[Senate Hearing 114-665]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 114-665




                               BEFORE THE


                                 OF THE

                          LABOR, AND PENSIONS

                          UNITED STATES SENATE


                             FIRST SESSION


                         FAMILIES AND RETIREES


                             JULY 21, 2015


 Printed for the use of the Committee on Health, Education, Labor, and 


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                  LAMAR ALEXANDER, Tennessee, Chairman

MICHAEL B. ENZI, Wyoming		PATTY MURRAY, Washington
RAND PAUL, Kentucky			ROBERT P. CASEY, JR., Pennsylvania
TIM SCOTT, South Carolina		TAMMY BALDWIN, Wisconsin
BILL CASSIDY, M.D., Louisiana

               David P. Cleary, Republican Staff Director

         Lindsey Ward Seidman, Republican Deputy Staff Director

                  Evan Schatz, Minority Staff Director

              John Righter, Minority Deputy Staff Director


            Subcommittee on Employment and Workplace Safety

                   JOHNNY ISAKSON, Georgia, Chairman

RAND PAUL, Kentucky                  AL FRANKEN, Minnesota
TIM SCOTT, South Carolina            ROBERT P. CASEY, JR. Pennsylvania
MARK KIRK, Illinois                  SHELDON WHITEHOUSE, Rhode Island
PAT ROBERTS, Kansas                  TAMMY BALDWIN ,Wisconsin
BILL CASSIDY, M.D., Louisiana        PATTY MURRAY, Washngton (ex 
LAMAR ALEXANDER, Tennessee (ex       officio)

                Tommy Nguyen, Republican Staff Director

                 Amanda Perez, Minority Staff Director


                            C O N T E N T S



                         TUESDAY, JULY 21, 2015


                           Committee Members

Isakson, Hon. Johnny, Chairman, Subcommittee on Employment and 
  Workplace Safety, opening statement............................     1
Franken, Hon. Al, a U.S. Senator from the State of Minnesota, 
  opening statement..............................................     3
Scott, Hon. Tim, a U.S. Senator from the State of South Carolina.    14
Murray, Hon. Patty, a U.S. Senator from the State of Washington..    16
Baldwin, Hon. Tammy, a U.S. Senator from the State of Wisconsin..    18
Warren, Hon. Elizabeth, a U.S. Senator from the State of 
  Massachusetts..................................................    19
Cassidy, Hon. Bill, a U.S. Senator from the State of Louisiana...    21
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode 
  Island.........................................................    23
Roberts, Hon. Pat, a U.S. Senator from the State of Kansas.......    24

                            Witness--Panel I

Perez, Hon. Thomas, Secretary of Labor, Washington, DC...........     4
    Prepared statement...........................................     7

                          Witnesses--Panel II

Litan, Robert, Economist and Attorney, Wichita, KS...............    25
    Prepared statement...........................................    27
Schneider, Peter, President, Primerica Inc., Duluth, GA..........    29
    Prepared statement...........................................    30
Miller, Darlene, President and CEO, PERMAC Industries, 
  Burnsville, MN.................................................    35
    Prepared statement...........................................    37
Puritz, Scott, Managing Director, Rebalance IRA, Bethesda, MD....    39
    Prepared statement...........................................    41

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    DOL Fact Sheet--Employee Benefits Security Administration, 
      U.S. Department of Labor...................................    49
    Financial Engines............................................    53
    Huffington Post article--Senate Republicanns Think Herbalife 
      is a Good Model for Your Retirement Savings................    55
    Wall Street Journal article--Creative Destruction at a Broker 
      Near You...................................................    56
    Save Our Retirement, letter..................................    58
    Response by Scott Puritz to questions of:
        Senator Isakson..........................................    59
        Senator Franken..........................................    59




                         TUESDAY, JULY 21, 2015

                                       U.S. Senate,
           Subcommittee on Employment and Workplace Safety,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:35 p.m., in 
room SD-430, Dirksen Senate Office Building, Hon. Johnny 
Isakson, chairman of the subcommittee, presiding.
    Present: Senators Isakson, Scott, Cassidy, Roberts, Murray, 
Casey, Franken, Baldwin, Murphy, Warren, and Whitehouse.

