to this tool that federal
workers currently have.
In a snapshot, workers will know not only how much they
have saved, but also what the balance would translate into in
guaranteed lifetime income, very relevant for their own
retirement plans.
And I know that this particular rule here is also part of
your plan to make sure Americans save enough to retire.
I wanted to address a few issues in the rule.
There have been question about the extent to which your
Department has sought input from the SEC and other regulators
regarding the specifics of the proposal. Would you provide some
details regarding these interactions and how the Department has
gone about receiving input in crafting a proposal that marries
well with securities law?
Secretary Perez. Sure. We have had extensive conversations
with the SEC. We detailed this in a letter. I have had, I
think, eight different, either face-to-face or calls, meetings
with Chair White throughout this process.
We provided the day before yesterday roughly 800 pages of
documentation to note and document the extent of the
coordination. And it has been very helpful. Our career staffs
have met countless times over the last four years. And as the
materials describe, you will see that they had helped inform
our judgment in every aspect of the rule.
This Committee has helped inform our judgment as well. And
I want to thank Congressman Guthrie.
We had a provision in the old rule that related to ESOPs.
And there were some concerns raised by Congressman Guthrie and
some of his constituents with whom we met. And as a result of
that, we took that out of the current proposal.
And so we are going to continue to listen and learn,
whether it is from the SEC, whether it is from members of
Congress, whether it is from industry. All the stakeholders
have really helped us make this a better rule. And I am
confident that the final rule will be even better because we
continue to get good input.
Mr. Polis. Thank you. And as you know, the proposal
includes a significant exemption from the prohibited
transaction rules for financial advisers who enter into a best-
interest contract with customers. To use that exemption, the
adviser needs to comply with significant disclosure
requirements.
And my question is around the cost-benefit of the amount of
disclosures and whether the disclosures actually provide an
average investor with information that they can process and
whether that additional burden is worth it.
And of course, we have heard from some advisers that the
disclosures currently in the rule are so burdensome that they
simply won't serve some of the middle-income investors.
So I was hoping you could address that kind of cost-benefit
tradeoff around those disclosure retirements.
Secretary Perez. Sure. The best-interest contract is our
way of making sure. This is our Ronald Reagan provision in the
rule, which is that we want to trust and verify.
I have yet to meet somebody who is an adviser who hasn't
told me that they put or they think they put their clients'
best interests first.
And so what we are saying in this rule is we agree with
you, that is the rule and it is now enforceable. And the best-
interest contract is a way to make sure that you have a
flexible road map for compliance and that it is enforceable.
There are a number of disclosure requirements that we
believe are very discrete and very targeted. You ought to know
how much, you know, what the fees are. I think that is a good
idea so that you can make informed judgments because, you know,
an educated consumer is the best consumer.
Mr. Polis. Would the consumer also have some basis to know
whether those fees are high or low relative to the fees of
others? Because I mean, they might not know in seeing the fee.
Secretary Perez. And that is part of the education that
they can absolutely get, because you want to comparison shop.
There is a lot of modeling that you can do to figure out, well,
what are the fees for a similar product elsewhere? And those
are the types of things that this rule would permit and,
actually, good practice would dictate.
Mr. Polis. Along with that education question, in your last
30 seconds, there is a carve-out, as you know, for investment
education in the rule. And I was hoping you could clarify about
where that distinction is between advice and education.
Secretary Perez. Sure. One of the main things we did, and
this was responsive to the feedback we got, is to clarify and
really explain the line between education and advice, because
we all agree that education is exceedingly important. And this
rule establishes very broad parameters for education.
So one of the most important things that you can do in
education is talk about asset allocation. That is totally
education, nothing kicks in there. You know, you should have
some of your money in, you know, equities, bonds, cash. That is
education.
Tradeoffs between risk and reward are education.
We had 1996 guidance that we put into the rule, the
proposed rule, so that we are operationalizing something that
the industry has been using for some time.
We clarified that employers can provide advice because
employers are trusted advisers that people go to. And they are
not generating a fee so they are not fiduciaries, so we
clarified that employers can provide advice.
And we welcome your comments on whether the line is drawn
in the right place or whether we should do something different
and better.
Mr. Polis. Thank you, Mr. Secretary.
Yield back.
Chairman Roe. I thank the gentleman for yielding.
Next is Chairman Kline.
Mr. Kline. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here.
I think there is nobody probably in this room and certainly
up here who doesn't agree that financial advisers ought to be
acting in the best interests of their client. But the rule
doesn't simply say that. The rule is in fact quite complex.
Dr. Roe lifted up the book and it is about this thick. And
clearly, there is a lot of confusion.
And so I am not as thrilled as the Ranking Member that you
have extended the comment period by 15 days; 45 would have been
better. But the more discussion we have, I think, the better
because right now I am afraid the rule is going to prove to be
pretty complex and in some cases may be unworkable.
Mr. Secretary, you said that you have had extensive
outreach to the SEC. And since you are here under oath, I have
got to assume that is a true statement, but it may depend upon
what ``extensive'' and what ``outreach'' means.
As you know, Mr. Secretary, going back to March 4, the
Committee has asked for documents and communications to verify
that substantive coordination has occurred between the
Department of Labor and the Securities and Exchange Commission.
And after months of virtually no response, less than 48 hours
before this hearing the Department produced 827 pages of mostly
scheduling emails, Outlook calendar items, and similar things.
And this leads us to believe the Department has still not
provided a complete response to our inquiry.
So here are the questions. Do these 827 pages represent the
entirety of the written communications between DOL and the SEC?
Secretary Perez. Could you repeat the question, sir? I am
sorry.
Mr. Kline. Do these 827 pages that we just got from the
Department represent the entirety of the written communications
between DOL and the SEC on this fiduciary standard?
Secretary Perez. No. We have had an extensive conversation
with your staff. And I am a big believer in the importance of
oversight. And I think you and I have had this conversation in
many contexts. And we look forward to continuing to work with
you.
We also had agreed--we offered, I am sure you are aware, to
provide a briefing about the extent of the coordination. The
materials were due the close of business yesterday; we provided
them to you at the close of business Monday so you would have
an extra day to review them in preparation for today.
And we will continue to work with you on this.
Mr. Kline. And we reviewed them quickly.
So I am not sure I still have the answer to the question.
Is there more documentation that we have not yet received?
Secretary Perez. We are still reviewing everything. This
process has taken place over five years. And so we wanted to
demonstrate our good faith in the work that we are doing. And
so we turned over the 800 pages.
Mr. Kline. But you are not claiming executive privilege for
not providing more documents, you just haven't found them yet?
Secretary Perez. No. We are continuing to work with your
staff, and I think we are working in a collaborative fashion.
And again, we offered up a briefing to show the coordination.
And with all due respect, the documents demonstrate,
because all of the areas of discussion for a particular meeting
are noted on the document, so the issue that was presented in
the oversight request was are we collaborating with the SEC.
The documents that you have, I would respectfully assert,
clearly demonstrate both a wide breadth and depth of
collaboration with the SEC.
Mr. Kline. Well, is it all of the collaboration? That is
what we are getting at.
I mean, we would like to have a log from you identifying
responsive documents by date, author, subject line, recipients,
and a summary of content. That is what we have asked for and we
haven't gotten that. We got 827 pages of stuff, and I
appreciate getting the 827 pages.
But as you know, Mr. Secretary, there has been a great deal
of debate and conversation and unrest about who should be doing
this in the first place, right? The SEC is charged under Dodd-
Frank with some activities here. DOL is acting under ERISA for
this.
But we have been looking at coordination. We have had
legislation in this body insisting that SEC act before DOL,
that has not been signed by the President, it is not law.
But we are very, very concerned as a body about what this
coordination is between DOL and SEC. You have given us a bunch
of stuff, we are looking for something a little bit more
precise than that. And I hope you will be able to provide that.
Secretary Perez. Well, I look forward to our staff oral
briefing because I think you will get even more depth about
what we have been doing.
And again, the documents that you have now and the proposed
rule, you will see that virtually every section of the rule,
there were conversations with us and the SEC.
So if the question is, were we talking? The answer is, a
lot.
Mr. Kline. I guess I believe a lot; I am looking for a
little more precision.
I yield back.
Chairman Roe. I thank the chairman for yielding.
Mr. Courtney, you are recognized for five minutes.
Mr. Courtney. Thank you, Mr. Chairman.
And thank you, Mr. Secretary, for being here today.
Secretary Perez. Good morning, Congressman.
Mr. Courtney. You know, just at the outset, I would just
sort of change maybe a little bit of the tone of the last
exchange. And again, I have nothing but the highest regard for
the Chairman, but you know, this Secretary, since he took over,
in my opinion, has shown, you know, a real willingness to work
with the committee members on a whole host of issues.
Mr. Kline and I raised the question of whether or not the
Department of Labor's actions in the Office of Contract
Compliance with hospitals was an overreach by the Department.
And to your credit, you ran the forensics and came back and
actually terminated an enforcement action which, again, was
what generated our objection.
The pension amendment to the Cromnibus, which the chairman
of the subcommittee and the Chairman of the full committee
worked with your Department to produce, you know, a change to
the crisis that existed in defined benefits again is another
example of where this Secretary has shown a willingness to work
with this committee.
And frankly, that has been a change since you took over.
The last time the Department came forward with a proposal
on a fiduciary rule, it was a disaster. I mean, and I am saying
that as a, you know, as a Democrat. It just was a fiasco.
And you have already sort of alluded this morning to some
of the changes that the Department has implemented or proposed
with the new proposed rule compared to the first fiduciary
proposal.
Again, you mentioned Mr. Guthrie's concern regarding ESOPs.
That was deleted.
The financial education piece, which frankly I personally
think needs more work, and you have already said this morning
you are willing to listen to people about ways to let the call
centers do their jobs without sort of too much restriction.
But the sellers' exemption is an example. Maybe you could
talk a little bit about, you know, where we are today versus
where we were whatever it was, three or four years ago, when
the Department came out with its first set of rules.
Secretary Perez. I think we have come a long way, in short.
And we have come a long way because I am a big believer, and we
had this chat yesterday, Mr. Chairman, when you are in the
regulatory process, number one, you have got to build a big
table, you have got to make sure you are listening to every
stakeholder. You have got to understand what the consequences
of your proposed actions are, intended and unintended.
And the best way to learn about the latter is to make sure
you have a big table so that you can hear and learn from people
who have been in it. And that is what we have done.
And I am heartened by the fact that this conversation has
evolved from a there really isn't a problem to address to an
increasing recognition that we have to have one standard and it
needs to be a best-interest standard because we don't save
enough.
And when a family works hard to save $50 or $100,000 or a
few hundred thousand in the case of the example I cited, we
need to make sure that the advice they are getting is in their
best interests. And that is what this is about.
And the question of how to operationalize that, we asked
literally dozens of questions in our proposed rule about
precisely that, because another principle of effective
rulemaking is humility.
We have ideas about how we think you can operationalize it.
But we also recognize that so do others. You know, we have met
with, and I have personally met with CEOs of Fidelity and
others, and their input is invaluable to us. And we will
continue to have those meetings.
I have met with small businesses who are in this space,
who, frankly, they tell me with regularity anyone who says that
they are going to get out of the $11 trillion market, could you
give them my email, because I am serving a lot of small savers,
and I am making good money using technology and looking out for
their best interests. So there is a way to do it.
And so, I think we have improved the rule as a result of
that listening, whether it is a more robust economic analysis,
whether it is the ESOP issue that Congressman Guthrie addressed
and we took it out, whether it is the best-interest contract
exemption, which is an effort to make sure that we have
guardrails, the best-interest rule, but we have flexibility and
compliance.
There is no bar on commissions. That was an issue that we
heard and feedback we got and we listened.
And we clarified the line between education and advice. And
as I said earlier, if people think that further clarification
is necessary, give me chapter and verse because we are all
ears.
Mr. Courtney. And you know, we are going to obviously watch
closely as the Department continues its deliberations.
So when August rolls around and there is a revised, I
guess, reg that comes out, there is an additional comment
period after that as well. I mean, if doesn't just shut down at
that point. Am I right about that?
Secretary Perez. Absolutely. We are having a public hearing
in August. The comment period closes, then we have a public
hearing, then we publish the transcript of that hearing, and we
invite comment on that transcript. So we are going to end up
having roughly 140 days of formal comment, and that is on top
of the 2 years or so of outreach that we have done to date.
Chairman Roe. I thank the gentleman.
And Dr. Foxx, you are recognized.
Dr. Foxx. Morning.
Secretary Perez. Good morning. It is great to see you
again.
Dr. Foxx. Nice to see you.
Thank you, Mr. Chairman.
And thank you, Secretary Perez, for being here today.
I have been listening to the comments made already and
having read a lot of the material about this with a great deal
of interest. This, I will tell you, is not an area of expertise
for me, but my husband and I discuss these things a lot. He
generally handles our investments for us with a little bit of
input from me.
But I am really interested in this issue of best-interest
contracts. And I know in many cases you can get advice that
people think is in the best interest. I know my husband over
the years has invested money in areas where he thought there
would be a great return, and yet something happens outside his
ability to control it.
It happens all the time in investments. You invest in one
thing and the market is going up and all of a sudden a new
technology comes along or some substitute for that product and
your investment isn't worth as much.
You know, best interest, it seems to me, is in the eye of
the beholder.
But I want to ask you a quick question about this. If I
talk to somebody, a financial professional, to help me open an
IRA, why do I need to sign a contract before we can even have a
conversation? Do you think that kind of requirement is going to
intimidate the new investors that we need to get into the
market and ultimately discourage them from saving?
You know, signing a contract for the average person is a
big deal.
Secretary Perez. The short answer is you don't have to sign
a contract before you have a conversation. And we understand
that the proposed rule and part of our feedback that we have
heard, this issue has come up with some frequency. And there
have been concerns raised about the timing of when the contract
requirement would go into place.
And so your question is a perfect example of the issue of,
how do we operationalize this, because we have a shared goal in
making sure that you can go out and get access to advice, shop
around.
You know, I want to know what you are telling me, , and I
want to make an informed choice. Just like if I buy a car or I
buy a refrigerator, I want to do some comparison shopping.
And our goal is to make sure that comparison shopping is
facilitated.
So we have heard that and that is an issue that we, I am
confident, are going to clarify because we want to encourage
shopping, we want to encourage informed consumers.
And there is a lot that you can go to now and not have a
contract. You can go and see somebody and talk about asset
allocation. You know, what should my asset allocation be? You
can look at interactive modeling and plug in a number of
different assumptions and you don't need a contract. That is
all a part of the shopping.
The most important part I have learned from talking to
folks in the industry about the conversations is the asset
allocation conversation. You know, what is your risk tolerance
threshold? And my wife and I have different risk tolerance
thresholds in this, and we learned that during the course of
meeting with our financial planner.
And those are the things we want to facilitate. And those
don't require a contract to have those conversations.
Dr. Foxx. Well, one of the things it sounds to me like, in
terms of best interest, is that this is going to be a full
employment regulation for trial lawyers, because who decides
what that best interest is going to have to ultimately be
decided.
One more question. Are you concerned at all that long-
standing, positive relationships between investors and advisers
will be disrupted if they are forced to comply with a host of
new mandates?
Secretary Perez. I am not concerned because everybody that
I have spoken to has said that I put my customers' best
interests first. I haven't met anybody who says they haven't.
And so what we are trying to do is operationalize and
memorialize that.
And as it relates to your question about--
Dr. Foxx. If they are already doing that, then why do we
need to have a host of new rules and regulations?
Secretary Perez. Because we are trusting and verifying.
Because I am sure that when, you know, the Toffels went in they
thought they were getting advice that was in their best
interest.
But there is a structural problem here. And it isn't about
bad actors as much as it is about the fact that when you have a
suitability standard there are five different products that are
suitable, but many of those products get you a better
commission. And it is completely appropriate for you to steer
someone to a product that gives you a better commission and
does so at the expense of the consumer.
I think that isn't in the best interests of the consumer,
and so that is why we are trying to change it.
And by the way, there is a substantial percentage of folks
who are already fiduciaries. There is no evidence of a
litigation boom with folks who are already fiduciaries.
And we also have a provision in the rule, for your
information, that allows a best-interest contract to have a
mandatory arbitration clause for individual claims. So a firm
can put that in if they want. And it was designed to get at the
concern that you address.
Chairman Roe. The gentlelady's time is expired.
Mr. Pocan, you are recognized for five minutes.
Mr. Pocan. Thank you very much, Mr. Chairman.