                  Opening Statement of Senator Isakson

    Senator Isakson. We welcome all our visitors. We welcome 
our Secretary of Labor--Secretary Perez, thank you--our other 
panelists who will testify in a little bit and, certainly, I'm 
always glad to have Ranking Member Franken here. He keeps me 
straight all the time. If not straight, at least he keeps me 
    Senator Franken. You keep me laughing, too. Is that the 
proper thing to say?
    Senator Isakson. That sounds good.
    Senator Franken. We're good friends. We are. And you're the 
co-sponsor of my very first bill.
    Senator Isakson. That's right, which you mentioned on 
television, which I really appreciate.
    Senator Franken. You're very welcome.
    Senator Isakson. It was the second comment I didn't like 
very much, but we'll talk about that later.
    Senator Franken. We're going to not rehash our personal 
history here.
    We're going to go right to the hearing, right?
    Senator Isakson. Only good friends talk like this to each 
    Senator Franken. Yes.
    Senator Isakson. Let me welcome all of you, and I'll start 
with an opening statement and then turn it over to Senator 
Franken for his statement.
    A comfortable retirement is part of the American Dream. 
Unfortunately, the fine print included in hundreds of pages of 
Department of Labor regulation that seeks to redefine a single 
word, fiduciary, would deny millions of Americans the chance to 
plan for one. The new rule would limit access to investment 
advice for the families who need it most and, in my opinion, is 
a solution in search of a problem.
    By way of example, in terms of that one word being defined 
by pages of regulation, that's the regulation and the comments 
by the Department of Labor on the fiduciary rule change, just 
to give you some idea of how much paperwork it took to explain 
    Senator Franken. Is that like a gift for me?
    Senator Isakson. I'm going to let you take that home and 
read it tonight or do whatever else you'd like to do with it.
    The regulation intentions are commendable to ensure that 
low- and middle-income families receive the same quality of 
advice about their investments as wealthy people do. Under the 
proposal, people who provide investment advice on retirement 
savings must act in the best interest of the investors or 
forfeit their fees.
    Under the new rule, providers of retirement savings 
vehicles such as IRAs and 401(k)s must either enter into a 
contract that says it will act as a fiduciary and benefit only 
the investor. The problem is that the regulations that govern 
fiduciary advisors would severely limit products available for 
retirement accounts and increase fees so much so that low- and 
moderate-income people would be more low-income, more moderate-
income, and less informed.
    The rule also requires disclosure of more information than 
is reasonable or often even at times impossible to provide. 
Advisors must estimate the cost, level of fees the investor is 
to pay over multiple years. Because fees often fluctuate, as do 
rates and return, such estimates are inevitably wrong. For that 
reason, they are considered misleading and actually banned by 
the Securities and Exchange Commission.
    I might insert here that in my private life, for 33 years, 
I dealt with Regulation Z in terms of disclosure of real estate 
and mortgage information. Expressing annual percentage rates 
and other rates of return at any one point in time can by its 
very nature be wrong the next day because of changes in 
markets, and you can penalize people for something that was no 
fault of their own.
    The regulation would also restrict IRA investors to a list 
of products that the Department of Labor deems appropriate. Why 
the Labor Department should meddle in investment decisions 
defies all logic. Yet there is a one-size-fits-all open 
approach that would prevent investors from diversifying in ways 
to protect from the downside risk.
    The hundreds of investment options that retirement savers 
now have would be reduced to a mere handful for most Americans. 
This seems entirely counterintuitive to our public policy goals 
of increasing retirement plan participation for all citizens of 
our country.
    Worst, because investors must have a contract with their 
advisors to receive recommendations about what to put in their 
investment accounts, the millions of existing IRAs and 401(k)s 
would, in effect, be blocked from getting ongoing advice 
because those contracts weren't in place when the accounts were 
created. Millions of people will receive letters from the 
brokerage firm telling them they will no longer be able to get 
personalized assistance.
    By one estimate, a third of the financial representatives 
would be forced to leave the business because they couldn't be 
properly licensed. Having a personal representative matters. 
According to a 2012 study, three-quarters of non-retired 
consumers who work with an advisor contribute to a retirement 
plan or an IRA, while fewer than half of the consumers that 
don't have advisors save for retirement.
    In other words, many working families will not be able to 
get the advice they need to feel comfortable about the 
decisions that are made. Studies have shown that losing 
personal assistance for retirement savings could reduce by as 
much as 40 percent the amount of savings saved by low- and 
moderate-income people.
    As I told Secretary Perez yesterday on the phone, I am 
interested in seeing to it that people get quality advice, that 
those that advise them are responsible and accountable for that 
advice, and that we do everything we can to improve the access 
and the amount of savings America's low- and moderate-income 
families have.
    The matter is not the goal. The matter is how you get to 
the goal and how you define it. In my judgment, that many pages 
of regulation and that much explanation of a single goal is 
entirely too much and too restrictive on the access to free 
advice that these people need to get.
    With that said, I'll turn it over to our Ranking Member, 
Senator Franken from Minnesota.

                  Opening Statement 0f Senator Franken

    Senator Franken. Thank you, Senator Isakson. This is my 
first hearing as Ranking Member of the Employment and Workplace 
Safety Subcommittee, and I look forward to working with my 
friend, Chairman Isakson, and members of the committee on the 
important role the subcommittee plays with jurisdiction over a 
variety of employment issues, including workforce education and 
training, the health and safety of America's workforce, wage 
and hour laws, and workplace flexibility.
    In today's hearing, we are discussing another very 
important issue, protecting America's workers' retirement 
savings, and, in particular, a review of the Department of 
Labor's proposed rule to address conflicts of interest in the 
retirement advice that Americans receive when managing their 
retirement nest eggs.
    We have read the headlines time and time again that 
Americans are not saving enough for retirement. I have heard it 
many times from hardworking Minnesotans about how hard they're 
working just to keep up and provide for their families, let 
alone save for retirement.
    Saving for retirement is hard, and investing can be 
intimidating for those without any experience, leaving many to 
rely on advisors to help guide them through their retirement 
planning. Most advisors and brokers put the interest of their 
clients first, and I have heard from a number of them who have 
sent me letters recently in support of the Department of 
Labor's proposed rule, including Charlie--I'm going to 
mispronounce Charlie's name, but it's something like Bolognino. 
I think it means meat sauce in some language.
    He is of Side-by-Side Financial Planning in Plymouth, MN. 
The best meat sauce comes from the western suburbs of 
    Charles Buck of Buck Financial Advisors in Woodbury, MN, 
and other Minnesota financial advisors have gotten hold of me 
in support of this rule. We will also hear from Scott Puritz 
later today. He is the managing director of Rebalance IRA, and 
he will be testifying. Mr. Puritz offers his clients asset 
management and custom investment portfolios for IRAs and offers 
one-on-one consultation, all while embracing the fiduciary 
standard, and he charges some of the lowest fees in the 
    There are also those who charge much higher fees and 
sometimes even lower returns for retirees. When that happens, 
it's hard for working Americans who are planning for retirement 
and they pay the price. These hardworking people shouldn't have 
to worry about the fact that some advisors don't have their 
best interest in mind. I think we can all agree to that.
    The Department of Labor's proposed Conflict of Interest 
rule seeks to address this issue. Many groups are supportive of 
DOL's role, but there are also those that believe the rule will 
result in unintended consequences. That's what this hearing is 
about, and that's why it's so important.
    This is a process. We will hear from a range of 
perspectives today to help us understand the benefits and 
shortcomings of the proposed rule. That's why I was a little 
taken aback by the title of today's hearing, which is 
Restricting Advice and Education: DOL's Unworkable Investment 
Proposal for American Families and Retirees.
    If I had been naming it, I could have named it DOL's 
Fiduciary Proposal: What a Great Rule. I don't think that would 
have helped much, right? No, of course not.
    I think the department's intent with the proposed rule is 
very clear: to help American investors keep more of their hard-
earned money for retirement. As the saying goes, ``the devil is 
in the details'', and at 400-plus pages, gift wrapped 
beautifully, there are many details in this rule. I look 
forward to hearing from Secretary Perez to better understand 
how this proposed rule will work and from other witnesses on 
how we can make this rule even better.
    Thank you, Mr. Chairman.
    Senator Isakson. Thank you, Senator Franken.
    We'll now turn to Secretary Perez of the Department of 
    Secretary Perez.