And thank you, Mr. Secretary, for being with us this
morning.
Secretary Perez. Good morning, good to see you again.
Mr. Pocan. Good to see you. Thanks for being here today.
And you know, I think we all agree that far too many people
don't have enough money put aside to live comfortably in
retirement and we need to do something to reverse this trend.
And I really appreciate the work that you and your Department
are doing to ensure that Americans savings for retirement are
able to receive investment advice that is in their best
interest.
I appreciate the open-comment period and extension for the
extra 15 days as well. And I think one of the things that you
have said over and over is in order for this rule to be
successful it must be workable. And I think that is where I
just have a few issues that I would like to bring up, just that
people brought up to me that I think are something I hope you
are looking at closely that maybe we can have some impact on.
I would echo Dr. Foxx's comment about this idea on signing
a contract with an adviser. I think it does need some clarity
and clarification.
While I completely disagree that the U.S. Chamber and NFIB
represent small business, I have been a small-business owner
for 28 years, I work in a business-to-business market, a
fraction of 1 percent aren't members of those organizations.
But you do know your thing. You are a chef, you may not be
the best businessperson, but you certainly may not be your best
retirement adviser, right?
But it does have some questions about whether or not if you
have to sign a contract right away, it isn't just asset
allocation, you might have some broader questions about, you
know, I want to do this in retirement, what should I be looking
at. It is just a step further. But if you have to sign a
contract for that, it is something that seems larger, I think,
than just getting some initial advice.
So you know, I guess I would just like to associate myself
with the comments on that, but just kind of really raise that
issue, because I was talking to another Democrat on the floor
yesterday and this issue came up with that person as well. So I
think more of us do look at this as something perhaps a little
bigger and would appreciate any consideration you can give to
that.
Secretary Perez. Absolutely. And you are addressing two
issues; one is the line between education and advice, and we
have a proposal out there, we think it is broad, but we are
hearing feedback about how we can make it even clearer. And
that feedback is really helpful.
Secondly is the issue that Congresswoman Foxx raised about
when you execute that. And again, we have heard that and that
is why I keep coming back to why I love this process because
you have to have humility to understand that, you know, you
have done your best to integrate the feedback you have gotten
and folks are going to help you make it better.
And your question, Congresswoman Foxx's question, other
questions about the operational aspects of this are very
important.
Mr. Pocan. And let me raise a couple more, if I could, just
while I have got the time.
Secretary Perez. Sure.
Mr. Pocan. Another one is there has been some concern over
the data that is being collected as part of the rule, both from
a substantive perspective and from the cyber security
perspective. And you have probably heard some of these through
the comment process.
A few of the things were, like, if you represent the
investment fees versus the return it can be misleading on the
type of investments. Some investments are more like apples,
some are more like oranges, but now we are going to try to
combine them completely.
There have been some conversations about the six years of
sensitive data that we are going to collect just making sure
that doesn't become something that is a collection of data that
isn't as useful.
And then there is a very specific about, you know, if
someone makes a good-faith mistake versus something that
instantly puts them into the excise tax area.
Those are some of the things that came up. But also then, I
guess, is this question on the cybersecurity levels and whether
DOL has the funding within the Department to make sure they are
going to have that.
We know we aren't great at appropriations around here. We
want to make sure that is all in place. So that is another
level, I guess, I would just like to raise real quickly.
And I do have one more after that.
Secretary Perez. No. I mean, the good news is that we have
heard from various stakeholders every one of those items. And
again, they are all in a bucket of how do you operationalize
this.
One of our goals is transparency. Right now the system is
very opaque. You don't know what the precise fees are.
Actually, people think it is free. And it isn't free. And so
that is why what we are trying to do here is to make sure that,
you know, by publishing what various fees are then you can
have, as I said before, a consumer reports of apples to apples
comparisons that will help consumers make informed judgments.
But all of the issues that you raised are absolutely things
that we have been thinking about.
Mr. Pocan. Yes, looking at it, I appreciate it. And the
last thing I would say with only seconds left, just real
quickly, on the eight month thing, a few folks have said it is
a little short. Can you just tell me how the eight month idea
for implementation came in mind and where we are in
flexibility?
Secretary Perez. Well, that is another area where we are
hearing a lot of feedback on. And there have been a number of
suggestions that have been raised about phase-ins or, you know,
how you can make sure that the rule is in effect. So that is an
area where we invite, we affirmatively ask for comment about
that. And we are getting a fair amount of it.
So I hope that we can have more conversation about that.
Mr. Pocan. Yes. And we will relate some of these concerns
directly to you.
Secretary Perez. Sure.
Mr. Pocan. I just really appreciate the openness, again. I
think, you know, every time you have come to this committee you
have been one of the most open folks that I have dealt with in
my two-1/2 years here. And thank you for--
Secretary Perez. Well, it is an honor to be here. And I
learn a lot. You make me smarter, all of you, so I appreciate
it.
Chairman Roe. I thank the gentleman for yielding.
Mr. Walberg, you are recognized.
Mr. Walberg. Thank you, Mr. Chairman.
Secretary Perez. Good to see you again, Mr. Chairman.
Mr. Walberg. Good to see you. And I hope you have got your
wife a trip planned back to Michigan, right?
Secretary Perez. Absolutely.
Mr. Walberg. Good.
Secretary Perez. U.P.
Mr. Walberg. Say hi to the U.P., too.
Secretary Perez. I don't have a Harley, though.
Mr. Walberg. Well, you have got to get one.
Secretary Perez. Yes, I will borrow yours.
[Laughter.]
Mr. Walberg. You are welcome to do that.
I heard you say nothing is free, and that is absolutely
true. So in relationship to some costs, I am concerned about
the cost of this proposal, including the potential litigation
and administrative costs that may go with it as a result.
How many additional ERISA fiduciary lawsuits do you project
will be filed annually if your proposal is finalized?
Secretary Perez. Well, again, there is a provision in the
proposal that allows for mandatory arbitration clauses in the
best-interest contract. And that is a provision actually that
we took from I believe it was SIFMA or FINRA.
And so in the area of trying to make sure we are
harmonizing our rules with other rules, we put that in place
because we recognize that was a concern people brought to our
attention.
Mr. Walberg. Any figure that you have considered on
additional costs and a number of lawsuits that might be filed?
Secretary Perez. Well, we certainly have considered that. I
would observe that we now have a controlled experiment going on
because there is a substantial subset of people in this space
who are already fiduciaries. So if your theory is correct that
if you are operating under the best-interest standard you are
more susceptible to litigation, that hasn't been borne out.
There is no evidence that folks who are fiduciaries get
sued more often. What the evidence shows is that when times are
good, there tend to be less lawsuits against advisers. And when
times are bad, there tend to be more lawsuits, regardless of
whether you are a broker dealer or whether you are a fiduciary.
Mr. Walberg. Well, in order to make sure that happens, how
expensive will this proposal be for participants and IRA
holders due to increased litigation risks and insurance costs?
Secretary Perez. Well, again, you know, the premise of
increased litigation risk, I mean, the evidence to date has
shown that folks who are fiduciaries aren't dealing with
increased litigation risk.
And everybody who has come in, including broker dealers,
and said I would like to think that I put my customers' best
interests first, if they are in fact doing that then they have
little to worry about.
Mr. Walberg. But they are worried about the complexity of
the regulation that is expanding with this for all sorts of
reasons. But there will be litigation costs. Is there any
figure out there that you have considered for the best
interests because, ultimately, won't these costs just be passed
on to the investors?
Secretary Perez. Well, again, if there was evidence that
fiduciaries were facing increased litigation costs, then that
is something we would have flagged. And there is no evidence of
that.
So the notion that this is going to trigger a litigation
bonanza when you have a mandatory arbitration clause in there
and when folks are already doing this, presumably, you know, I
respectfully take issue with the premise.
Mr. Walberg. Well, I mean, expanded regulation always adds
some costs. So I guess I will take your answer, but I am
concerned that we haven't assumed some greater costs and,
ultimately, the impact upon the investor as well as the IRA
holders, participants, et cetera. That would be a concern for
me. And I guess I would put it out still further.
I would like to see the workup done to ultimately bring
satisfaction to your mind that you have seen evidence, and that
is fine, that this won't increase the costs and, ultimately,
those investors will experience paying for that cost.
Let me jump onto one other thing.
Secretary Perez. There is the real cost of the status quo,
sir, as well. So I mean, and we have that.
Mr. Walberg. I can understand that. Yesterday, I spent
significant amount of time in the Oversight and Government
Reform Committee on the issue of OPM and the data breach that
went on there.
We also had in recent months VA in front of us as well.
I was in a classified briefing there also and it was
unbelievable the lack of preparation and expertise and ability
to handle this with the OPM director. And ultimately, as you
are probably aware, there has been a call for her resignation.
In this issue with the increased amount of data that you
are going to be pulling in, what are you doing to make sure
that data is secure and we have investors as well as the
fiduciaries protected from a breach like that?
Secretary Perez. Well, if you look at our budget request
for the fiscal 2016 budget, we have a very robust request for
IT. And it is not simply for this, but it is to make sure that
our IT infrastructure is as impermeable as possible.
And so I look forward to citing you during our budget
deliberations about the need to have our IT requests--
Mr. Walberg. Yes, it isn't always money. It is preparation
and I hope you are prepared to a great degree right now. I
would like to have some confidence in that.
Chairman Roe. The gentleman's time is expired.
Mr. Sablan, you are recognized for five minutes.
Mr. Sablan. Thank you very much, Mr. Chairman.
And Mr. Secretary, it is always good talking to you and
having conversations.
I have some concerns in addressing, how best do you
operationalize this best-interest standard in my district?
Coming into this room, I thought we had nine securities
investment or advisers, now I only count that we may have
actually four, three with each one of the banks and one, the
gentleman that is a dealer or agent for Fidelity. And so you
can see how small the market is for us.
And how do we do this, how do we bring this very well-
intentioned best-interest standard, which I like very much,
without forcing these investment agents, at least the one with
Fidelity, to stop doing business in the Northern Marianas with
forcing them to close shop because the costs of managing this
government oversight is going to go higher, of course, when his
clients aren't very large?
And I would like to maybe work with your office. And maybe
if I understand, maybe--I am sure you may have an answer for
this, I don't know. But because we are so small and I can tell,
I can probably count on my two hands how many people have
investments with firms that are, you know, housed in Honolulu
probably and they have the means to get up and fly there and be
there.
But for those who are the smallest investors, retirement
savings investors, there is very little. And I would like to
see how would we manage these small accounts.
Secretary Perez. In the same way you would manage every
account. And that is, you know, small investors are the ones
who are most vulnerable.
Mr. Sablan. Very small.
Secretary Perez. Because you know, if you have a 1 percent
loss, let's say you invested, you know, I think it is $10,000
and you have it in for 35 years, if you as a result of
conflicted advice see a 1 percent diminution in your return,
that translates to almost $10,000 less. So it would be about
$35,000 over time and instead it is $25,000.
And so, I think that this rule is most designed for small
investors.
Mr. Sablan. Don't get me wrong. I think I like the rule, I
think it is about time. But it is just that for places as small
as the Northern Marianas where there isn't very much money
invested, it is just forcing these companies to decide to say,
no, we will just stop doing business there.
Except for those 10 people I can count on my hands,
everyone else would lose the chance towards accessing an
investment agent maybe, not necessarily a broker, but an agent
on how they could invest their retirement savings, aside from
those who are employer-based.
Secretary Perez. Well, one thing that has been really
helpful, and I have certainly learned a lot about this industry
over the course of the last two years, is that technology is a
huge ally. It is a huge ally in rural America, it is a huge
ally in the CNMI.
And I mentioned in my opening remarks a company out of
California Wealthfront. They are a startup. They are four years
in. They have now over about $2 billion in assets. They don't
charge a fee for anyone who is under $10,000, and that is
because they believe that--they have a platform that enables
them to significantly lower the fees, operate as a fiduciary
and do well by doing good.
And so I think technology is a big ally for the residents
of the CNMI because--
Mr. Sablan. Mr. Secretary, and I don't doubt the well
intention of this rule. Let me just give you an example.
Primerica, for example, has 21 investment accounts in the
Northern Marianas, 21. I am sure Fidelity has much more. ASC
Trust does a larger business there.
But Primerica is a huge company. They have 1.9 million
investment accounts in the country, 21 of that is in the
Northern Marianas, so we are very small.
I am just concerned that this new rule will force people to
close shop. And instead of growing the market for us, it would
have a negative effect.
I am not trying to stop your rule and I probably won't. But
just having this conversation, I hope that--
Secretary Perez. Well, I look forward to talking with you
about the various vehicles that are accessible as we speak
right now.
Mr. Sablan. Thank you for your recent decision, Mr.
Secretary, that this five years extension also works for that.
I appreciate that very much.
Chairman Roe. Thank you. The gentleman's time is expired.
Mr. Guthrie, you are recognized for five minutes.
Mr. Guthrie. Thank you.
Thank you, Mr. Secretary. Thanks for being here.
Secretary Perez. Good to see you, Congressman.
Mr. Guthrie. And I know it has been mentioned a couple of
times, us working together on sections of this proposed rule.
And that was just a great process.
I want to reiterate, I think I talked about it before when
we were in a public hearing, but I mentioned something in a
hearing such as this, you said let's get together and talk
about it and followed through. And I think that it was a
healthy change to the proposed rule and we appreciate you doing
that very much so.
The one thing I just want to talk about is the President
had a proposal. The myRAs, myRAs, and so there is a difference
in myRAs and IRAs, IRAs. And I know it is Treasury so it isn't
in your area, but just how your rule treats, does it treat
these differently?
And I will just start by asking, and I will do this. There
is a December 2014 letter from the Department of Treasury that
exempts the myRA program from ERISA's fiduciary obligations.
And the letter states that the exemption is granted for
employers, in part, because, and I will quote: ``some employers
may also want to hold employee meetings to explain the myRA
program and encourage eligible employees to participate. Others
may want to answer employees' inquiries about the myRA program
or refer them to Treasury's financial agent.''
And so this description does sound a lot like the advice in
many similar circumstances that workers in my district rely
upon. And since the letter acknowledges that workers need to
get information and begin saving and then exempts myRAs for
fiduciary liability, why are myRAs different from IRAs? And is
that in your area that you have looked at?
Secretary Perez. The myRAs are not covered in this rule.
And the Treasury Department controls all aspects of the myRA
rule.
Mr. Guthrie. But in your proposed rule, do you treat the
myRAs different from IRAs in your proposal?
Secretary Perez. MyRAs are not covered under our rule.
Mr. Guthrie. So you don't have the fiduciary--
Secretary Perez. Yes. So that wouldn't kick in at all.
Mr. Guthrie. And the reason they are different, the reason
you treat the myRAs and IRAs differently?
Secretary Perez. Well, again, the myRAs as I understand it,
and again, I am outside my lane here, so I want to note that at
the outset, the purpose of the myRA was to encourage auto
enrollment in a different way so that we can help more people
who are trying to save.
And when the Treasury Department put those in place, you
know, as a result of the fact that it is kind of a startup,
that was the decision that was made. And I think it makes
sense. And so that is the situation there.
I can get you more information because I don't want to
misrepresent anything. And at the moment, you know, what I do
know is that the myRA isn't covered here. You know, what I
don't know are the nuts and bolts of the myRA.
Mr. Guthrie. You know, and I think it is because the myRA--
I guess where the Treasury Department seems to look at it is
the myRA is a government-run thing so the government agent
wouldn't be a bad actor or a physical agent.
Secretary Perez. Right. Yes.
Mr. Guthrie. I assume that is where they are coming from.
Secretary Perez. Well, there is also no referral fees for
myRAs. So you aren't falling into any of the tests that would
come under here still. That is kind of a biggie.
Mr. Guthrie. Okay. So if an employer--well, you wouldn't
really hit the employer in this. But if an employer is making a
presentation to employees and said here is myRAs, here is IRAs,
I mean, how is that handled in the proposed rule?
Secretary Perez. Sure. Well, an employer, if you are
talking about an employer, I have 50 people in my business, I
have a grocery store, I think that was the one we met--
Mr. Guthrie. Yes.
Secretary Perez.--and you are making a presentation, you
aren't a fiduciary because you aren't the one--and I think it
was Congressman Pocan who said, you know, I am a good cook, but
I am not, you know, this is not my bailiwick.
So employers can provide those seminars and provide that
advice. And they wouldn't fall within the rule because, again,
they aren't the ones who are--
Mr. Guthrie. Selling the product.
Secretary Perez. Right, exactly.