    Secretary Perez. Thank you, Mr. Chairman.
    Senator Isakson. If you could hold your remarks to about 5 
minutes, we'd appreciate it.
    Secretary Perez. I'll do my best.
    Senator Isakson. Thank you.
    Secretary Perez. Thank you, Mr. Chairman, Ranking Member 
Franken, and members of the committee. It's an honor to be here 
with you.
    I want to start by talking about a real person, because 
behind every regulation or proposed regulation is a real 
person. Merlin Toffel was a Navy veteran and an electrician. He 
did everything right. He and his wife, Elaine, raised four kids 
in suburban Chicago. They built a solid middle class life. They 
saved their money. They built up an impressive portfolio with 
    When Merlin was stricken with Alzheimer's and could no 
longer manage their finances, Elaine made an appointment at the 
local retail bank. They had used this bank for years. They 
trusted them. The bank's investment broker told her to 
liquidate the Vanguard portfolio and sold them a very complex 
variable annuity to the tune of $650,000. Merlin was something 
like 75 or 78 years old at the time of the sale of this 
variable annuity.
    Elaine trusted this advice. She thought it was in their 
best interest. The annual fee on that variable annuity--the 
annual fee was $26,000, and if the Toffels needed to access the 
money right away, a 7 percent surrender charge would cost them 
more than $45,000. In the end, the broker's conflicted advice 
cost a hardworking family more than $50,000.
    This story is tragic but not unique. It's also not illegal, 
because someone concluded that the advice was suitable. 
Conservative estimates by the Council of Economic Advisors 
place the cost of conflicted advice at more than $17 billion 
    ERISA is over four decades old. In my parents' generation, 
when you retired, you got a pension, a pin, a party, and that 
pension was a defined benefit pension. Today, we have an $11 
trillion market of defined contributions of 401(k)s and IRAs, 
$11 trillion.
    Times have changed. Consumers now have to make critical 
decisions about how to invest these funds that they have so 
hard earned. Three of the most important decisions that people 
now make are medical, legal, and financial. When you go to a 
doctor or a lawyer, they have a medical and legal obligation to 
put your best interest first.
    The Labor Department's Conflict of Interest rulemaking is 
about making sure that the same set of rules--best interest of 
the consumer--apply to when you are getting help in retirement. 
Most people assume, actually, that the standard already exists, 
and that is, indeed, the case for many advisors, like the one 
my wife and I use, who is a fiduciary, and he does so, and he 
puts our best interest first. The majority who operate in this 
space are under no such commitment, although in many cases 
their marketing actually suggests that they are.
    It's important to make one thing clear, and Senator Franken 
alluded to this. While there are undeniably some bad apples, 
this is not a case about bad people doing bad things. The 
majority of folks in this space are trying to do the right 
thing every day. The nub of the problem is good people who are 
operating within a structurally flawed system, a market that 
sees personal financial interests of the advisor and the firm 
all too frequently misaligned from the best interest of the 
customer. The result is what we saw happen to the Toffels.
    Our goal in this proposed rulemaking is straightforward, to 
align the best interest of the customer with those of the 
advisor and the firm. This proposed rule has been the product 
of a significant amount of outreach to a wide array of 
    I appreciate the support we've gotten from so many in the 
industry, people like Brian Moynihan, the CEO of Bank of 
America, who said, ``We believe that doing what is in the best 
interest for our customers is absolutely the right thing to 
do.'' Jack Bogle, the founder of Vanguard, is a very strong 
supporter of this rule. We'll hear from a witness shortly who 
plays in this space every day as a fiduciary working with small 
investors who tells you when you put your customers' interests 
first, it's great for your customers, and it's great for 
business, addition.
    I also invite you to look at the transcript of a recent 
hearing we had in the House, because there is a really 
interesting thing happening right now. The conversation is 
shifting from whether to have a best interest standard to 
ensuring that a best interest standard can be effectively 
implemented. I'm heartened by that shift. We welcome any and 
all suggestions on how to improve the proposed rule to ensure 
that it can be effectively implemented.
    We've heard and understand concerns that have been raised 
about issues, such as point of sale disclosure, data retention, 
and the mechanics of implementing the best interest standard. 
As long as we don't lose sight of our north star in 
enforceable, best interest commitment, we are very flexible on 
the question of how to get this work done. This is about 
providing guard rails, not straight jackets.
    It's important to remember as we go through this rulemaking 
that a substantial subset of the advisors already operate under 
a fiduciary model. They serve a wide array of customers, 
including small businesses, small investors, and they do it 
well. We know that it can be done, because it is already being 
done by so many businesses.
    A number of folks have raised concerns that the proposed 
rule will shut out the small saver from investment advice. 
Entities such as the Consumer Federation of America, entities 
such as AARP--they take a back seat to no one, and they're 
concerned about small investors, and they strongly support this 
    We've consulted with several profitable firms whose 
business model is all about working with the little guy. There 
was an investment firm out in Palo Alto called Wealthfront. 
They cite their success as,

        ``living proof that not only is it possible to provide 
        fiduciary service at low cost to small investors 
        nationwide, but the market greatly rewards this 

    When I talk to firms like this and tell them about the 
argument on the other side, that our rulemaking will make it 
impossible to serve the small saver, the most frequent advice I 
get is ``Give them my phone number, give them my email, because 
you know what, I'll take their business any day of the week.'' 
I know that the industry can adapt to serve this $11 trillion 
market, and I'm confident that we can work with them.
    We've reached out, in addition, to small savers, to small 
businesses who want to ensure that their employees have access 
to retirement plans so that they can recruit the best and the 
brightest. Our proposed rule has a number of safeguards and 
safety valves so that they can access retirement plan options 
for their employees.
    As Kelly Conklin, a small business owner from New Jersey, 
told us,

          ``I am all for this proposal. I don't have a big firm 
        with our own in-house financial management team that 
        can advise me. I want the financial advisors I work 
        with to be required to represent my interests.''

    That's precisely what we're trying to do, build a big 
table, invite everyone up. I believe one of the most important 
things you can do when you're doing rulemaking is build a big 
table, listen, and have a healthy dose of humility. That has 
been our approach: humility, good faith, an open mind, and a 
keen ear.
    We know our destination and enforceable best interest 
standard. It's in the line of Ronald Reagan--trust but verify. 
Your marketing material says that you look out for your 
customers' best interests. This standard is memorializing what 
is in the marketing materials.
    We're open to different routes to getting to that 
enforceable best interest standard, and we look forward to 
continuing to hear from as many voices as possible. We've 
extended the comment period. We're convening 3 days of public 
hearings next month, and then we'll reopen comment after we 
publish the transcript of those hearings. We look forward to 
the engagement.
    We have gotten so much good feedback from so many 
businesses who have come in with a get-to-yes attitude. They 
have challenges, they have questions, they have concerns, but 
they have a get-to-yes attitude, because they recognize, like 
Jack Bogle said, that when you put your customers first, it's 
great for your customer, and it is, indeed, great for business.
    This is about middle class security, and one of the pillars 
of middle class security is retirement security. I look forward 
to working with this committee and with all the stakeholders to 
continue the process of producing a rule that will work for 
American savers and will work for American business and will 
work for all stakeholders.
    Mr. Chairman, thank you for your time.
    [The prepared statement of Secretary Perez follows:]
                   Prepared Statement of Thomas Perez
    Thank you for the invitation to appear before the subcommittee to 
speak about the Department's proposal to protect workers from conflicts 
of interest in retirement investment advice. As this subcommittee 
explores the issues facing America's workers, I'm pleased to have the 
chance to discuss this rulemaking, and hope that we can continue to 
engage in a productive dialog. We believe that we have proposed a 
reasonable, middle-ground approach that is responsive to our extensive 
outreach and feedback. It is grounded in a basic principle--that 
investment advisers should act in their clients' best interest not 
their own. The proposal's 90-day comment period closes at the end of 
today, and will be followed by public hearings that begin August 10th. 
The comment period will reopen on the day of the hearing and remain 
open until 14 days after the hearing transcript is published--a process 
that we anticipate will provide an additional 30 to 45 days of public 
comment. I want to assure all stakeholders, including Congress, that 
the Department is appreciative of the comments received to date, which 
have already begun to sharpen our thinking about potential changes so 
that the proposal accomplishes its goals in the simplest, most 
practical way for all concerned.
    Retirement security is a fundamental pillar of the middle class. We 
must ensure that Americans who work hard and save responsibly for 
retirement are getting a fair share of the returns on those savings. 
This subcommittee knows too well that there is a retirement crisis in 
America and that not enough Americans are saving for retirement. I'm 
deeply concerned that even if you've done the right thing, worked hard, 
and saved what you could, you could end up in a situation where you do 
not have what you need for retirement simply because your adviser isn't 
required to put your interests first. The majority of advisers already 
does the right thing and serves the interests of clients first, but 
most Americans do not have room for error and cannot afford to invest 
in products with unnecessarily high fees or low returns that benefit 
their advisers but do not meet their own needs.
    Throughout my career, I've seen over and over again that making the 
right financial decisions is critical to a person's life and future, 
but that far too often, people don't have the information and tools 
they need to make the best decisions. When I was in State government 
and at the Justice Department, I saw firsthand how the foreclosure 
crisis turned the American Dream into a nightmare for millions of 
families; I saw how it turned thriving communities into decaying 
    The crisis was a function of inadequate regulation and 
irresponsible, sometimes predatory, lending practices. But it was also 
a stark reminder of how little so many of us understand the biggest 
financial decisions we make, and how we so often have to rely on what 
we are told by professionals, and to trust that they're giving us the 
best information.
    The biggest decisions we're faced with fall into one of three 
categories: medical, legal or financial. Most people know that lawyers 
and doctors have an obligation to look out for what's best for you. 
When you go to a doctor, you expect to get advice that's in your best 
interest. If you have cancer, you don't want your doctor telling you 
just what's ``suitable'' for you. You need your doctor to tell you 
what's best for you. When you hire an attorney, that attorney is 
legally bound to work in your best interest.
    And most people assume the same is true for professionals who 
provide financial advice. You should expect that when you are relying 
on someone to provide retirement investment advice, they are going to 
tell you what is best for you, not what earns the most money for them. 
But in reality, conflicts of interest and hidden fees too often result 
in bad advice that is not in our best interests.
    There are many advisers who work every day to do right by their 
clients. Some financial advisers commit to serve your best interests. 
But others operate under no such commitment, and there's nothing 
stopping them from getting backdoor payments at their client's expense. 
The corrosive power of fine print and buried fees can eat away like a 
chronic illness at a person's savings.
    An analysis by the Council of Economic Advisers concluded that this 
kind of conflicted advice leads to losses totaling about $17 billion 
every year for IRA investors. Losses due to conflicts of interest, on 
average, reduce returns for affected savers by about 1 percentage point 
per year. Over 35 years of saving, this could reduce savings by more 
than a quarter. And in many cases, the affected consumers don't even 
know it is happening. The lack of rules of the road is confusing, it 
creates an un-level playing field, and it hurts working people who just 
want to be able to save enough to retire comfortably.
    When I became Labor Secretary 2 years ago I committed to slowing 
this rulemaking in order to ensure that we got it right. During that 
time, my review of the evidence has demonstrated that there is in fact 
a large problem that needs to be solved. I heard from too many hard 
working Americans whose golden years became tarnished when the savings 
they thought would carry them through retirement disappeared into high 
fees and poor performance. One of the people whose story I learned is 
named Phil, a retiree from California. In 2002, Phil was offered a 
buyout from the company where he had worked for 30 years, and he was 
presented with three choices: he could ignore the offer and keep 
working; he could take the company's pension and receive a monthly 
check of $1,500 for life; or he could take a lump sum of $355,000--
money he had earned. After talking it over with his wife, he decided to 
call a financial adviser whom the company had brought in a few years 
prior to provide some retirement advice to employees.
    That adviser came to Phil's house, and sat with them at their 
kitchen table. She encouraged Phil and his wife to take the lump sum 
and let her invest it for them. When Phil came to Washington recently 
to tell lawmakers his story, he said