Mr. Guthrie. Okay. I guess my confusion is that the
Treasury Department treats employers and says employers
wouldn't be fiduciaries. So it seems maybe, and it is probably
different than your section, so it is probably--I think we have
answered where I need to go with that.
But again, appreciate the work that you have done on that
and done with me and different members of the committee and
people you have talked to, and I think it has been an open
process.
I know there are some questions and more information will
flow, but I will tell you I had a good experience working with
you and I really appreciate it.
Secretary Perez. Anything else that comes up, feel free to
give me a call to my cell.
Mr. Guthrie. Thanks.
Chairman Roe. I thank the gentleman for yielding.
Ms. Bonamici, you are recognized for five minutes.
Ms. Bonamici. Thank you very much, Mr. Chairman. Thank you
for holding this hearing on this really important topic.
And we talk a lot about retirement security. And I have to
tell you, I have had a lot of meetings about this issue.
I am particularly proud of my state. The legislature just
passed the Oregon retirement security bill which is a voluntary
plan to make an IRA available to all Oregonians without access
to a retirement plan at their workplace, which once again our
state is showing some leadership there on this really important
issue.
This is a fascinating, but complex issue and I am fairly
new to it, even though I did some work years ago as a lawyer in
securities. So to try to understand the whole jurisdictional
issue with when the Department of Labor is involved because it
is ERISA and when state law is preempted and then the SEC
involvement.
And I am glad you are working with the SEC. And I
appreciate your comments about telling the committee about all
of those discussions and correspondence.
So I wanted to just emphasize how important this is to our
constituents, particularly middle- and low-income families in
my district and all of our districts. It is important for them
to have access to financial advice that they can trust.
And again, I have had a lot of meetings about this. I have
also heard from people in the industry who are very concerned
about the implementation. We have made progress with the
consensus now that the best interest is what the industry is
saying they agree to and it is the implementation that appears
to be the issue.
I have also heard from AARP, NAACP, National Council of La
Raza all supporting the rule. And they have really made
consumer rights a centerpiece of their advocacy. And I have a
background in consumer protection and I very much appreciate
that.
And to me, it seems like we have the same goal here, to
make sure that the people who are getting advice are getting
advice that they can trust and that it is in their best
interests.
So let's talk a little bit about some of the issues that
have been raised. Particularly, will you please clarify because
I have heard over the past couple of years it is going to be a
big problem because we won't be able to sell any products on
commissions? That has been clarified, correct?
Secretary Perez. We won't be able to?
Ms. Bonamici. Sell products and get a commission.
Secretary Perez. Right. Commissions are not banned under
the rule.
Ms. Bonamici. Thank you. And then the information versus
advice, and this has to do with the timing. Are you open to
working on that and taking advice from people who are here?
When does that contract--you talked a little bit about what if
somebody calls in and can they get advice about the balance of
investments. Let's talk about the timing because that has been
raised by industry as well. When does that contract need to be
signed?
Secretary Perez. Right. And as I said, I think, in response
to a couple of other questions, we want to make sure that we
are facilitating advice and that conversation and the shopping
that is critically important for consumers. And so that is an
area that people have said it doesn't feel clear enough to me
when I have to sign the contract.
And so we are working together to make it clear. And our
goal is to make sure that we can facilitate the shopping and
that we are talking about it.
And one thing I think that is clear in the rule is that
there is a heck of a lot that you can do right now. So you can
go to your adviser and he or she will tell you, you know, what
is your asset allocation and what is your risk tolerance
threshold and let's go online and, you know, we can plug in
some assumptions and you can see how if you go more equities
versus bonds and given your risk tolerance threshold how it
will affect you.
All of these things are in the realm of education. We have
a whole group of folks that do a steady diet of educating,
including seminars and things of that nature, because we
recognize, again, as I have said, an educated consumer is the
best customer.
At the same time, I am confident that line is going to be
drawn even sharper as a result of the input that we are getting
right now. And we welcome that.
Ms. Bonamici. And I appreciate your involvement. And
certainly, the products are much more complex than when I think
ERISA was enacted in the mid-1970s. And you know, it really is
a different world out there and it is critical.
So I just want to emphasize that I appreciate your
Department's willingness to work with the industry, your
openness to hear the concerns. Because again, we have the same
goal, we want to make sure that people are getting advice that
they can trust, that is in their best interest.
And even though prevention is obviously ideal, your story
that you told at the beginning about what happened to the
family, you know, it is devastating what happened. I hope they
had a remedy and I hope that through this process we make sure
that people who do end up in those situations have a remedy so
that they don't lose their life savings and their home.
So again, thank you for your willingness to work with us.
And appreciate your being here.
Secretary Perez. I look forward to it.
Ms. Bonamici. Yield back. Thank you, Mr. Chairman.
Chairman Roe. Thank you for yielding.
Dr. Heck, you are recognized for five minutes.
Mr. Heck. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here today.
Secretary Perez. Good morning.
Mr. Heck. You know, I think we have heard from everybody on
the panel that no one would disagree of the importance of
making sure that it is the best interest of the client who is
seeking investment advice that comes first, just like the
patient seeing their doctor or the client seeing their
attorney.
And again, it comes down to what my colleague just said
about the implementation that seems to be under discussion and
making sure that the actions of a few don't impact the
practices of the many who are doing a good job and providing
advice and education to their clients.
You know, I appreciated the anecdote you told about that
couple that had problems with their investments. And you know,
I have a constituent, Janice who called her insurance agent to
see if he could help her with her recently deceased husband's
401(k) plan.
They were retired, lived off of his pension as well as
Social Security. From time to time, they take some money out of
the 401(k) to supplement their income.
Once her husband passed away, she became a beneficiary of a
decedant 401(k). So then when Janice tried to get some much-
needed money from a plan, she was informed from the company
that she was not eligible to withdraw the funds anymore because
she was the beneficiary and that she needed some help in
understanding what her options were.
So she called her agent. They discussed her needs, went
over some of her options. She could take the funds out and pay
taxes, continue to invest the dollars using a rollover, discuss
the types of risks she was willing to take in the time frame
they were working with to help her meet her needs.
Ultimately, she was able to make a decision, rolled over
approximately $21,000.
There are many people like Janice who perhaps would not be
able to find the information and knowledge to take care of
these or many types of 401(k) rollovers or transactions that
are in their best interest under the proposed rule.
So if you could tell me, how does the rule actually protect
the interests of individuals in this type of a situation?
Secretary Perez. Well, the rollover market is a huge
market. And that is where you really need the right advice. And
one thing that our rule does is clarify that employers are very
much able to provide advice, including keep your 401(k) with us
even after you leave. Because we are talking about, you know, a
trillion-dollar impact here.
And so the standard, whether it is the rollover, whether it
is, you know, how do I invest my 401(k), is the same. You have
to make sure you are looking out for your clients' best
interests.
Mr. Heck. And I would say that this situation, this is the
insurance agent that they have used their entire lives, that
they did have trust in, and that this insurance agent did look
out for--
Secretary Perez. I would agree from the circumstances that
you have described. And again, that insurance agent sounds to
me, at least from the limited facts that we know, has been
already looking out for people's best interests, which is why
compliance with something you are already doing is very readily
attainable.
Mr. Heck. You quoted, you know, Mr. Bogle of Vanguard
saying that, you know, they would basically look for a simple
rule where clients come first. However, it doesn't appear that
this rule is that simple.
So there are concerns amongst those individuals, like this
insurance agent, that the proposed rule would actually limit
their ability for providing these services to their long-term
clients, because before they enter into this discussion they
are going to have to have a contract signed, they are going to
have to have all this disclosure and disclose any potential
fees that might be upfront.
I mean, it is the same thing if somebody was coming into my
office that I had a long relationship with and all of a sudden
I had to ask them to sign a disclaimer form and all these forms
about potential fees and what not. Why would I continue to use
that individual as my adviser?
Secretary Perez. Well, I actually think that the
implementation of this is a lot simpler, sir, especially for
those like the person you described who is already doing the
job and is already abiding.
Because folks, whether it is a large firm, they already
have in place policies and practices to make sure that they are
mitigating conflicts. And so what we are saying now is, you
know, you have an obligation to do that.
And so if they are already doing it, I think compliance is
very workable.
Mr. Heck. I think we have a few seconds left. You said
several times that commissions aren't banned under the rule.
Secretary Perez. Yes.
Mr. Heck. But what are the restrictions, obstacles or
impediments to people providing products based on commission
under the rule, if any?
Secretary Perez. Well, you have to make sure that you are
putting your clients' best interests first. And so, you know,
the situation that we deal with now is under the suitability
framework. You may have four or five different options that are
suitable, and two of those options get you a significantly
higher fee than the other two options.
Well, if under a review of the circumstances that is
reasonable, well, then, you could do it. But chances are, you
know, the thing we are trying to do is correct the malalignment
right now because I want to make sure that when that person is
making the decision, making the recommendations to me, that he
or she is motivated by my best interest as opposed to I have
got four products here that are suitable and I want you to take
these two products, even if it gets you 1 percent less.
I don't think that is right. And I think that has real
costs for people.
And we have prepared a toolkit for every member of Congress
who wants to use it so that they can help educate their
constituents on the questions to ask. Because this is a
complicated world and there is an inequality of information and
we want to empower consumers.
Mr. Heck. Thank you, Mr. Chairman.
Chairman Roe. Time is expired.
And Mr. Secretary, we don't want to become fiduciaries.
Mr. Takano, you are recognized for five minutes.
Secretary Perez. You would do pretty good at it, sir.
Mr. Takano. Thank you, Mr. Chairman.
Welcome, Mr. Secretary.
You mentioned a few times in your testimony that this is a
simple proposal that allows for flexibility to reflect not only
different business models, but also the innovation and
technological advances some in the industry have made and
continue to make.
How do you envision the industry reacting in terms of
product offerings and tech-based solutions? And how will this
help small savers?
Secretary Perez. Well, let me take the example of
Wealthfront. Wealthfront is a California-based company. They
started roughly three years ago. And this is actually a letter
from their CEO.
They were built from the ground up to operate under a full
fiduciary standard, despite serving small accounts and charging
incredibly low fees. And they have now become a $2 billion
asset management company.
They don't charge management fees for accounts under
$10,000 because ``we do not believe we need to make money on
those in the beginning stages of saving and investing. We
charge a fraction of what others charge for accounts over
$10,000.''
``And we know that there is a significant debate regarding
ways to increase the protections and requirements around
providing high-quality fiduciary service. We believe technology
can dramatically aid in this front.''
``Wealthfront is living proof that not only is it possible
to provide fiduciary service at low cost to small investors
nationwide, but that the market rewards these efforts.''
``And we believe that technology can not only improve the
quality of service provided to small investors, but also lower
the barriers and costs that have limited their access in the
past, whether they are in California''--they have a 50-state
footprint. I don't know whether they are in the CNMI.
But we have spoken to folks like Wealthfront. We have
spoken to individual broker dealers who are doing this on the
front lines. I think technology is a real ally in this.
Mr. Takano. But has this been borne out, the technology? My
concern is that some would say, what I have heard from people
in the industry, is that this rule will disincentivize people
to help the small saver. And you are saying, well, technology
will help offset that problem.
And I am just wondering, so Wealthfront has been able to
build a market, they have been able to reach these small
savers, the $10,000-a-year savers, I am just wondering whether
or not if there is a test of this technology.
Yes, go ahead.
Secretary Perez. Well, Wealthfront is not the only company
that has figured out how technology can be your ally in helping
to serve small-, mid-sized, large-sized savers. I mean,
technology is, I think, a linchpin to the innovation that is
enabling more people to get access to advice. And that is why I
think this is so important.
An equally important fact here, and I think this is
something that often gets overlooked, is a lot of people don't
seek advice right now because they don't trust the advisers.
Mr. Takano. Okay.
Secretary Perez. And what we are trying to do by
establishing a best-interest rule is to help bridge the trust
gap that currently exists. Because there is a lot of marketing
out there, but sometimes the marketing and the reality, there
is a little bit of a gulf between the two.
And so when we can have, you know, increased trust by
having a best-interest standard, I think we help everybody,
including small savers and large savers, get access.
Mr. Takano. I want to talk more from the point of view
about the remedies for the saver who thinks that they have been
deceived or misled.
At the end of the day, this rule is about guaranteeing
Americans being able to make investments to retire comfortably.
Can you tell me a bit more about the process for investors if
they feel they have been misled?
You talked about the mandatory arbitration. But are there
other remedies besides? I mean, arbitration may be a big part
of it. Under what agency would they seek redress? Is it FINRA?
Who is the--
Secretary Perez. Well, we currently, our Employee Benefits
Security Administration, EBSA, we have right now a robust
docket of enforcement cases. Bernie Madoff, we were part of
that prosecution team. The Enron case, we were part of that
effort.
We have a steady diet of cases right now involving folks
who have breached their fiduciary obligation to the detriment
of individuals. And so that will continue.
In this particular rulemaking, you know, what we are trying
to do is to create for the individual who has been wronged
potentially a remedy through the best-interest contract. The
proposition that we are putting forth here is that you now have
an enforceable contract, so that looking out--
Chairman Roe. Mr. Secretary, could you go ahead and wrap
that up because we have another panel also--that answer.
Secretary Perez. I am done, sir.
Chairman Roe. Time is expired.
Mr. Takano. Thank you, Mr. Chairman.
Chairman Roe. Mr. Allen, you are recognized.
Mr. Allen. Thank you, Mr. Chairman.
Secretary Perez. Good morning, sir.
Mr. Allen. Thank you, Mr. Secretary. Thank you for being
here. Appreciate what you are doing.
You know, you talk about trust. I am from the small-
business community myself and about 30 years ago recommended
that our folks participate in our 401(k) program. Of course, I
am assuming that now makes me an investment adviser. I don't
know.
Secretary Perez. Actually, it doesn't, sir.
Mr. Allen. It doesn't? Okay. But anyway, recommended that.
And they asked me, well, why? And I said, well, you know,
frankly, I can't trust that Social Security is going to be here
when you retire, you know, based on if you look at the
actuarials and all that of Social Security.
And so, yes, there is a trust problem out there, even with
our own Social Security system. Exactly where is that going and
why aren't we working on that to try to fix that and then we
will start giving people advice on how to deal with their own
savings?
But as far as the rule is concerned, obviously the
investment business is just like my business, it is a
relationship business.
You know, I have never had anybody that hired our company
that went to the Internet and said, well, I am going to pick
this company. You know, they would actually check out exactly
our reputation in the industry.
Plus the fact, as I understand it from my friends in the
investment business, it is a highly regulated industry already.
And the fact that you had the Enrons and the others involved,
you know, part of that problem was the fact that it was
accounting that should have been long ago discovered as far as,
you know, keeping two sets of books.
But as far as trying to give investment advice, I don't
quite understand how you are going to make this work. I mean,
say you are dealing with my business right now and you said,
okay, we are going to implement this rule in your business.
What would that look like?
Secretary Perez. Well, again, you aren't a fiduciary, sir,
because you are running a business.
Mr. Allen. Okay.
Secretary Perez. If somebody is giving you advice or there
is somebody, your employee, has $100,000 in their 401(k) and
they want to know how to invest it and they go to an adviser
and he or she gives that person advice, they simply have to
look out for your best interests. Just like if you go to the
doctor, they have to look out for you.
Mr. Allen. Let me ask you this. You know, I advised our
folks to get involved in this 401(k). Well, they were all
tickled to death with it until 2008 and 2009 when the market
took a tumble.
And along with my investment adviser and myself, we
suggested that, hey, you know, America is going to come back.
We need to have the confidence the country is going to come
back.
Now, I am going to tell you what, they are a happy bunch
right now. But what would it look like had that not happened?
And here I am and my investment adviser had given this advice,
what does your rule do to me then?
Secretary Perez. Well, again, you have a duty to act with
reasonableness and prudence, just as a lawyer has a duty to
look out for their clients and a doctor has a duty to look out
for her client, her patient.
Mr. Allen. Who determines that? Who determines what is
reasonable and prudent?
Secretary Perez. These are rules. Reasonableness and acting
with prudence, this is a construct that has been in place in
the financial service industry for literally decades, just as
in other contexts, whether it is, you know, in the medical
malpractice context, the duty of care. That is not a new
concept.
And so the notion that you have to look out for your
customers' best interests isn't anything new. And in fact, you
know, again, many people are already doing it.
Mr. Allen. Don't we already have those rules in place?
Secretary Perez. For some, but not for everyone. And that
is why it is really confusing. Because if your constituents,
when they go in, they think that everybody is looking out for
them and some have a legal obligation to do it and some don't.
That is a problem. That is confusing.
Mr. Allen. So how are you then going to mandate that
people, I guess, check out their reputation or their investment
advice?
Secretary Perez. Well, no. What we are establishing is that
the adviser that they seek out has an obligation to look out
for their best interests. I cannot, we do a lot of education
and outreach and we hope that people will take the due
diligence that they need.
But what we are doing is making sure that the people they
go in to see, we are taking out the uncertainty. Is this person
looking out for my best interests or does this person have
other options? I don't think that is good for consumers. That
is why we are doing this.
Mr. Allen. How can I--
Chairman Roe. The gentleman's time has expired.
Mr. Allen. Thank you, Mr. Chairman.
Chairman Roe. Ms. Wilson, you are recognized for five
minutes.
Ms. Wilson of Florida. Thank you, Mr. Chair.
Secretary Perez, good to see you.
Secretary Perez. Good to see you.
Ms. Wilson of Florida. I know that you are just as
concerned as I am about the economically vulnerable. I
represent one of the most economically depressed districts in
the country and these individuals I represent work extremely
hard to provide for their families, but they struggle to make
ends meet. The median household income in my district is
$36,748 a year, 30 percent less than national average.
South Florida also has a high cost of living which is
growing faster than the national average. These economic
realities make it extremely difficult for my constituents to
save at the levels that guarantees a secure retirement.
In fact, on average, south Floridians have saved 20 percent
less in their 401(k) retirement accounts than the average
American.
For example, as a former educator I worked with many
teachers who lived on limited wages for years, but were given
lump sums out of DROP, sometimes as much as a half-million
dollars to last them through retirement. They did not know what
to do with all of that money.
Because there is so little margin for error for those with
limited savings, I want to be sure that they have access to
sound advice from financial professionals, trusted.
My late husband was a financial adviser, so to speak, back
in the 1980s. He sold tax-sheltered annuities to first-time
people who had little money, but were able to save.
So I know there is going to be a rule. I know there is a
proposed rule. And I am hoping that this rule will make sure
that, when it is finalized, that people are not intimidated and
will find the process access-friendly, that they will want to
save and be given that sort of financial assistance.
I want to thank you for responding to my letter and
extending the comment period so stakeholders have the
opportunity to submit comprehensive feedback.
And under your leadership, I am confident that the
department will continue to engage with stakeholders and the
public and really look at the feedback that has been provided,
because it is my understanding there has been a lot of
feedback.
I know how committed you are to making this rule work for
all investors. I have heard your life story and I know where
you come from and how you have achieved.
Can you speak more about the process that will ensure that
all interested parties are heard in the formation of the final
rule?
Secretary Perez. Certainly. We are in the middle of the
formal comment period. One of the things that we don't
generally do, but we did here, was to have a public hearing in
August so that we can take additional comments on the rule.
Following that public hearing, we will publish that transcript
of that hearing and invite comment on that.
We continue to do regular meetings. And I am working not
only, you know, with our team, but a lot of other folks have
been involved in this effort. My colleague Jeff Zients at the
White House has been very helpful.
And our goal is to get it right. I think we can thread this
needle. Your concerns that you have expressed about small
savers, everybody, that is a concern we all share. And I
actually think that small savers can least afford the
consequences of conflicted advice. And you know, places like
Wealthfront and others are serving every corner of this country
now.
And I look forward to learning from you and others about
how we can use this as an opportunity to actually enhance
access to services for everyone, but in particular for small
savers, because I think we can. Because when we increase trust
in the people from whom you are getting the advice, then we can
increase access even greater.
Ms. Wilson of Florida. Just one final comment. Technology
is very intimidating to many people in our communities. It is
something that we feel comfortable with because this is what we
do. But people who don't have access to technology, it is
intimidating. So let's be sure that we don't eliminate them
from the equation because they are thrust into a pit that they
don't quite understand--
Secretary Perez. The human element, absolutely.
Ms. Wilson of Florida.--but that when this rule is
finished, they will have the same opportunities.
I want to make sure that not only people with small amounts
of money, but first-time investors, people who find themselves
with DROP, a half-million dollars and not know what to do with
it. These are the people I am concerned about.
Thank you.
Chairman Roe. Thank you. The gentlelady's time is expired.
Mr. Messer, you are recognized for five minutes.
Mr. Messer. Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
You use the phrases ``small savers'' and ``first-time
investors,'' and that is what we are here to talk about today
in this hearing.
I represent a district full of those people. I represent 19
counties in east, central and southeastern Indiana, working
communities, people that work in agriculture and manufacturing.
I am also the product of a single-parent family. My mom
just retired from the Delta faucet factory there. She raised my
brother and me on her own. She was somebody that couldn't
really afford to save until she was well into her 40s and falls
in the category here.
I think one of the things we have got to remember as
policymakers is we aren't just accountable for our intentions,
we are also accountable for our results. And we could bring
forward rules with the best of intentions designed to protect
people that, in the end, actually hurt the very people we are
trying to protect.
I think part of the challenge of threading the needle here
that you have talked about is we have looked at other countries
that have tried to do it and not had much success. And so we
need to be careful that with the best of intentions of
protecting these investors we don't end up making their
situation much worse.
Of course, the best way to avoid that is by coordinating
with others who have knowledge in the field.
And I know Chairman Kline talked to you a little bit about
your efforts to coordinate with the SEC. We are, of course,
concerned that we haven't gotten the documentation from you
that shows that coordination also at the Department of Labor.
I want to give you a quote and ask you to respond to it,
Secretary Perez. In February of this year, SEC Commissioner
Daniel Gallagher said the follow, ``The DOL has not formally
engaged the commissioners, at least not this commissioner, on
its fiduciary rulemaking process and the impact it may have on
investors. And despite public reports of close coordination
between the DOL and the SEC staff, I believe this coordination
has been nothing more than a check-the-box exercise by the DOL
designed to legitimize the runaway train that is their
fiduciary rulemaking.''
Secretary Perez, is this true?
Secretary Perez. I did not coordinate with that particular
commissioner because I coordinated with Mary Jo White. She was
the one commissioner because she is the chair, just as when I
coordinate with the EEOC I go through the chair.
And the documentation--
Mr. Messer. All this work is done at the chair level?
Secretary Perez. Pardon me?
Mr. Messer. So all this work is done at the chair level,
there is no staff coordination?
Secretary Perez. No. If I could finish, sir. The documents,
the 800 pages of documents that we have provided demonstrate
the dramatic and extensive coordination between our staffs. And
you will look and see that there is, you know, page after page
of documentation relating to meetings, relating to calls,
relating to conversations about various aspects of the rule.
I also traveled, sir, to the U.K. because I wanted to learn
from their experience as well. And what we learned, we learned
a lot about how the U.K. experience can inform our judgment.
I have also spoken to the Consumer Protection--
Mr. Messer.--specifics about what was--
Secretary Perez. Pardon me?
Mr. Messer. Much of that documentation didn't include
specifics about what was discussed in those meetings.
Do you care, does the Department of Labor care about the
inconsistency and confusion that could result from unharmonized
rules of the road in this area?
Secretary Perez. Well, it is interesting that the former
chair of the SEC is very supportive of the Department of Labor
moving forward. And actually, the current chair has indicated
publicly that she thinks the best-interest standard is the
right way to go for the SEC regulatory agenda.
So actually, she is saying conceptually that they should be
doing the same thing that we are proposing in this rule.
Mr. Messer. Again, I think most folks, no one would quarrel
with the intention of protecting these investors. The question
is, will these rules actually make matters worse for those
investors?
You commented earlier about potential coordination with
FINRA. And I want to give you another quote and give you the
opportunity to respond. In March at the 2015 Annual Financial
Industry Regulatory Authority Conference, FINRA Chairman Rick
Ketchum said, quote: ``I fear that the uncertainty stemming
from contractual analysis and the shortage of useful guidance
lead many firms to close their IRA businesses entirely or
substantially constrain the clients that they will serve.''
Secretary Perez, to what extent did you coordinate with
FINRA and other industry analysts? And why didn't you address
their concerns?
Secretary Perez. Well, actually, what is interesting to
note, if you look at the totality of Mr. Ketchum's comments, he
says now that a best-interest standard is indeed the right way
to go, and I appreciate that. He says a requirement, and he
talks about the solutions, requirements that firms carefully
design structures and procedures to minimize conflicts, that is
what we are trying to do in this rule. Adherence to existing
security laws, more effective disclosures.
So actually, there is a remarkable amount of overlap
between what our rule says and what he stated.
And we met with FINRA staff as recently as last week. And
we met with the Consumer Financial Protection Bureau.
I personally traveled to England to meet with regulators
over there and learn from them. We have done a lot of outreach
and will continue to because it is important in this process.
Mr. Messer. Thank you. And we appreciate your time.
Chairman Roe. I thank the gentleman for yielding.
Mr. Jeffries, you are recognized for five minutes.
Mr. Jeffries. I thank the chairman for yielding, as well as
for Secretary Perez for your presence and your leadership.
The rule that we are discussing today was first put forth
in 2010. Is that correct?
Secretary Perez. Yes, that was 2010.
Mr. Jeffries. And then it was subsequently withdrawn. Is
that right?
Secretary Perez. It was withdrawn and then we re-proposed
it earlier this year after a lengthy period of outreach.
Mr. Jeffries. And can you walk us through sort of the
substantive changes that have been made from the withdrawal to
the re-institution of it?
Secretary Perez. Sure. One of the issues that was raised
was there was a concern about having a more extensive economic
analysis. So this rule contains a much more extensive economic
analysis.
There was a concern that Congressman Guthrie and others
addressed about a provision we had in the 2010 rule about
employee stock ownership plans. And the recommendation was to
take that out, and we took that out.
There was a concern about giving more flexible exemptions
from the rule that you have to put your clients' best interests
first. And the best-interest contract exemption is the attempt
to do just that, so that we have created guardrails, but not
straitjackets. So that is a new feature of this rule.
We clarified the line between education and advice and we
continue to take comment on that to see what the reaction is to
where the line is drawn. And we have had some discussion about
that today.
So those are some examples of, I think, material changes
from now as opposed to 2010.
Mr. Jeffries. Thanks. Now, there has been some discussion
about ongoing engagement with the SEC.
Secretary Perez. Yes.
Mr. Jeffries. Has that engagement resulted in any
substantive changes that have either been adopted or are under
consideration?
Secretary Perez. Well, I think the SEC, our interaction
with them, especially I had interaction I think there was eight
different times with Chair White, our staffs have been together
innumerable times, and I can certainly tell you with confidence
that I think the rule, the proposal is a better proposal as a
result of that interaction. It was a soup-to-nuts interaction
talking about, you know, so many aspects of this process.
Mr. Jeffries. Are there any specific concerns that the SEC
raised that the Department of Labor has responded to in
yielding the newly proposed rule?
Secretary Perez. Again, you know, we had a consistent back-
and-forth. And again, we welcome that. And I had a consistent
back-and-forth with Chair White. I didn't participate in the
career-level meetings and those were the ones where there was a
lot of good discussion and good feedback under way.
And again, I think as a result of that feedback you will
see there are provisions in the rule that I think are very,
very, you know, informed by our judgments and our feedback, not
only from them, but from the Consumer Financial Protection
Bureau, from members of Congress, from consumer groups, from
industry stakeholders.
Everybody has an expertise to bring to bear in this. And
our goal was to make sure we built a big table so that we could
take all that advice to bear.
Mr. Jeffries. Now, is my understanding correct based on
your earlier testimony that the CEO of Bank of America supports
the proposed rule?
Secretary Perez. Well, what I said before was that what
Brian Moynihan said was we believe that doing what is in the
best interest for your customers is absolutely the right thing
to do. We have been clear that we see the industry moving and
we expect to help it move there.
And so, you know, the fundamental tenet of this rule, which
is that you have to act in your clients' best interest, is a
tenet that has increasing support.
Now, we are getting a lot of feedback from everyone,
including but not limited to B of A, about the questions of
operationalizing that and making sure we give it good meaning
and that we address the issues of unintended consequences,
things of that nature.
But a really important part of this rule, a linchpin if you
will, is making sure that when you walk in and your
constituents walk in to get advice that they don't have to
wonder whether that person is operating under one standard, a
higher standard or a lower standard or maybe both.
Mr. Jeffries. Lastly, as my time is expiring, Mr.
Secretary, how would you define a small investor in terms of is
there a threshold, is there an amount of the investment? Who
are the individuals that could potentially benefit or could
potentially be harmed by this approach depending on what
stakeholder you are listening to?
Secretary Perez. I think any investor who is going to have
greater assurance that his or her person giving the advice is
looking out for their best interests is going to be benefit.
And you know, small, medium, large is kind of in the eye of
the beholder. You know, I have spoken to people who have
clients that have $5-$10,000 in their portfolio. I have spoken
to people with clients who have millions. And the rule is the
same.
Chairman Roe. The gentleman's time is expired.
Mr. Grothman, you are recognized for five minutes.
Mr. Grothman. Thank you very much.
My first question is with regard to fraternal
organizations, okay? Fraternal organizations, okay?
Secretary Perez. Okay.
Mr. Grothman. Fraternal organizations, first of all, are a
little bit different breed because they have certain
requirements under the IRS code so they are, you know, kind of
highly regulated by another agency. And for that, they also
disproportionately, I think, take care of smaller investors,
maybe a lot of the IRAs or under $25,000, which is just kind of
a unique thing as well.
And I think the combination of the fact that they have
their own rules under the IRS and that they have a lot of
smaller investors are going to make this much more difficult
for them to implement.
Have you had discussions with these fraternal
organizations? And are you prepared to have further discussions
and maybe make changes so that these large organizations which
have so many investors in them, including myself, are continued
to be able to thrive?
Secretary Perez. The short answer is we have had
discussions with fraternal organizations. I think that is
501(c)(8) of the Internal Revenue code.
And what we did in the rule, we ask a number of questions
in the rule, and one of the questions that we ask is: do you
have a unique set of circumstances that dictate that we should
be taking a different approach as it relates to your
circumstance? And this is an example.
The meetings that have been taking place with fraternal
organizations, that is the issue that we invited. And I welcome
that and we are having that discussion as we speak. And I look
forward to your more specific observations about what you think
should be done in relation to them.
Mr. Grothman. Well, if you want, we can meet in my office.
I mean, I think right now these large organizations with I am
sure millions of investors and many employees are really
jeopardized. And that is a problem you have whenever you have,
you know, some massive new rule, some one-size-fits-all rule.
Sometimes you have people who don't fit that rule.
And I am told and it makes sense to me that this would be
devastating for these large organizations.
Now, do you plan on making further changes before this rule
would be implemented or meeting with them again?
Secretary Perez. Oh, again, we have already met, we will
continue to meet. And the purpose of meeting with people is to
learn from people and figure out what changes are called for in
a final rule.
And as you have seen, the current proposal is far different
from the 2010 proposal. And that is because we sat down, we
built a large table and we listened to folks. And we are
continuing that process now.
And so I appreciate the fact that folks have been taking us
up on it. And anyone who comes to see you to say I have a
challenge, I would encourage you to send them our way because
we want to listen and learn.
Mr. Grothman. Good. Good. That will be good.
Next quick question, and I am kind of jumping ahead here to
the testimony of somebody that is going to be speaking later,
it just kind of jumps out at me that apparently there is going
to be a public database of compensation, total compensation
given to employees of firms or that sort of thing. Is that
true?
Secretary Perez. There is a transparency provision that is
designed to get at the following problem. Compensation schemes
are very opaque right now because you can legally get your fees
from different sources in this. And what we want to make sure
is when consumers are making judgments they understand how much
things cost and so they can make an informed judgment as to
whether this is a good deal for them.
Mr. Grothman. Right. Just what kind of jumped out at me
was, you know, if I am making $40,000 a year, if I am making
$90,000 a year, if I am making $150,000 a year, all of a
sudden, am I reading this right, that all of a sudden that is
going to be public knowledge? I mean, maybe it should be. I am
just saying it is kind of interesting.
Secretary Perez. Well, the database isn't public. I think
the one you are referring to is not a public database.
Mr. Grothman. It says a website. No?
Secretary Perez. But it is not a public website.
Mr. Grothman. Okay. Final question I have for you. People
are permitted to earn reasonable compensation and nobody should
be able to earn unreasonable compensation, of course, but who
defines that and what is the definition of reasonable
compensation?