          ``I will admit, being a blue-collar union employee and being 
        watched over, cared for and protected by the company and the 
        union my entire career, I was ignorant when it came to these 
        financial matters I had to deal with, and I needed professional 

    As so many of us do every day, Phil and his wife trusted the 
adviser to guide them in the right direction.
    But she didn't do what was in their best interest. Instead, she put 
Phil's money in investments that weren't appropriate for him, and she 
misled him about how much monthly income he could safely withdraw. 
Today, Phil and his wife have lost nearly all of their savings. They 
live on a strict budget and shop at thrift stores. They're at risk of 
losing the home they've lived in for more than 40 years. They won't 
have anything to leave for their kids or grandkids.
    In addition to stories like this, the Department's own economic 
analysis conservatively estimates that the proposed regulatory package 
would save investors more than $40 billion over 10 years, even if one 
focuses on just the one subset of transactions that have been the most 
studied. The real savings are likely much larger as conflicts and their 
effects are both pervasive and well-hidden.
    Even as I became more convinced of the problem, I knew that we had 
to act carefully to solve it in a way that protected people like Phil, 
but that avoided unwarranted disruption to the industry. As I assured 
this committee when I appeared before you just a couple of months ago, 
our proposal serves three main principles: (1) it updates our 
regulation to protect retirement savings in the much-changed retirement 
landscape; (2) it allows flexibility so the industry can use its 
knowledge and expertise to find the best way to serve its clients and 
continue to innovate; and (3) it meaningfully responds to the input we 
received in the extensive outreach that we have conducted. I would like 
now to show how I believe our proposed rule honors those three 
    The existing DOL rule was put in place a generation ago, in 1975, 
when most of America's workers did not have to worry about making 
decisions regarding how to invest their retirement savings. But now 
that the retirement landscape has changed, our rules have to change as 
well. When the rules were last overhauled almost 40 years ago, 
Individual Retirement Accounts had just been created and employer-based 
401(k)s did not even exist. Today, America's workers have more than $7 
trillion invested in IRAs and more than $5 trillion in 401(k)-type 
plans, which, combined, exceed the value of traditional pension 
benefits. As more baby boomers retire, more and more of them are moving 
their retirement savings from employer-sponsored plans into IRAs, 
making the protection of rollovers and IRAs increasingly important. 
Congress created and encouraged the growth of this 401(k) and IRA 
marketplace by giving those savings tax preference--as a result, under 
ERISA and the tax code, we have an obligation to ensure that those 
savings are protected.
    The proposal will close the loopholes in the 1975 DOL rule that 
today make it possible for advisers to exclude from protection the kind 
of advice relationships that are common now for 401(k) and IRA holders. 
Under the proposal's new definition, a fiduciary is a person providing 
investment advice for a fee or other compensation with respect to a 
plan or IRA if either the person doing so acknowledges he or she is 
acting as a fiduciary within the meaning of ERISA or the Internal 
Revenue Code OR the advice is provided pursuant to an agreement or 
understanding, written or verbal, that the advice is individualized to, 
or specifically directed to, the advice recipient for consideration in 
making investment or management decisions with respect to investments 
of plans or IRAs.
    To serve our second principle to allow maximum flexibility, the 
proposal that we published in April does not include detailed rules as 
to what advisers can and cannot do to serve their clients. Instead, the 
proposal has one fundamental tenet that should be unassailable--
retirement advisers should put the best interests of their clients 
above their own financial interests. This proposal is intended to 
provide guard rails, but not to be a straightjacket, because we know 
there is not a one-size-fits-all solution to putting clients' interests 
    Our proposal's second principle is best illustrated by the 
proposal's carve outs and exemptions, which allow for flexibility and 
workability. The proposed exemptions from ERISA's prohibited 
transaction rules would broadly permit firms to continue common fee and 
compensation practices, as long as they are willing to adhere to basic 
standards aimed at ensuring that their advice is in the best interest 
of their customers. Rather than create a highly prescriptive set of 
transaction-specific exemptions, the Department instead is proposing a 
set of exemptions that accommodate a wide range of current business 
practices, while minimizing the harmful impact of conflicts of interest 
on the quality of advice.
    At the heart of the proposal is the best interest contract that 
would govern the advisory relationship if the adviser is receiving 
conflict of interest fees or other payments. It is an innovative 
approach designed to respect existing business models while protecting 
consumers and leveling the playing field for impartial advisers. This 
principles-based approach obligates the adviser to honor the interests 
of the plan participant or IRA owner, while leaving the adviser and 
employing firm with the flexibility and discretion necessary to 
determine how best to satisfy these basic standards in light of the 
unique attributes of their business.
    The proposal clearly reflects our third principle--a commitment to 
being responsive to the substantial input we received from a wide range 
of stakeholders. My staff and I have met with representatives of all of 
the major financial industry groups, CEOs of big and small firms in the 
financial services industry, and representatives of employers who offer 
retirement plans to their workers. I have also met with consumer groups 
and civil rights groups who are concerned that their members are the 
ones who can least afford to see their retirement savings dissipated by 
conflicts of interest among financial advisers they rely on for 
investment advice. We have also worked extensively with colleagues 
throughout the government, including and especially the Securities and 
Exchange Commission.
    I am encouraged by the substantial and growing areas of agreement 
between the Department and the financial services industry. For 
example, there is an acknowledgment and acceptance among our 
stakeholders in the financial services sector that there are 
significant conflict of interest problems in the marketplace serving 
retirement investors. There is also a broadening consensus around the 
core elements of a solution, including: (1) an enforceable best 
interest standard, (2) a requirement that firms carefully design 
structures and procedures to mitigate conflicts, (3) adherence to the 
existing securities laws, (4) more effective disclosures to investors, 
and (5) the need for concrete steps to address fees and other revenue 
incentives that may improperly influence investment recommendations.
    We heard from numerous stakeholders, in both the industry and 
advocacy communities, that a principles-based rule would work best in 
this rapidly evolving marketplace. We responded with the best interest 
contract exemption--a completely new approach that directly addresses 
these suggestions.
    You can also see our responsiveness not just in what the rule will 
do, but also in what the proposal won't do:

     We heard that banning commissions would cause excessive 
disruption in the industry--therefore, like the prior proposal, the new 
proposal does not ban commissions or many other common payments for 
     We heard that including appraisals or valuations of stock 
held by employee stock ownership plans in this rule was too complicated 
and not a good fit--so the rule does not apply there.
     We heard that large plans with sophisticated fiduciaries 
making investment decisions need greater flexibility in dealing with 
advisers so we included a carve-out for them, commonly referred to as 
the seller's exception.
     We heard that it was important to provide retail customers 
who want to direct their own transactions with the ability to place 
orders without unnecessary process, so the rule will not apply to 
brokers who just take direct orders from customers and do not provide 
     Finally, we heard about the important role that the 
financial services industry plays in providing much-needed financial 
education. Because we value that role, the proposed rule does not limit 
access to financial education. In fact, it would expressly allow 
employers, call center employees, and other financial professionals to 
continue to provide general investment education without becoming 
fiduciaries, and extends this express allowance, historically 
applicable only in the 401(k) market, to distributions, rollovers and 
IRAs as well.

    The proposed rule and its accompanying Regulatory Impact Analysis 
includes numerous requests for comments on particular issues--more than 
any other rule that we have published while I have been Secretary. I 
think of these specific requests as an invitation to a very real 
conversation that I hope will prove to be a productive one. Our track 
record gives us credibility when I say that we are open to making real 
changes in the rule to improve it, and that's why we urge our partners 
in the industry and advocacy community to engage in a good faith dialog 
during the comment process. For example, we included in the rule some 
illustrative examples of the kinds of practices and procedures that 
firms could adopt to meet the requirements of the best interest 
contract exemption. We hope that comments from stakeholders will 
address whether these are the right examples or whether there are 
better ones.
    Many of you have raised important questions about how this may 
affect retirement savers with small balances, something we carefully 
considered while drafting. I simply don't believe the argument that 
small savers cannot be served by advice that is in their best interest, 
especially with the advent of new, technology-based and technology-
assisted models. We know that advisers can live up to a best interest 
standard and still make a living because so much of the industry 
already does just that. Every day, Americans are served by advisers 
like the certified financial planner with whom my wife and I work, who 
has embraced the best interest standard. In fact, the rule will help 
the best advice win out, because those already selling good products or 
giving good advice stand to benefit in a world where a client's best 
interest has to be put first. What I've learned through a robust and 
exhaustive outreach process is that when you put the interests of your 
customers first, it's good for your customers and it's good for 
business. Jack Bogle, the founder of Vanguard, made this concept a 
cornerstone of his business model, and he and other firms large and 
small have proven that it can be done to great success.
    We have put forth a simple proposition--the client's best interest 
should come first. So far, we have heard from some who want us to go 
further and ban all conflicts of interest and end commissions, while 
others have said that we don't need to act at all. Those comments tell 
me that we have probably found the right middle ground in providing 
greater consumer protection in a way that respects the important role 
played by investment advisers in helping the middle class achieve the 
American dream of a secure retirement. I am most heartened by the 
comments that offer suggestions on even better ways to achieve that 
objective. I hope to continue that conversation here with you.
    Thank you again for the invitation to testify.