Secretary Perez. Well, again, these are definitions that
have been part of the practice for literally decades. You know,
acting with reasonableness and prudence under the
circumstances.
Everything is a case-specific determination, but these
principles of acting prudently and looking out for your
consumer, your customers' best interests have been well-
established. This is not something that is drawn out of thin
air.
Chairman Roe. The gentleman's time has expired.
Mr. Hinojosa, you are recognized for five minutes.
Mr. Hinojosa. Thank you, Chairman Roe.
Can you hear me?
I want to thank you and Ranking Member Polis for holding
this important hearing.
But I especially want to thank Secretary Perez for being
here and for the work you and your staff have been doing in the
conflicts of interest rule re-proposal.
Subcommittee Chairman Roe and I co-chair a Senior Citizens
Caucus, which covers financial literacy to help these senior
citizens make good financial choices in their retirement years.
So this rule that we are discussing is of great interest to
both of us as chairs and to many members on both sides of the
aisle, as I have heard the questions.
I think that we want to ensure access to advice at a very
low administrative cost as federal employees which number
probably several million get a quarter of 1 percent
administrative costs for investing our Thrift Savings program
investment and retirement portfolio.
I think that I really paid attention to Congressman Rick
Allen from Georgia, giving us his example of investors losing a
large amount back in December 2007 and the following year,
2008, which is the time of the worst recession in 50 years.
And I enjoyed listening to how you handled that. And many
of us did the same. We stayed in the market.
But I will say to you, Mr. Secretary, that sometimes older
men and women have good advice, simple. I remember hearing one
tell me, just remember that you buy low and sell high. And so I
did that. On the first week of January of 2008, I called and I
changed my particular investment portfolio into Treasuries 100
percent. And that is the best thing that I could have done.
Secretary Perez. Why didn't you call me, sir? I could have
followed suit.
[Laughter.]
Mr. Hinojosa. I can only say that this hearing today has
been very, very interesting.
And I want to ask a question or two before my time gets
away.
I read Mr. Haley's written testimony which reads he claims
the best-interest contract is problematic and that the rule is
unworkable as drafted. Moreover, that small business and lower
and middle-income investors will be harmed the most.
Mr. Secretary, in your view, do you believe this to be the
case?
Secretary Perez. I don't, for all the reasons that I have
discussed. Small investors are the ones who can least afford
the consequences of conflicted advice.
Mr. Hinojosa. I absolutely agree with you 100 percent. Let
me ask you another question because we agree on many things.
I am most interested in the proposed rule's impact on the
small savers and those middle-class workers who do not have
hundreds of thousands of dollars to invest, but who are
interested in insuring what they do have to invest, they want
it to grow, and I want their savings to do that, too.
Is there any reason that they should expect to pay more for
the administrative services they currently receive as in
examples that I heard that are up to 4 percent of the
investment?
Secretary Perez. Well, I think it is not going to be in
your best interest. I would rather have more money in my pocket
when I can get a better return. And the challenge right now is
that the system is misaligned and too often advice is motivated
by the fees it generates for the person giving the advice as
opposed to what is in the best interest of the customer.
Mr. Hinojosa. In my opening remarks, I said that we,
federal employees, and we number in the millions, only pay a
quarter of 1 percent for advice and for them to do the
investments for us. And that 4 percent, as you said, is way,
way too high.
So I will ask one last question before my time is up. Would
you say this rule can help address the challenges in retirement
savings gap many Hispanic and minorities face when it comes to
saving for retirement, because they, according to the materials
I have read, are amongst the highest, like 40 percent, that
have very little in assets to protect and invest?
Chairman Roe. Mr. Secretary, I am going to have to ask you
to hold that thought.
Secretary Perez. I have one sentence.
Chairman Roe. I am sorry. The time has expired.
Mr. Carter, you are recognized for five minutes.
Mr. Carter. Thank you, Mr. Chairman.
Secretary, thank you for being here.
Mr. Secretary, I have to be quite honest. I am going to
preface my questions by saying that I am deeply disturbed by
this and not in favor of this at all. I will just go ahead and
tell you.
But, let me ask you something. The premise for your action
here seems to be that you are saying that conflicts of interest
have resulted in higher fees for those that are in IRAs than
are in 401(k)s and that it is because of these conflicts of
interest that it has resulted in the higher fees.
Yet the Investment Company Institute has discredited that
number and said that isn't true, said that it has only
increased at .16 percent and that indeed can be attributed to
the fact that they get more advice and that they get a higher
level of service.
So if your premise is that the conflicts of interest are
the reason why we need to have contracts, and yet we have the
Investment Company Institute who disputes that, what is your
premise then?
Secretary Perez. Well, sir, we have many people in the
industry who are saying that we need to have a best-interest
standard because the system is misaligned. When I go in to see
my doctor, I know that he or she is looking out for my best
interest. I have got cancer, you are going to tell me what is
best for me, you aren't going to tell me what is suitable for
me.
And when I go into a doctor or when I go into a financial
adviser and they are telling me what is suitable, well, what
that means is that there may be four or five products that are
suitable.
Mr. Carter. But aren't you kind of painting it with a broad
brush here by saying that all investment bankers or all
investment consultants don't have your best interests at hand?
Secretary Perez. Well, with all due respect, sir, in my
opening statement I explicitly said that most of the people in
this business are trying to do the right thing. There are a few
bad apples.
What we have is a structural systems problem. People are
rational, they respond to the incentives that are there. And it
is perfectly legal right now to steer someone to a product that
maximizes your return as the broker dealer at the expense of
the return of the individual investor.
And that is what we are trying to change. We are trying to
change this malalignment and make sure that every time I walk
in and every time your constituent walks in, they can have
confidence that their adviser is going to do that.
Mr. Carter. Mr. Secretary, wouldn't you agree that this is
already an over-regulated field, that we have probably more
regulations in this area than we have in any other area? And
what you are suggesting is that more regulation will actually
solve the problem.
Secretary Perez. The Toffel family couldn't disagree with
you more, sir, because the Toffel family lost $50,000 as a
result of conflicting advice.
Mr. Carter. I understand that. But there have been many
families, and I am sure you could give many situations and many
examples, where just the opposite has happened where you have
had advice given by advisers that has resulted in people being
able to live a better retirement.
Let me give you an example. I am a small-business owner. I
have owned a small business for over 27 years now. When I first
went into business, I started a 401(k) within my business. And
I will say that it is one of the best things I ever did, a
great program. And it is one of the things that I am most proud
of in my business, the fact that I can offer my employees that
kind of program where they can invest, I can help match, we
have profit sharing within that, they can borrow from it and
they do that.
In fact, just this past week I had an employee who is
actually borrowing from her 401(k) in order to pay medical
bills that she is saddled with right now.
So that is something that has worked out well. And I don't
think that I would have done it had I had to enter into a
contract with a financial adviser. I mean, I am a pharmacist
and my patients don't have to sign a contract with me before I
make recommendations for them.
I am not seeing where more government regulation is going
to solve this problem. This seems to me to be a solution in
search of a problem.
Secretary Perez. Well, sir, one thing I can wholeheartedly
agree with you on is we will not agree on this.
Mr. Carter. Well, and you are absolutely right because the
fact is that I am a free market person. And the fact is that I
believe the free market works.
My example, unlike what you might see, is a better example
and an example of where it has worked and it has worked well.
And I am very proud that I was able to offer that to my
employees. They are very happy with it. I am very happy with
it. It provides all of us with a good retirement and it did not
come about because we had a contract with a financial adviser.
Mr. Chairman, I yield back.
Chairman Roe. The gentleman's time is expired.
Mr. Scott, you are recognized for five minutes.
Mr. Scott. Thank you.
Mr. Secretary, what is wrong with the free market just
taking place and people being able to get what it can out of
transactions?
Secretary Perez. Well, the free market didn't quite work
for the Toffel family, congressman. And it didn't work because
the system right now creates incentives and it is perfectly
legal for people to give advice that is motivated not by a
concern first and foremost for your clients' best interests,
but by the fee structures. That is what we are trying to
change.
Mr. Scott. If you had the free market, would there be any
limit to what an unscrupulous adviser could get out of a
client, even if they might agree to it?
Secretary Perez. I fear we would have more Toffels.
Mr. Scott. When we are talking about pension funds, this
rule only affects pension funds, is that right?
Secretary Perez. Well, it affects, you know, 401(k)s, it
affects IRAs, it affects rollovers. Trillions of dollars is
what we are talking about right now.
Mr. Scott. Tax-advantaged accounts.
Secretary Perez. Correct.
Mr. Scott. We made these tax-advantaged for a reason. Is
there any reason that they should be treated more preciously
than other funds that an investor may have?
Secretary Perez. Well, Congress made a judgment to give
tax-preferred treatment, and that was a good judgment, that was
a sound judgment. I don't think Congress made a judgment to
give tax-preferred treatment so that people who are then trying
to make sure they have a healthy retirement, like the Toffels,
then get themselves into the circumstances they have found
themselves in, which were totally preventable.
Mr. Scott. We have heard about this industry being highly
regulated. Did I understand you to say that if an investment
adviser knows that another product may not be as good, but he
can make more money on the other product, that he can sell that
product to the client knowing that he is going to make more and
the client's going to make less?
Secretary Perez. There is a suitability threshold that must
be surmounted. But within that suitability threshold, you can
have a number of products that have different commission or
other fee structures for the person selling that.
And the current system does not prevent you from taking
advantage of that incentive. And I think that is wrong, and
that is what we are trying to change.
Mr. Scott. So if you are selling essentially an S&P 500
fund and you know that the client could get it at a much lower
price, there is nothing wrong in the present system in selling
the mutual fund that pays the broker more money right out of
the client's pocket.
Secretary Perez. You would want to look at not simply
price, but return and things of that nature.
Mr. Scott. S&P 500 fund, all of them are going to do
essentially the same.
Secretary Perez. The premise of your question, yes, I mean,
assuming all things are equal, then that is the challenge that
we are trying to address in this rule is to make sure that we
are putting your clients' best interests first.
Mr. Scott. Now, how would a client know that they are
getting ripped off like this without the rule?
Secretary Perez. That is a huge part of the challenge that
we confront, because people are unaware. You don't know what
you don't know. There is a very significant inequality of
information here. And that is why this rule is necessary.
Mr. Scott. And that is why the client went to the adviser
in the first place to try to get some good advice.
Secretary Perez. Well, and they assumed that they were
trustworthy. They read the marketing materials. And in fact,
most are very trustworthy, but we are trying to do the Ronald
Reagan trust but verify by having an enforceable contract.
Mr. Scott. What level of sophistication are we talking
about? People coming to an adviser looking for the right
advice, how vulnerable are many of the people to getting ripped
off?
Secretary Perez. Well, if you are like me you don't know a
heck of a lot about it. And I feel like I am a fairly educated
person, but I also when I go to my financial adviser I feel the
same way as when I go to my mechanic. These are two areas where
I know very little about and I want to trust somebody else and
I want to make sure that trust isn't misplaced.
Mr. Scott. Thank you, Mr. Chairman.
Chairman Roe. I thank the gentleman for yielding.
Thank you, Mr. Secretary.
And before I close, just a couple of comments. I think we
all agree with the best-interest standards. I think everyone in
the industry does and everyone here today does. I don't think
there is any issue about that.
Also, the GAO report clearly showed that we have 29 percent
of the people in this country that have saved no money over 55,
that is over half the nation; 23 percent just have a small
defined benefit and no savings.
So we have a huge crisis. I don't think we need to make it
harder. We need to make it easier for people to invest money.
Forty-five percent of people in the TSP have a default, that is
just a treasury, and that is a very poor return.
And you gave an example of a very unfortunate investment
advice. Let me just share, Mr. Carter shared with you some, I
can share with you many of them. A $78,000 investment in
November of 1996 that went through the worst economic recession
since the Depression, that in March of 2015 in a broker dealer
fee-based plan was $362,000 left alone and invested with that
same advice. So there are great stories out there also.
And I think the question I would have to ask is, at the
end, and you can think about this, does this rule make it
easier? And for businesses to do this, does it make it cost
less?
Can you make a commitment basically today that no one will
lose their financial adviser? I mean, it is like the President
said if you like your doctor you can keep it, but it didn't
work out that way in reality when all the rules of the
Affordable Care Act came in.
Will people not pay higher costs, a low-income person who
very much Ms. Wilson and others over here are worried about?
The small investor, will they be forced into a plan where 1
percent of $10,000, maybe three-fourths of a percent that I
might pay on a managed account, are they going to have to pay
that?
So those are the things I think we need to think about in
the rulemaking process.
And I want to thank you for being here. You have been very
forthright today. And look, for a large family like yours with
five in the family, four out of five turning out okay was not
bad.
Secretary Perez. That is pretty good. I agree.
[Laughter.]
Chairman Roe. So thanks very much, Mr. Secretary.
Secretary Perez. Thank you for your time, sir.
Chairman Roe. Thank you.
Secretary Perez. And I always appreciate your courtesy.
Chairman Roe. Thank you so much.
It is now my pleasure to invite our second panel to the
witness table, please.
It is now my pleasure to introduce our distinguished panel
of witnesses for the second panel. Our first witness is Mr.
Kent Mason who is a partner of Davis & Harman LLP specializing
in employee benefit matters. Prior to entering private
practice, Mr. Mason held positions at the Joint Committee on
Taxation and in the Treasury Department. He represents a broad
cross-section of firms that offer and service employee benefit
plans.
Mr. Jack Haley is the executive vice president,
Professional Services Group, with Fidelity Investments. He has
been with the company more than 30 years and currently serves
on its executive board. Mr. Haley also currently serves as
president and chairman of the board of directors of Fidelity
Management Trust Company.
Mr. Dennis Kelleher is the president and chief executive
officer of Better Markets, Incorporated, a nonprofit
organization that promotes the public interest in the capital
and commodity markets. Previously he has held several senior-
staff positions in the United States Senate and was a partner
with the law firm of Skadden, Arps, Slate, Meagher & Flom.
Dr. Brian Reid is a chief economist at the Investment
Company Institute where he leads the institute's research
departments. Previously, Dr. Reid was a staff economist at
Monetary Affairs Division of the Federal Reserve Board.
Lastly, Mr. Dean Harman is the founder and managing
director of Harman Wealth Management. He has over 17 years of
experience working with individuals and families with planning
and investment management. Mr. Harman is a member of the Board
of Directors of the Financial Services Institute.
Mr. Mason, you are recognized--well, before I start let me
swear you in.
[Witnesses sworn.]
Let the record reflect the witnesses answered in the
affirmative.
And you may take your seat.
Before I recognize you to provide your testimonies, let me
briefly explain our lighting system. You have five minutes to
present your testimony. When you begin, the light in front of
you will turn green. When one minute is left, the light will
turn yellow. When your time has expired, the light will turn
red. At that point, I will ask you to wrap up your remarks as
best as you are able.
And members will each have five minutes to ask questions.
Mr. Mason, you are recognized for five minutes.
STATEMENT OF MR. KENT MASON, PARTNER, DAVIS & HARMAN, LLP,
WASHINGTON, D.C.
Mr. Mason. Thank you, Mr. Chairman.
My name is Kent Mason. I am a partner with the law firm of
Davis & Harman and I have worked in the employee benefits area
for over 30 years.
I want to thank the subcommittee for inviting me here to
testify. I am testifying today on my own behalf based on
extensive discussions with plan sponsors as well as numerous
financial institutions.
Before turning to the meat of my testimony, I want to
mention three key points. And this first one echoes, I think,
what you have said here, Mr. Chairman.
The industry is absolutely fine with a best-interest
standard and has been for the past four and a half years, you
know? I mean, every time somebody says, well, now, there is
concern from the industry, there hasn't been for four and a
half years.
The concern has always related to the prohibited
transaction rules. And these are the rules that make certain
business models effectively illegal, such as the brokerage
model; and those are the business models that provide
assistance to low- and middle-income individuals and to small
businesses. So that has been the issue for four and a half
years and it has really not been addressed.
The second point I want to hit is, even aside from the
advice issue, we have had a lot of talk this morning about
education. I just want to make one thing clear. The 2015
proposal significantly cuts back on permissible financial
investment education. 2010 preserved financial education; 2015
explicitly cuts back permissible financial education.
And that leads to the third point I want to hit before
going to the meat of my testimony, which is I think there has
been a perception that this has been an evolution. That we took
the 2010 proposal and we sort of updated it and made some
progress and we got to 2015 and we are going to make some more
progress.
In actuality, there is a growing consensus among the
industry that the 2015 proposal, and this is detailed in my
written testimony, is actually much worse and much less
workable than the 2010 proposal. So the trend line is going in
a disturbing direction.
In the meat of my testimony, I would like to focus on two
points: the effect of the re-proposal on small accounts, small
IRA accounts, and the critical need for legislation.
Small accounts, there are two ways that IRA accounts can
get assistance. One is the brokerage model with commissions
paid and payments from the mutual funds, such as marketing fees
or record keeping fees.
As I explain in detail in my written testimony, as a
practical matter the proposal makes the brokerage model
illegal. So really, that model is off the table.
The second way to provide investment assistance is through
something called an advisory model. Now, if somebody comes to
me and says I want to enter into an advisory relationship, what
I owe that person is 24/7/365 fiduciary responsibility. I owe
them around-the-clock fiduciary responsibility.
In exchange for that, what I get is a flat fee like 1
percent of pay. And that 1 percent of pay, the problem is that
structure won't work for small accounts. Because if somebody
comes to me with a $4,000 IRA, I can't provide around-the-
clock, 365-day service for $40 for 1 percent of pay. So that is
not available to small accounts.
Oliver Wyman found that because of this analysis, just
under their study sample, over 7 million IRAs would lose access
to an investment professional and as many as 360,000 fewer IRAs
would be opened every year.
And a lot of the reaction to this has been, well, industry
will never walk away, they will never walk away from this
market. But that is exactly what happened in the United Kingdom
under almost an identical rule. The industry went away from
small accounts in droves.
And then the question is, when would this happen? Under the
current structure, under the current timetable from the
Department of Labor, millions of small accounts would be told
in the fall of 2016 that their investment adviser can no longer
serve them because of new government regulations. October,
September of 2016, that is the message that would be delivered.
And just to wrap up, what we need here is bipartisan
legislation that establishes a best-interest standard with
workable rules, not the unworkable rules that are in this
proposal.
[The testimony of Mr. Mason follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Roe. Thank you, Mr. Mason.
Mr. Haley, you are recognized for five minutes.
TESTIMONY OF MR. JACK HALEY, EXECUTIVE VICE PRESIDENT, FIDELITY
INVESTMENTS, BOSTON, MASSACHUSETTS
Mr. Haley. Chairman Roe, Ranking Member, members of the
Subcommittee, and thank you for the opportunity to testify.
My name is Jack Haley. I am an executive vice president at
Fidelity Investments. I oversee a team of investment
professionals dedicated to helping employer clients and their
workers access a wide variety of high-quality investment
products and services to meet their investing needs.
At Fidelity we have the privilege of helping more than 25
million people save for their financial goals and serving more
than 14,000 workplace clients, including 8,000 small businesses
who offer retirement savings benefits to their workers.
From our roots as a small mutual fund company, Fidelity has
grown into a diversified financial services leader. Fidelity
takes seriously the responsibility of helping employers set up
and offer competitive retirement savings plans.
I appreciate the opportunity to share our experiences
helping small businesses and express our concerns about the
Labor Department's proposal.
First, I want to answer a call from the Department of Labor
by stating directly up front Fidelity acts in the best
interests of its clients and investors. We support a best
interest fiduciary standard, but the details matter.
We are proud of the services, products, and choices we
provide our customers, but we fear that this proposed
regulation will severely restrict our ability to continue
providing this assistance to small-business workers.
While the framework of the proposal would theoretically
allow service models to remain when acting in the best
interests of customers, its so-called best-interest contract
exemption contains so many problematic conditions that the rule
is unworkable as drafted. Labor's proposal effectively
prohibits access to affordable financial help, even when it is
in the interests of the investor.
We believe a balanced approach where savers can be
protected by the best-interest standard and continue to have
access and choice in their retirement products, services, and
providers.
We look forward to continuing to work with the members of
Congress and the administration to ensure that this balance is
reached.
Small businesses remain the lifeblood of our economy. These
hardworking entrepreneurs and businesspeople bring significant
expertise and passion to their work. We see their desire to
offer competitive, high-quality retirement savings benefits to
attract and keep a highly skilled workforce.
Not surprisingly, with all they have to do to manage their
businesses, there is little time, expertise, or desire to
manage their retirement savings plans. That is why small
businesses turn to us. We provide a range of critical services,
from helping companies understand and select the right savings
vehicles, to providing all of the critical functions to keep a
plan running smoothly, including record keeping, compliance
testing and reporting, selection and ongoing monitoring of
investment, and, most importantly, education and guidance for
their employees.
Unfortunately, the DOL proposal would specifically prohibit
service providers from assisting small businesses. The result
would have a devastating impact on retirement coverage and
savings for millions of workers employed by small businesses
across the country.
I reiterate, we support a best-interest fiduciary standard,
but without exemptive relief from ERISA's strict rules Fidelity
would be prohibited from providing critical services to small-
business clients, even when we provide help that is in their
best interest.
Just as important as our small-business services is the
critical education and guidance we provide to their employees.
The proposed rule jeopardizes many of the ordinary, everyday
conversations we have with job changers, even if the
conversation is merely educational where we do not discuss
investments or advice.
We are also able to help workers prepare for retirement by
discussing potential product and service offerings with them.
The proposal would require workers to sign a contract before a
conversation would even occur. Each customer would have to have
a contract with each of our phone reps, which number in the
thousands, in order to get answers to basic questions.
In addition to this new contract, the rules also include
burdensome, confusing disclosure requirements that do not
actually disclose potential conflicts. These requirements are
not in anyone's best interests and must be addressed.
These are just a few examples of the critical services we
provide to small businesses and employees and how the proposal
would harm the very people the rule intends to protect.
We believe a balanced approach providing investors with
fiduciary best-interest protections, retaining existing service
models, is achievable.
We look forward to working with you to make the necessary
changes to allow individual retirement savers and businesses
offering retirement plans to have choice and access to the
products and services they need.
Let me close by stating unequivocally that we support a
best-interest fiduciary standard crafted in a way that allows
workers choice and access to the services they need and desire.
Thank you, and I am happy to take questions.
[The testimony of Mr. Haley follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Roe. Thank you, Mr. Haley.
Mr. Kelleher, you are recognized for five minutes.
TESTIMONY OF MR. DENNIS KELLEHER, PRESIDENT AND CEO, BETTER
MARKETS, WASHINGTON, D.C.
Mr. Kelleher. Chairman Roe and members of the Subcommittee,
thank you for the invitation to Better Markets to testify
today.
I would like to discuss just a few points that are detailed
in my written testimony.
First, it is unacceptable that brokers and others today are
allowed to put their economic interests above their clients'
best interests. That conflict of interest is costing Americans
saving for retirement tens of billions of dollars every year.
Make no mistake about it. That is what is at stake here and
ending that is what the Department of Labor's proposed rule is
all about.
Today, tens of millions of hardworking Americans are
struggling to make ends meet, provide for their families, and
save a little for retirement. Figuring out how to invest those
retirement savings forces many to seek investment advice from a
broker, but that broker can put his or her economic interests
above the client's best interests.
What does that mean?
If there are two similar investments but one pays the
broker 5 percent and the other pays the broker 1 percent, then
it is perfectly legal today for that broker to advise the
client to invest in the product that will cost his client five
times what it should be.
Making matters worse, often the products that pay the
brokers more don't perform as well as similar products. That
means not only has the client paid five times more up front,
but he or she is also stuck with a product that doesn't perform
as well over time. The client is doubly victimized.
As famed Vanguard founder Jack Bogle has called it, they
are victimized by the tyranny of compounding costs.
That is what is happening every day in this country. It is
costing Americans tens of billions of hard-earned dollars.
For example, the Department of Labor has detailed that
these conflicts in the IRA arena only are costing savers as
much as $430 billion over 10 years or $43 billion a year.
Second, the rule governing retirement investment advice is
40 years old; it is outdated and incapable of properly
protecting workers and retirees in light of the dramatic and
far-reaching changes in the way Americans now have to save for
retirement.
When this rule was written 40 years ago, almost all
retirement savings were in defined benefit plans which were run
by employers and managed by investment professionals with
fiduciary duties. Forty years ago, 401(k)s did not exist and
IRAs had just been created. Today, 40 years later, 401(k)s have
gone from zero dollars to $4.6 trillion and IRAs have gone from
$3 billion to $7.4 trillion.
By 2012, 90 million Americans, more than two-thirds of all
workers with retirement plans, had individual contribution
plans. They are all forced to figure out their own retirement
investments. This is a monumental and mind-boggling shift from
40 years ago, and yet the rule has remained frozen in time as
if nothing has changed when everything has changed.
As the world has changed, so, too, must the rule change.
And the time is now for the Department of Labor to act. It has
considered this proposal for years. It has sought and received
input from all stakeholders, including, in particular,
industry. It has addressed many of the industry's concerns and
incorporated many of their suggestions into the proposal,
including their priorities.
Yet they continue to object and the reason is clear: They
simply do not want to change the status quo and work under a
simple principle, a rule that says you must put your clients'
interests first.
The industry's complaints, however, boil down to a false
choice, either brokers get to put their interests above their
clients' best interests or they won't serve those clients. That
is a false choice.
The real choice is this: Let the DOL act to protect 100
million workers and retirees across this country or continue
letting brokers and other advisers put their interests ahead of
their clients'. That is the real choice.
If some brokers don't want to do that or feel that they
can't make enough money doing that, then there are plenty of
retirement investment advisers who are more than willing to put
the clients' interests first and, frankly, today there are tens
of thousands of advisers doing that right now across the
country with fiduciary duties, low cost, best interest of the
client, serving them today, literally hundreds of thousands.
In conclusion, we all agree we have a very serious
retirement crisis in this country. Not enough people are saving
for retirement and too many of those that do aren't saving
enough, as the chairman said in his opening statement.
They need to keep every penny in their retirement accounts
and not in their brokers' pockets. That is why updating a 40-
year-old rule is so important and why putting the clients' best
interests first is imperative.
Thank you, and I look forward to your questions.
[The testimony of Mr. Kelleher follows:]
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Chairman Roe. Thank you, Mr. Kelleher.
Dr. Reid, you are recognized.
TESTIMONY OF DR. BRIAN REID, PH.D., CHIEF ECONOMIST, INVESTMENT
COMPANY INSTITUTE, WASHINGTON, D.C.
Mr. Reid. Thank you, Chairman Roe and Ranking Member.
I am Brian Reid, chief economist of the Investment Company
Institute, a leading global trade association representing
mutual funds and other regulated funds in the United States and
around the globe.
I am here today to discuss the economic analysis that the
Department of Labor uses to justify its proposed rule defining
fiduciary duty for retirement advice and services.
I have spent a lot of time on the DOL's regulatory impact
analysis. I regret to say that it is fatally flawed. Its
analysis is an exercise in storytelling, crafted more to
support the Department's agenda than to measure accurately the
proposal's impact on retirement savers.
In fact, the economic analysis raises the question of
whether the DOL fully understands the market for retirement
advice.
The DOL justifies its proposed rule by claiming that this
market suffers from a substantial market failure resulting in
serious harm for retirement savers who invest through broker
dealers. But the Department's assertions don't stand up when
tested against actual data and experience. Even worse, the
DOL's proposal could actually have significant net social harm.
I have five points to explain why.
First, the DOL's analysis is flawed when it claims that
retirement savers will lose as much as $1 trillion over the
next 20 years without its rule. The DOL reaches this number by
arguing that brokers who are paid commissions through front-end
loads on mutual funds are directing their investors into funds
that under-perform.
But a simple test, with data drawn directly from the market
since 2007, shows just the opposite. Investors who own mutual
funds with front-end loads actually bought funds that
outperformed, not underperformed, the average return for their
fund category.
This one finding eliminates almost all of the rationale
that the DOL uses to justify its proposal.
Second, the DOL ignores market realities and the fact that
investors may end up paying more, not less for advice under its
proposal. The DOL predicts that its rule will drive down
brokers' fund commissions by almost two-thirds, but will not
drive brokers from the retirement market. That seems highly
unlikely to me.
Furthermore, the DOL ignores the costs that investors will
face if brokers do exit the market. The DOL estimates that
investors are paying up to 28 basis points a year in front-end
loads, but advisers charge, on average, almost four times as
much for alternative, fee-based accounts.
If the DOL rule forces savers into fee-based accounts,
savers may end up paying more, not less.
Third, none of the academic studies that the DOL uses
addresses the core question: whether an investor's performance
is different when her adviser is a fiduciary compared to when
her adviser isn't a fiduciary. Thus, the DOL does not actually
measure and cannot measure, based on these studies, whether an
investor will get better results using a fiduciary adviser.
Fourth, the DOL fails to identify and analyze the
significant harm to savers that could likely result from this
proposal. With the new burdens created by the DOL's proposed
rule, the high minimum balances typically required for fee-
based accounts, it is inevitable that many IRA investors would
no longer be able to obtain advice at all. Retirement savers
will be worse off if they do not have access to assistance and
advice.
Finally, data show that IRA investors are concentrated in
lower-cost funds, not higher-cost funds. The White House
Council of Economic Advisers has widely promoted an estimate
that IRA investors lose $17 billion a year through under-
performance largely stemming from excess fees.
The CEA report uses a hypothetical calculation to argue
that, on average, IRA investors pay 1 percentage point a year
more in fund fees than do 401(k) investors.
If we put actual fund data into the CEA's calculation, the
difference between what IRA investors pay and what 401(k)
investors pay is 85 percent less than what the CEA assumes.
Now, let me be clear. The ICI has long supported the
principle behind the DOL proposal that financial advisers
should act in the best interests of their clients when they
offer personalized investment advice. Unfortunately, the DOL's
proposed rule is hopelessly complex, confused, and unworkable.
As the subcommittee recognizes, this issue is vitally
important to American workers and their families. Research by
ICI and others show that the U.S. retirement system is working
to help deliver a secure future for millions of Americans. But
those successes depend on workers' access to advice and
services.
Any policy that impairs retirement savers' ability to get
the help that they need will significantly harm the prospects
of millions of workers. Unfortunately, the DOL proposal will do
just that.
I look forward to your questions.
[The testimony of Dr. Reid follows:]
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Chairman Roe. Thank you, Dr. Reid.
Mr. Harman, you are recognized for five minutes.
TESTIMONY OF MR. DEAN HARMAN, CFP, MANAGING DIRECTOR, HARMAN
WEALTH MANAGEMENT, THE WOODLANDS, TEXAS
Mr. Harman. Good afternoon, Mr. Chairman, Ranking Member
Polis, and members of the Subcommittee.
I am Dean Harman, founder and managing director of Harman
Wealth Management in The Woodlands, Texas.
I am here representing the Financial Services Institute.
FSI advocates on behalf of independent financial advisers and
independent financial services firms. FSI is a strong supporter
of a uniform fiduciary standard. But, unfortunately, the
Department of Labor's proposal is unworkable, complex, and
costly.
Let me make it plain. This proposal will harm retirement
investors.
Let me start by sharing one of the ways this proposal is
unworkable. For a client to be able to pay for my services
using a commission model, my firm would have to comply with the
requirements of the best-interest contract exemption known as
BICE.
BICE requires that we give clients an estimate of all
investment costs for one, five, and 10-year periods. In order
to do this, I would need to predict investment performance.
This will put me in direct conflict with SEC and FINRA rules.
These projections may also create unrealistic expectations
for investors.
The proposal is also too complex. For example, BICE
requires that firms maintain a machine-readable public website
and update it quarterly. This website would disclose
compensation received by the adviser, the firm, and any
affiliates for every investment product sold.
In the independent investment model, financial advisers
have access to a wide variety of investment options. All of
these investment products have unique pricing structures. Every
single mutual fund family may offer as many as 500 or more
versions of its fund. Compiling, presenting, and maintaining
the required Internet disclosures would be a massive
undertaking.
This complexity of the project could lead to inadvertent
errors which may result in litigation. More importantly, the
complexity may confuse investors and discourage them from
saving for retirement.
This proposal is also too costly for investors seeking
retirement services. They may encounter high costs as financial
advisers are faced with a mountain of regulatory burdens that
lead advisers to institute or raise asset minimums on
retirement accounts.
Because of this, investors of moderate means will find it
difficult to gain access to valuable retirement advice and
products. I do not want to turn away a potential client who
needs my advice, but that will be the consequence of this
proposal.
That last point is so important. Let me give you an example
from my own practice. I manage about $200 million in assets for
618 clients. Of those total assets, $10 million are held by 331
clients with an average balance of $30,000. These clients are
mainly lower net worth, elderly, or young professionals just
starting out.