    Senator Isakson. Thank you, Secretary Perez. We appreciate 
your attendance and your service to the country.
    If your rule was implemented as it's currently contained in 
this stack of papers here, what would have happened differently 
to Merlin Toffel and his wife with the $650,000 they cashed in 
at Vanguard and bought a variable annuity? What would your rule 
specifically have done with the $26,000 fee, which was the 
maintenance fee annually, or the 7 percent early withdrawal 
fee, or any other thing you might determine was wrong?
    Secretary Perez. Sure. What would have happened differently 
is that that person advising them would have had an obligation 
to look out for their best interest. What happens in a 
suitability standard----
    Senator Isakson. Excuse me for interrupting. That's a point 
I want to get to. I understand who they went to was a bank. Is 
that correct?
    Secretary Perez. Yes.
    Senator Isakson. Would that bank be considered--would a 
bank be considered to meet the fiduciary standard you require?
    Secretary Perez. They went to a broker dealer at a bank. A 
broker dealer has an obligation--had a suitability obligation, 
which is less--which creates part of the challenges that we 
have in this situation.
    Senator Isakson. Continue.
    Secretary Perez. The broker dealer under the proposed rule 
would have an obligation to look out for the best interest of 
the consumer. The challenge that we see and the $17 billion 
annual cost of conflicted advice is born out of the fact that 
there are multiple products that can be suitable, and that 
broker dealer is totally within his or her bounds to then take 
four or five suitable products and steer the customer to the 
product that generates more fees for him or her at the expense 
of the customer. We think that isn't right, and we think it 
should be changed.
    Senator Isakson. In your vision, how would they be able to 
remedy the situation with this broker dealer? What would have 
been the broker dealer's obligation under the fiduciary rule to 
the lady and gentleman who bought the variable annuity?
    Secretary Perez. To put the customer's best interest first.
    Senator Isakson. How do you do that? I mean, what if he 
said that was in the best interest of the customer? What 
penalty is there--what do you do to the broker dealer or the 
person offering the advice to penalize them for what you 
consider was bad advice?
    Secretary Perez. You would file a claim for excessive fees 
to recover the losses that were incurred as a result of the 
conflicted advice.
    Senator Isakson. It basically creates a cause of action for 
an individual who feels like they've been aggrieved to be 
remedied. Is that correct?
    Secretary Perez. Right. The proposed rule has a provision 
in an individual claim like this that the particular bank could 
have an arbitration clause so that they could require that if 
there's any claim that arises out of the service they provide, 
it would be resolved through arbitration. That's one of the 
proposals in the rule that's in the----
    Senator Isakson. The advisor would do that or the 
individual would call for it?
    Secretary Perez. No. The institution that is working with 
this individual could, as part of the agreement working with 
that individual, be able to include an arbitration clause. In 
other words, it says that if we have a problem, you can't go 
and file a claim in State court or Federal court. You have to 
go through arbitration.
    Senator Isakson. I understand.
    Secretary Perez. That's a proposal that is taken from--we 
spoke to a lot of other agencies that are involved in this 
issue--SEC and other regulators--and that is basically parallel 
to the procedures that are used in another sister agency.
    Senator Isakson. It's a meritorious move. You made the 
statement--you said the nub of the problem--and I wrote fast, 
so if I missed it, tell me. You said the nub of the problem is, 
``good people operating in a flawed system.'' Would you explain 
    Secretary Perez. Sure. There is a misalignment between the 
incentives that a person giving advice has and the best 
interest of the consumer. For instance, again, getting back to 
the Toffels, if you have four or five different products under 
the current suitability rule that are suitable, and the first 
product, the variable annuity, generates $26,000 a year in 
fees, and another product which would have a comparable return 
has a fraction of those fees, you have a perverse incentive to 
steer them to the product that generates the most fees.
    Again, that's totally permissible, so I'm not casting 
aspersions on the person that does it. I'm saying that that's 
not right. We can devise a system--and I underscore what I said 
in my testimony. There's a substantial number of people, 
including one of the witnesses who will come up on the next 
panel, who operate under a fiduciary model already. They've 
demonstrated that this can be done. This is being done.
    Senator Isakson. Senator Franken.
    Senator Franken. Thank you, Mr. Chairman.
    Secretary Perez, I know today is the last day of the 
official comment period, and next month a public hearing is 
scheduled followed by a second comment period. I've heard from 
stakeholders who said they are participating in this process 
and are thankful that the department has provided opportunities 
for feedback.
    Can you share with us how the department has incorporated 
this feedback in the rule that we have before us today?
    Secretary Perez. I can talk about the feedback that we have 
gotten. We haven't made any decisions yet, Senator, on what to 
do because the comment period is still open, and so we want to 
take in all the comments that we get during that comment 
    What I can say to you with confidence is that we've gotten 
some great advice. Again, there have been a number of people 
who have come in from industry who have talked about how we 
agree that there should be a best interest standard. We want a 
level playing field, as you said from your testimony. We have 
concerns about things like--there are some data retention 
obligations, and we think you could do it differently.
    There's a best interest contract framework, and we have 
heard feedback from folks saying that it's clunky, and there's 
a more streamlined way to do it. We have a point of sale 
disclosure requirement, and people have said that that is not 
    What we've done in every circumstance--when someone says 
that the best interest contract is clunky, our response is, 
``Tell us how to do it better. How do we retain that north star 
of an enforceable best interest contract and do it better?'' 
That's the feedback we're getting and it's been really, really 
    Senator Franken. And you've incorporated it?
    Secretary Perez. We haven't made final decisions yet 
because we won't put out a final rule until after we've gotten 
all of the comments. I'm quite confident that if history is a 
guide, the final rule will be materially different than and 
better than the proposal, because you've got to be a good 
listener in this business. We haven't made any decisions, and 
we continue to keep that open mind.
    Senator Franken. And you're open to continued suggested 
fixes from industry and----
    Secretary Perez. Absolutely. We're not only open. We have 
affirmatively reached out for it, because there's a lot of 
folks who know a lot about this, and we want to get their 
    Senator Franken. Darlene Miller, who is from Minnesota and 
is going to be testifying in the next panel, is president of 
PERMAC Industries in Burnsville, MN, and she'll be talking 
about being a small business owner. She offers a 401(k) plan on 
roughly 30 employees.
    Darlene is helping her employees prepare for retirement and 
setting the right example for many other businesses. She has 
some concerns that the proposed rule will jeopardize her 
ability to provide this important benefit to her employees 
going forward.
    Can you assure us that you will continue to work with 
business owners like Darlene to make sure that these rules 
don't have unintended consequences?
    Secretary Perez. I welcome the opportunity. I read Ms. 
Miller's testimony, and she's a very successful business owner, 
not to mention a Minnesotan. We've spent time with small 
business owners. Small business owners--what they tell me most 
frequently is,

          ``I'm an expert at making my product, my widget. I 
        have 10 or 15 people. I don't have expertise in 
        401(k)s. I know I want to offer it, because I want to 
        attract the best and the brightest.''