For these individuals, an advisory fee model does not make
sense. A commission-based model is appropriate for them because
it eliminates the out-of-pocket costs and provides a way to pay
for the advice, products, and services that these clients need.
I want to ensure that any written rule by the Department of
Labor will make it easier for these investors to continue
receiving high-quality retirement services from a trusted
financial adviser, but this proposal fails them.
In conclusion, FSI supports a uniform fiduciary standard.
We will continue to work with the Department of Labor to
protect investors and expand access to retirement advice.
Unfortunately, the current proposal is unworkable, it is
complex, and it is costly.
Thank you, and I look forward to any questions that you may
have.
[The testimony of Mr. Harman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Roe. Thank you, Mr. Harman.
Thank you to all of the panel for your testimony.
I will now recognize Dr. Foxx, for five minutes.
Dr. Foxx. Thank you very much, Mr. Chairman. I appreciate
it.
You gentlemen were all here and you heard the Secretary. Of
course, we never have enough time to ask the questions and get
answers that will be helpful. But I intend to ask him this
question in follow up and hope I can get some kind of a
specific answer.
He kept saying that it is a structurally flawed system, but
he never truly identifies what that is except saying he doesn't
think the best interests of the clients is always done.
I would like to ask, and I would love each of you to
respond, maybe perhaps not today, but I would like to get an
answer from each of you.
But I am going to ask Mr. Mason and Mr. Harman if you would
answer. Can you tell from what the Secretary has said exactly
what the structurally flawed part of the system is? And would
this fix that? I think you have said no already. But does it
work except for very bad actors that might violate any system
that is put into place?
Mr. Mason?
Mr. Mason. Yes. I think just on your last point, a lot of
the horror stories that we hear that are really just upsetting
to hear and, you know, are illegal under current law; so, I
mean, so in terms of is this a structural flaw of present law,
some of these horror stories, absolutely not. A lot of these
things are illegal under current law.
The only thing that I got out of it, and you know, I don't
speak obviously for the Secretary, but the thing that I got out
of it today was the core principle that advisers should act in
the best interests of their clients. And that is an issue in
which there is, you know, in terms of the people who have
spoken both up there and back here, there has been unanimity.
The one disagreement is essentially that they have come up
with this exemption from the prohibited transaction rules that
you have to go through in order to provide help to small
accounts, I talk to dozens of financial institutions and there
isn't one who can use it.
So the issue they are either trying to correct, best
interest, that is fine; the way they went about it doesn't
work.
Dr. Foxx. Mr. Harman, before you answer, I would like to
say what I got from his comments is that they want equality of
outcomes, they want guaranteed outcomes for everyone. It seems
to me that is it. They want maximum benefit. Well, all of us
want that, for heaven's sake. But there are risks associated.
So Mr. Harman, if you would, if you have any additional
comments to what Mr. Mason said.
Mr. Harman. I think Mr. Mason's points are right on point.
Currently, advisers are highly regulated as it is. So we have
had this current structure for many years. I don't think it is
broken. I think we need to have the ability to provide multiple
solutions for clients based on what their individual needs are.
So I don't think the current structure is broken at all.
And in fact, the current structure allows us to serve clients
in different ways based on different needs, especially the
moderate-and lower-income clients, their needs are oftentimes
different than what we would consider to be high-net-worth
clients. And the options and products that they need available
also need to be preserved.
Dr. Foxx. I also think there is a problem with, again, who
will ultimately decide what is in the best interest of the
client. And I truly believe that is just going to result in a
lot of lawsuits, because you pretend this eight-ounce cup has
four ounces of water in it, is it half empty or half full? Who
defines what the best interest is, is I think, ultimately,
going to be decided in the courts and by expensive trials.
So thank you all very much.
I yield back.
Chairman Roe. I thank the gentlelady for yielding.
Mr. Scott, you are recognized for five minutes.
Mr. Scott. Thank you. Thank you, Mr. Chairman.
Mr. Mason, you mentioned the $4,000 fund and said a 1
percent fee would be insufficient to make it worth your while
to give advice. How much money would you have to get out of
that fund to make it worth your while?
Mr. Mason. Well, I am not in the business, but different
financial institutions set different minimums in terms of how
much they will require for an advisory account like that. Some
of them, for example, are $100,000 or $50,000.
In order to accept 365-day liability and responsibility,
you really can't do it for $40. It is not economically sound.
Mr. Scott. But basically--
Mr. Mason. I am sorry, go ahead.
Mr. Scott. Basically, the $4,000 fund amount would be
problematic whatever you are doing.
Mr. Mason. No, no, see, actually not because under the
brokerage model what happens is it is a completely different
relationship. Suppose I have to act in the best interest, but I
am on the brokerage model. And Jack were to come to me and ask
me for help. I could give him help on that particular
transaction, but I would have no ongoing duty to counsel him
with respect to what to do tomorrow or the next day.
That is a transactional model that has worked very well to
help the low- and middle-income individuals on a much less
expensive basis get the assistance they need. So it is a
completely different model. And that is why the advisory model
doesn't work.
Mr. Scott. Now, under the rule, if you are doing just a
transaction, are you covered by the best interest?
Mr. Mason. Absolutely. In other words, again, Jack comes to
me and asks me for my advice under our sort of scenario and
under the Department of Labor's, you would have to give advice
that is in the best interests and we would support that,
absolutely.
Mr. Scott. Okay.
Mr. Kelleher, if you are doing a single transaction and
somebody comes to you for the transaction, are you subject to
the best interest under this rule?
Mr. Kelleher. Yes.
Mr. Scott. On a single transaction?
Mr. Kelleher. I am sorry?
Mr. Scott. On a single transaction?
Mr. Kelleher. One of the loopholes in the current rule is
that if it is not on a regular basis, then it falls outside of
a fiduciary duty. And one of the things the new rule is
intended to do is to capture actual substantive retirement
advice, even if it is only one time.
Mr. Scott. Okay. But if you just ordered the mutual fund,
you wouldn't be subject to it, right?
Mr. Kelleher. It depends on the context. As I understand
the rule, if you were giving substantive retirement advice--
Mr. Scott. You are giving advice.
Mr. Kelleher. Right.
Mr. Scott. Okay.
Mr. Kelleher. It is very clear on education and call
centers. Not every person that works in a call center is going
to become an adviser. In fact, there is a very broad
description as to all sorts of advice that people can use at
call centers and elsewhere.
And in fact, the rule on that point is specifically
tailored to the input by the industry on this very issue. It
hasn't taken away their complaints, notwithstanding they have
been addressed rather extensively.
Mr. Scott. Okay. Now, Chairman Roe mentioned an investor
who was very satisfied because the size of their investment
went up over the years. He didn't say how the investment
measured compared to an S&P 500 fund. If you can evaluate
advice over the years, what should you compare it to?
Mr. Kelleher. Well, one of the things that this is focused
on is if you put the clients' best interests first, then you
can actually evaluate on a level playing field the Chairman's
example as well as the Secretary's example. The problem now is
that with the very low suitability standard, which allows the
broker or the adviser to act in their own best interests above
the best interests of their clients, you don't actually know
whether the--and I can't remember the chairman's example, I
think it was $365,000 the account grew to--that may or may not
be actually a good return.
If it is a return and the broker ended up getting 5 percent
at the front end and they lost, as Jack Bogle would say, the
tyranny of compounding costs and every year he lost x percent
where a similar product he could have been put into, he well
could have had $495,000, $500,000 or more. You don't know
because no one is required currently to act in their best
interest.
And that is the core of the problem. Many of the problems
and complaints go away if everyone is required to put the
clients' best interests first.
Mr. Scott. And let me ask Mr. Haley a question. As I
understand your testimony, you are comfortable with the best-
interest rule, you just want it administered in a way that can
be easily administered. Is that right?
Mr. Haley. That is correct.
Mr. Scott. And can you help write the language where the
best-interest standard is used, but it does not have the
complications that you see in the present rules?
Mr. Haley. Yes.
Mr. Scott. I yield back.
Chairman Roe. Thank the gentleman for yielding.
Just for clarification, that IRA was my wife's.
[Laughter.]
It did beat the S&P. And I happen to know it very closely
because it was in my own family.
Mr. Allen, you are recognized for five minutes.
Mr. Allen. Well, just for the record, I am a little nervous
that a department of the federal government that owes more than
$18 trillion would be working on a rule that overreaches about
fiduciary responsibilities. That would make us all nervous, I
think, sitting here.
But Mr. Harman, as you said in your testimony, as an
investment adviser, based on this rule, you would have to
predict what your client would earn?
Mr. Harman. Yes. It is my understanding under the current
BICE exemption that in order to be able to predict fees on an
account for a 1-, 5-, and 10-year period, you also have to make
assumptions as to the returns that the asset allocation--
Mr. Allen. So basically under the current interest rate
policy of this government, you would have to recommend that
your folks have a 60 basis point earnings in their programs.
Mr. Harman. You would have to--
Mr. Allen. To guarantee.
Mr. Harman. Yes, you would have to come up with some
assumption that the portfolio would return at a certain rate.
Mr. Allen. And Mr. Mason, if this rule eliminates the
brokerage side of the business, how big is that business? What
percentage of the total financial industry, can you guess on
that?
Mr. Mason. Ninety-eight percent of the IRAs under $25,000
are held in brokerage accounts. So the damage that would be
done to the small investor is incalculable; 98 percent of the
IRAs under $25,000.
Mr. Allen. That is unconscionable to me that--I mean, I sit
here and I just cannot believe. You know, I wish you all had
gone first because I think I am a little more educated about
what really is going on here.
[Laughter.]
Mr. Haley, you said that, again, you answered the question
as far as support of best-interest regulatory rule. In your
mind, did the Department of Labor come to any industry experts
and ask them what they thought about what might be in the best
interests of the investor in this situation?
Mr. Haley. I am not aware of that. We have had
conversations with them in response to their proposed
regulations.
Mr. Allen. The rules.
Mr. Haley. And we are waiting to hear what their response
is.
Mr. Allen. Okay. So you have any idea what--I guess I
should ask the Secretary of Labor. That is why I wish he had
gone last. Where did they come up with this rule? Does anybody
know that? I mean, who wrote this thing? If it was not the
industry, who is actually responsible for this?
Mr. Mason. I think that what happened was back in 2010 they
thought that, well, these rules are out of date. And I think
that the one piece that was really overlooked in this
calculation was essentially, and again, I hate to use this
term, but the prohibited transaction rules, they are also out
of date.
Mr. Allen. Right.
Mr. Mason. Because it is those rules that prohibit the
brokerage model from functioning. And so what happened is they
updated one piece of it and updated it in a way in which we
have very grave concerns about. And then they really haven't
updated the prohibited transaction rules and those are the
rules that cut off low- and middle-income individuals and small
businesses from help.
So if they could update those to accommodate the new
system, that is how we can achieve the best of both worlds, a
best-interest standard with workable rules that allow access to
low- and middle-income individuals.
Mr. Allen. So the consensus would be is that the rule does
need to be updated?
Mr. Mason. I don't think the industry has any concerns
about updating a rule to ensure a broader best-interest
standard. We are absolutely fine with that. It is really if
that is going to be the case, we absolutely have to update the
prohibited transaction rules to make them workable for the
world that does exist today. Because right now, this would,
just as you said, I mean, this would be a terrible development
for the small accounts and the small businesses.
Mr. Allen. Mr. Haley, how do we solve this problem?
Mr. Haley. Well, the first thing is the exemptive relief
under the BICE does not apply to small businesses. So if you
think about Fidelity, how do we serve small businesses? Number
one, we have over 8,000 small businesses with less than $100
million in assets or less than 100 employees.
Today when that 401(k) comes to us, they give us a request
for a proposal. They are looking for the lowest fees. They are
also looking for a prototypical document.
We do that. They ask us, what type of investments would you
like, you know, in the portfolio? We are an open-architecture
firm, so when you think about it, one of our divisions is
Fidelity's Funds Network. That is the largest mutual funds
supermarket in the world. We have $1.4 trillion on our platform
of non-Fidelity assets. So I am not conflicted. We give them a
lineup.
I actually like to tell the story. I am the largest
distributor of Pimco's mutual funds, okay? In addition to
being--
Chairman Roe. Mr. Haley, Mr. Allen's time is expired.
Mr. Allen. I yield the time I don't have.
[Laughter.]
Chairman Roe. Ms. Bonamici, you are recognized.
Ms. Bonamici. Thank you very much, Mr. Chairman.
And thank you to the witnesses. You have been here a very
long time and I am glad you are all here. It has been a very
enlightening conversation.
I have always found that consumer confidence is really an
important part of economic growth. It is good for businesses
large and small when their customers know that they are being
treated fairly and honestly.
If you look back at the history of where the SEC came from,
you know, after the Great Depression the SEC was formed and
those securities rules were written in order to bring that
confidence back to the market. So it is a critical part, that
consumer confidence.
And it is important as we have this conversation about the
critical issue of retirement security that consumers have that
confidence in their advisers and their transactions.
So I am really glad to hear of industry's support for the
best-interest standard.
And let me just clarify something real quickly, because I
want to make sure I am understanding what you are saying. Some
of you have said the best-interest standard and some of you
have said the best-interest fiduciary standard. Does everybody
agree that the best-interest standard is a fiduciary standard?
Does anybody not agree with that?
Mr. Mason. I think we agree.
Ms. Bonamici. Okay, great. That is really helpful.
And I want to ask a couple of questions and save time for
Mr. Kelleher.
But Mr. Mason, you and Mr. Harman sort of brought up the
same thing. I thought maybe for a minute you were law partners,
you were like Mason & Harman.
[Laughter.]
Mr. Harman. There is no relation.
Ms. Bonamici. So Mr. Mason, you said something about the
brokerage model doesn't work under this rule for small
accounts.
And Mr. Harman, you basically said the same thing, that
this proposal will, I think you said, fail the lower-net-worth
clients who pay on commission. And I am confused about why,
because the Secretary sat here and said commissions will be--
there will be the ability to charge commissions under this
rule.
So can you briefly tell me why you say that the brokerage
model won't work? And then I want to save time for a question
for Mr. Kelleher.
Mr. Mason. I am happy unless you want to--
Ms. Bonamici. Go ahead, Mr. Mason. Go ahead.
Mr. Mason. Okay. I am happy to do it. Briefly, it is going
to be a challenge because what it is there is a long, long list
of requirements that essentially are unworkable. I will give
you one example.
I think there was a great discussion this morning on the
contract rule about how you have to enter into a contract
before you even enter into a relationship and then the
secretary indicated openness to sort of work on that.
Ms. Bonamici. Right.
Mr. Mason. But I will mention one other that was mentioned
by one of the members here this morning, which is one of the
disclosures is to provide detailed information on every piece
of direct and indirect compensation earned by the adviser, the
financial institution and every affiliate on every single asset
that could be purchased by any retirement investor in the
country.
Well, there are thousands and thousands of different mutual
funds.
Ms. Bonamici. Of course.
Mr. Mason. Did you want to say something?
Ms. Bonamici. No. I just wanted to make sure that I have
time left.
Mr. Mason. Yes, I apologize.
Ms. Bonamici. And thank you for pointing out that.
Mr. Mason. But that is one of, say, 10 things.
Ms. Bonamici. I am going to reclaim my time for some other
questions.
Mr. Mason. Go ahead.
Ms. Bonamici. That was very helpful.
And Mr. Haley, you brought up the contract before the
conversation. But that is not what Secretary Perez said.
So Mr. Kelleher, you heard the discussion both with the
Secretary and the discussion here today about this problem that
has been raised or this issue that has been raised about the
best-interest contract exemption would require signed contracts
before any conversations. But that isn't what the Secretary
said.
So it seems like we are talking about two different things
here.
Mr. Kelleher. Well, I mean, first, let's look at the facts.
In 2010 the Department of Labor proposed a rule and the
industry says we are for best-interest standards and they
killed the rule. And here we are again.
What they said at the time is the rule is unworkable,
withdraw it, consider our input and re-propose it. The
Department of Labor did exactly, and I could give you the
quotes from 2010, 2011, and 2012, from the titans of the
industry who said that; so they withdrew the rule. They have
done extensive outreach, unprecedented outreach over the years
with the industry.
They have accommodated the industry. The industry said the
world will end if we can't charge commissions. So working with
the industry, the Department of Labor for years has figured out
how to accommodate that complaint.
They could have done what the U.K. did, ban commissions.
And by the way, the statement earlier about the U.K. isn't
accurate in terms of the response of the industry to that
fiduciary standard without commissions. But they have
accommodated the commission interest here. And yet,
nonetheless, the industry is against it.
So they say they are for a fiduciary standard, but they are
never actually for the one that is pending.
And it is interesting because every major labor, consumer,
investor, and senior citizen group supports this rule. And a
letter went to the chair and ranking member of this committee
today from I don't know how many, 40 or 50 of them, detailing
that support.
And you started with trust and confidence of the American
people and investors. That is what this goes to. Put their best
interests first and you will restore trust and confidence.
Ms. Bonamici. And I see my time is expired. I just wanted
to note that there are other areas where there is a fiduciary
duty that we can get this done. And if you are all in agreement
that we need to have this fiduciary standard, I don't see any
reason why we can't make this happen.
Thank you, Mr. Chairman.
Chairman Roe. Thank you for yielding.
Mr. Grothman, you are recognized.
Mr. Grothman. Sure. Well, I have two short questions, keep
it short here.
The first one--and I had another committee hearing, so
maybe I missed if you dealt with it, Mr. Harman.
I had a little discussion about an hour ago with the
Secretary as to whether or not compensation paid to people was
going to wind up on a public website. And I was citing your
testimony here and it was our testimony. Yes, this testimony
that it wouldn't be.
Could you comment on that? Or do you believe that under
this rule, you know, kind of an interesting thing, that, say,
if I worked for a brokerage firm or whatever, that someone can
get on a website and see how much I am making?
Mr. Harman. I am sorry. Could you repeat it again? I was
having a hard time hearing it.
Mr. Grothman. Okay, this is the deal.
Mr. Harman. Thank you.
Mr. Grothman. I asked a question before of the Secretary,
and I asked a question off of your expected testimony. It
appears to me in your testimony here that you are under the
belief that if this rule goes into effect you will be able to
get on a website and see how much individual people are making.
If you want to look on page 18, the website must be in machine-
readable format and include the direct and indirect
compensation payable to the firm, each individual adviser and
each individual affiliate of the firm for each asset available
the last year.
Okay, which looks to me like if I am an employee of, you
know, you name it, somebody can get on a website somewhere, has
the chance to get on a website somewhere and see I made $40,000
last year, $140,000 last year, whatever I am making.
Now, the Secretary implied that is going to be confidential
and the website is only for, I don't know, not public use.
But could you give me your opinion as to what is going on
there?
Mr. Harman. Yes, absolutely. Thank you for the question.
I guess one of the concerns about the website, my
understanding is that it would be public under BICE. But one of
the big concerns is context and information around context. I
am concerned that this will create additional confusion for
investors because they don't know necessarily how to interpret
this data and that.
Then the other thing from a performance reporting
standpoint that is concerning is every client has different
objectives. And so back to kind of benchmarking that was
mentioned earlier today, it is difficult to know one client
from the next whether that was successful or not based on the
fact that different people have different goals and different
objectives for their portfolio. And their portfolios are
managed differently to achieve those goals.
Mr. Grothman. Okay. And when I read your testimony, I take
it to mean if I am an agent for a captive industry or whatever,
somebody can get on a website, and maybe that is fine, maybe we
should all know what everybody else is making. It is just kind
of an interesting thing, the proposal is, that I can get on a
website and see that John Jones made X amount of dollars last
year. Is that the way you read that?
Mr. Harman. I do. And again, the public nature of that has
been, you know, concerning from a confidentiality standpoint.
Mr. Grothman. That is just an interesting thing.
Now, my other question will be for Dr. Reid and then we
will let you guys be.
The administration claims that advice is costing $17
billion a year. Could you elaborate one more time as to how
that figure is arrived at or whether you think it is accurate?
Mr. Reid. Both the Council of Economic Advisers and the
Department of Labor have argued based on their reading of the
academic literature that individuals in brokerage accounts are
under-performing by at least a full percentage point a year,
the Department of Labor says perhaps 2 percentage points.
This is actually a fairly easy task. You can go into the
Morningstar data, you can look and see where the assets are
holding for the types of funds that they are talking about in
their analysis, you can actually find that the assets are
concentrated in low-cost funds that outperform their
Morningstar average.
And so the claim that they do under-perform by this 1
percentage point is not based in data or in actual experience.
Mr. Grothman. Thank you.
I yield the rest of my time.
Chairman Roe. I thank the gentleman for yielding.
Mr. Sablan, you are recognized for five minutes.
Mr. Sablan. Thank you very much.
Mr. Harman, you actually got me there in your testimony.
But then the statement that investors would be under-served
because they don't really know where to go to, who is that
investor you are talking about?
Mr. Harman. Which investors am I talking about? I am
talking about lower net worth and midsize clients, midsize
investors as well. So people--
Mr. Sablan. How much wealth do they have invested?
Mr. Harman. Really, anyone with less than $50,000.
Mr. Sablan. Okay. I am just curious because I was very
pleased with the response Mr. Haley provided Ranking Member
Scott that there could be a way to work this thing out. After,
Mr. Kelleher--Mr. Kelleher, right--said that actually the
Department, this isn't the first time we have had this, I just
got into the subcommittee, but that 2010, 2011, or 2013, so
that every time--why don't the industry get together with the
Department of Labor and work something out that works for all
of us?
I mean, I don't think any one of you will say that you
don't want to be known as not having the best interests of your
client. But then why is it so difficult to get there when Mr.
Haley says that we can without actually without writing a rule
that doesn't--it makes negligible any offenses to it. I am just
curious.
I am from the Pacific islands, so I don't really know these
things. Educate me, please.
Mr. Kelleher. The way to align that would be to support a
best-interest rule. There are a lot of people running around
saying we support the best interest, we just don't want it to
be in the rule. And they don't say it that way, and that is the
problem.
You know, today there are 90,000 certified financial
planners, there are 10,500 registered investment advisers with
the SEC representing 200,000 individuals, all of whom provide
services in the clients' best interests.
The sky hasn't fallen. They are making plenty of money.
They are doing right by their clients. And it proves, the
market proves that is not only possible for the client to
thrive, but for the business to thrive.
And we also have these new entrants that were mentioned
earlier. Rebalance IRA, Wealthfront, Personal Capital, their
entry is coming in from small businesses across the country,
technology and otherwise, to serve small savers, small
businesses as well as large savers and large retirement
accounts with a fiduciary duty.
The only question is, is the rule going to put the clients'
interests first of the brokers' interests? That is what we are
talking about. That is the choice.
And if everybody is going to say I support the best-
interest rule for my clients, then stop saying it, step up and
support a rule that actually does it.
Five-plus years of warfare against the rule doesn't quite
coincide with the pretty words.
Mr. Sablan. But now, let me get this straight. We have
spent five years trying to work out this rule. And whose fault
is it that it isn't yet a rule?
Mr. Kelleher. Well, I think if you look at what--the
Department of Labor has undertaken unprecedented outreach.
Better Markets has participated outreach. Better Markets has
participated in the rulemaking process across--
Mr. Sablan. I have another question, Mr. Kelleher. This is
just out of curiosity because, again, I need an education to
catch up on all of this. How much exactly is it costing the
industry for government oversight over this investment? How
much is the cost of government oversight to the industry that
they have to get their lawyers paid so that they could make
sure everybody is following the rules?
Mr. Kelleher. You mean how much today?
Mr. Sablan. Yes. Say, is there an average on industry
standards, say, 10 percent, 15, whatever?
Mr. Kelleher. I don't know if anybody has put a number on
it. But I think everybody has conceded that it is a very highly
regulated industry, and I think everybody concedes it is
appropriate to be a highly regulated industry when you are
dealing with people's retirement money--
Mr. Sablan. Oh, sure.
Mr. Kelleher.--which isn't only tax-advantaged, but
incredibly hard-earned.
Mr. Sablan. Yes.
Mr. Kelleher. And so it is appropriate that we have for
everybody the right rules and the right laws in place so that
the money from hardworking Americans is treated appropriately
in their best interests where they get the best return, lowest
cost, best outcome.
Mr. Sablan. All right. And again, you know, I am just
afraid that Mr. Haley's agent will close shop if he is
concerned about, yes, the additional cost for defaulting--
Mr. Kelleher. There is also a cost, by the way, of no
oversight. A rule that puts the brokers' interests first is
costing the American people a fortune.
Mr. Sablan. I understand that.
Mr. Kelleher. So there is actually a cost for poor
regulation or no regulation.
Mr. Sablan. I understand. I think the five-years spent, you
know, time spent on trying to come to an agreement and we have
no agreement. So I agree.
I yield back.
Chairman Roe. Thank the gentleman for yielding.
We have mentioned, I will finish the questions briefly, we
have mentioned the word ``trust'' and the secretary did. And
all due respect to the Secretary, who do I trust more, the
Department of Labor or my financial adviser? And I can
guarantee you it is my financial adviser who is looking after
my interests a lot more because he just texted me during this
hearing.
[Laughter.]
I just got a text from him. So I do, and I sincerely mean
that. I have great trust in him, and I have a great
relationship, a 20-year relationship with my financial adviser.
And we will continue to do so as long as he is doing that
business, and I am doing it.
I think a few of the things I think we agreed on today, and
I think this has been a great hearing by the way, from the
Secretary is the best-interest standards and to update the
rules that will make it, and Mr. Sablan mentioned this, about
making this happen. I think this can happen, I really do. I
think everybody here at this hearing thinks it needs to be
updated.
It ought to be done, but it also ought to accommodate
without the onerous--I mean, look, do you ever read, that is
where the details are, not the little one sentence, but this is
where the rubber hits the road. Believe me, as a doctor having
to deal with Medicare--and by the way, I wish the Secretary
would ask Medicare to be as transparent as he is asking these
financial people to be. That would help me a lot in my work.
But I think that I heard Mr. Carter say it, I have heard
others say it here is that we don't want this to get so
unmanageable because somebody pays the bills here and it is
always me, the client, that does that.
And I want Mr. Harman to answer this question if he would,
just a second ago. And he mentioned a minute ago that confused
me a little bit. In the new rule, it says you have to predict
future earnings. And every time I have ever picked up any
mutual fund or looked at it at all--in full disclosure,
Fidelity has some of my retirement account, I will make that
public--past performance doesn't predict future returns. I hear
it every time.
Is that a conflict? Or how do you reconcile those two
things?
Mr. Harman. It is a tremendous conflict, I think. And you
mentioned trust in your statement here. And that has the
potential to significantly undermine trust, simply that alone
by putting that in there. Because as we know, things are not
static, they don't always end up 10 years from now exactly as
we might think they would today, even though we are making the
best recommendation for the client at that point. So that is
problematic.
And it is problematic that it crosses current FINRA and SEC
regulations as well.
Chairman Roe. I think it absolutely does. I think you
cannot now go out and my adviser can't go and say, yes, I am
going to guarantee you or you are going to probably make this
much money. He has never said that, in my life I have never
heard him say that.
The market is volatile. We certainly saw it in--look, I
have been through the recession of 1981, through the later
recession of the later 1980s, in 2000, and it will come again.
This is not the last recession we will have. Hopefully it won't
be as bad.
Let me ask one other question. Is it true that higher-cost
plans, Dr. Reid, always yield a lower cost?
And Mr. Kelleher mentioned a minute ago about it happened
to be a family member's IRA that was a managed account like
that. Look, I don't care if I pay 3 percent on a load if I make
12 and my net is 9. I am looking at my net return and not just
what I pay in a fee because I may get a better return, I may
not.
Is there data out there in the industry to show that?
Mr. Reid. So Mr. Chairman, I think this obsessive focus on
fees alone, and even a fiduciary standard doesn't say that it
has to be the lowest-cost fund, can really be blinding so much
so that the train can leave the station and you are not on it.
And what do I mean by that? What I mean is that investors
who were not properly allocated to the market, who didn't have
enough equity exposure completely missed the market run-up
since 2008.
We have been in the most vigorous, bull market in the stock
market probably in the last 100 years, and yet as one of the
panelists has indicated, 45 percent of government employees in
the TSP are in the G Fund, which basically makes just enough to
get above inflation.
That is evidence, when you don't get help and advice, how
much you can lose out. It is a cheap alternative, it is low
cost, but they missed the train.
Chairman Roe. But someone just mentioned briefly the
website. That was confusing me what the Secretary said. Who
would have access to this website with all this data? Would you
have to sign the contract? Is that how we would get access to
the website? How does that work? Because you heard him say
that.
Mr. Mason. For example, every participant in an entire
plan, so if you have 100,000 participants in a plan, every
single participant would have access to the information that is
stored.
Chairman Roe. In that website.
Well, I want to thank you all very much for your
participation. You have been very patient sitting through a
long first panel.
And I will yield to Ms. Bonamici for closing remarks.
Ms. Bonamici. Thank you very much, Mr. Chairman.
And first, I would like to enter into the record the letter
referenced by Mr. Kelleher dated June 16, 2015, from various
organizations in support of the rule. I would like to enter
that into the record.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Roe. Without objection, so ordered.
Ms. Bonamici. Thank you very much, Mr. Chairman.
And I am going to give the opening statement on behalf of
the Ranking Member. But I want to say that I am an optimistic
person. And when I hear everyone has the same goal, the best-
interest fiduciary standard, and there are some definitional
differences about how we get there, I am confident that we can
get this done. And I get to say this because I also serve on
the Science Committee, it is not rocket science to get this
done.
[Laughter.]
So we are a long way, 40 years away from the days when most
people had traditional pensions to rely on in retirement. This
shift away from defined benefit plans has exacerbated
retirement insecurity in this country. And the proposal we
discussed at length today modernizes this outdated fiduciary
rule that was developed when the defined benefit plans were the
standard, which is certainly not like today.
At the end of 2014, $7.4 trillion in U.S. retirement assets
could be found invested in IRAs. Much of that had been in
ERISA-covered plans before being rolled over. And $6.8 trillion
could be found in private, employer-sponsored, defined
contribution plans like a 401(k).
Individuals with little to no financial expertise must
determine their own retirement strategy as well as make
complicated investment decisions in order to prepare for
retirement.
Too many middle class and working families are worried
about saving enough for retirement, and it is critical that
when these individuals seek advice from professionals they
receive recommendations and advice that is in their best
interest rather than conflicted advice that is in the best
financial interest of their adviser.
Unfortunately, conflicted advice has been permitted under
the standard we have been operating under for the past 40
years.
The Department's proposal, which they have been working on
for years with input from the industry, is reasonable and
affords participants the access to all the necessary
information available to help them make informed retirement
decisions.
We look forward to continuing to work with the Department
to ensure that the final rule appropriately addresses concerns.
Thank you very much to the witnesses for such an
enlightening hearing.
Chairman Roe. Thank you very much for yielding.
And in conclusion, we do have a situation in America today
where not enough people save for retirement. We know that.
Twenty-nine percent of people over 55 don't have any savings at
all. That is frightening when you think about it. It means they
are going to have to--and life expectancies are going up and up
and up, so it puts great strain on social services.
So we need to, and I believe this, the day I started
practice we had a pension plan for every employee that was in
our practice, and we still do to this day. And many of you, and
certainly, Mr. Harman, you do have individuals, small
investors.
Fidelity is a huge company; you are a smaller business, of
course. But you provide a tremendous service for people and
advice that help people who are not sophisticated investors
gain knowledge about how to invest their money and how to save
for the future and give them a lot of confidence about how they
are going to live when they get older.
I can assure you, having a mother that will be in assisted
living right now, and knowing those costs and so forth, you
can't save enough money. I don't know if anybody ever said they
have saved too much money. And that is obviously a challenge
that we all have.
We have a big problem that we worked through on multi-
employer pension plans. You remember, that is still a serious
problem we haven't completely solved. So saving for our future
and for our retirement is a national problem. We need to make
that easier, not harder.
I certainly heard very encouraging things here today from
the secretary and from industry about the best-interest
fiduciary standard. I think all of you support that. No one
supports conflicted advice, no one that I know of does.
So I think we need to hopefully work this out. And the BIC
exemption is not workable. I mean, I have tried to sit down and
figure it out, and I have already heard from Mr. Haley--again,
full disclosure--our small business isn't going to be able to
get advice because Fidelity is our brokerage service for our
business.
And I just realized when he said what he said that we won't
be able to get advice from Fidelity with this new rule. That is
ridiculous for a group that is trying to do the right thing by
employees and its folks that work for them.
So I thank you all. This was a great hearing.
[An additional submission by Secretary Perez follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[Questions for the record and there responses follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
If there are no further comments, the hearing is adjourned.
[Whereupon, at 1:21 p.m., the Subcommittee was adjourned.]