    What we have done in this proposal is include a number of 
carve-outs for small businesses so that they can continue to do 
that. Actually, what we do to help protect people like Ms. 
Miller is we're changing the status quo, because the status quo 
right now--and she's had a very good experience with her 
advisor. Other's haven't.
    When you have a bad experience with your advisor, under the 
status quo, if litigation ensues, the defendant is the 
business. It's not the advisor, because under the current 
status quo, the person providing the advice is actually off the 
hook. I actually think that's kind of perverse, and I think it 
doesn't help people like Ms. Miller.
    I'd love to sit down and explain to her the carve-outs that 
help her and other small business owners, as well as why the 
status quo actually presents challenges for small business 
owners. We look forward to doing that with her and other small 
business owners.
    Senator Franken. I'm running out of time, but let me just 
end with this. Some have said this proposed rule may limit 
their ability to market their services and products to their 
clients or even limit small business employers and employees 
from access to education and financial advice. How would you 
briefly respond to that?
    Secretary Perez. Sure. We've sought to clarify the line 
between education and advice. Education is critical. The 
educated consumer is the best customer. What we've done here is 
clarify that, for instance, if you want advice on how to 
apportion your portfolio, how much is going to be in index 
funds, how much is going to be international, et cetera, 
    Senator Franken. Asset allocation.
    Secretary Perez [continuing]. Asset allocation. It's 
totally education. You can run simulations about different 
asset allocation models, and that is education. Those are the 
critical nuts and bolts of advice.
    What we've told people who have said to us, ``We feel the 
line between education and advice is either blurred or should 
be drawn differently''--again, our response is, ``How would you 
do it better, and what ideas do you have? '' We've heard 
feedback to that effect.
    We attempted to be responsive the first time around, and 
our proposed rule is quite different from the 2010 rule in the 
education-advice context. We continue to look forward to 
hearing more advice.
    Senator Franken. Thank you.
    Senator Isakson. For the benefit of the panelists who are 
going to testify in the second panel, I'm going to be very 
strict on the 5-minute rule, and I'd appreciate you holding 
your answers to a concise answer so we can get everybody's 
questions in, because we're on a definite hard stop at 4 
o'clock, and I don't want to cut our other testimonies short by 
running out of time.
    Secretary Perez. OK, Mr. Chairman.
    Senator Isakson. Senator Scott.
    Secretary Perez. Good afternoon, sir.

                       Statement of Senator Scott

    Senator Scott. Thank you, Mr. Chairman.
    Good afternoon, Secretary Perez. How are you doing?
    Secretary Perez. I'm doing well. Good to see you again.
    Senator Scott. Thank you. You, too. Over the last 80 years 
or so, the SEC has been the primary regulator of broker dealers 
and investment advisors. That is why Dodd-Frank charged the SEC 
with having significant involvement in any effort to revisit 
the standards of care that apply in retail security 
    Nevertheless, your department has now stepped--and I would 
suggest overstepped--into this area of regulation. Last month 
at a House hearing, you used the phrase, dramatic and extensive 
coordination, to describe the relationship between DOL and 
Chair White on this rulemaking. You referred to pages and pages 
of documentation about meetings and calls between DOL staff and 
Chair White's staff.
    It's one thing to coordinate, but that verb doesn't tell us 
the whole story. I realize that you cannot speak for Chair 
White. She can speak for herself. Based on your private 
coordination meetings with Chair White and the SEC, is it your 
impression that there is no daylight between your thinking and 
their thinking on this issue?
    Secretary Perez. I can't speak for Chair White on this. 
What I can certainly say is that the feedback we got not only 
from Chair White but from the career staff there has been 
extensive. We've been talking to the House Workforce Committee. 
We've given them, I think, 800 pages of documents showing the 
extent of the coordination.
    In short, I think the proposed rule is a better proposal as 
a result of our coordination. I would note that we have some 
overlap, but we are the agency that Congress has charged with 
enforcing ERISA for over 40 years.
    While we have some overlap, we have distinct jurisdictional 
responsibilities, and that's why ERISA is in our lane. We've 
gotten some good feedback from them and have incorporated it, 
but we continue to have that responsibility.
    Senator Scott. You're suggesting that because of the amount 
of coordination that you guys are on the same page, or you 
can't suggest that you're on the same page at this point?
    Secretary Perez. Again, what I've heard from Chair White--
and she has stated this, I think, a couple of times--is that 
she thinks that the best interest standard is, in fact, the 
right standard for the SEC purposes. The definition of best 
interest that we used in the proposed rule is actually taken 
from the 2011 SEC report that was prepared in the followup to 
the Dodd-Frank law, and it was done so because, again, we heard 
a lot of feedback that we should try to harmonize to the best 
extent possible the work we're doing between the DOL and the 
SEC. In fact, the key definition is taken in large measure from 
that 2011 report.
    Senator Scott. On the fee structure that you mentioned in 
the example that you gave on the person who had $600,000 or 
$700,000 and had an annual--what would be an appropriate fee 
structure for an investment with a proper risk allocation and 
asset allocation?
    Secretary Perez. I wouldn't be able to answer that question 
because I don't know all the facts about their risk tolerance 
threshold and what they had told their client. What--pardon me?
    Senator Scott. Do you have--I'm sorry. Do you have--you 
said you can't really answer that question. Do you have any 
idea that what went into the actual fee structure in the 
product that was sold was just basically a mutual fund, or was 
    Secretary Perez. No, it was a variable annuity, a very 
complex instrument.
    Senator Scott. Did it have a lifetime income that was 
factored into the fee structure?
    Secretary Perez. It did, and it was given to a person who 
was in his mid- to late-70s and who kept very copious records.
    Senator Scott. Did it have a life insurance component?
    Secretary Perez. I don't know whether it had a life 
insurance. What variable annuities try to do is help guard 
against the risks and help give you more reward. What I've seen 
in the outreach we have done is that we've had a number of 
significant challenges in the variable annuity context, and 
this family--$50,000 is what they lost.
    I believe the son-in-law came and testified because Mr. 
Toffel passed away a few months ago. There was a hearing in one 
of the committees here, and it was a sad story, and it was 
preventable, in my judgment.
    Senator Scott. Part of the challenge that I have with the 
fiduciary rule as we know it today is that I do believe that 
while we have an opportunity today to discuss the success or 
the failures of a representative, that, in most part, so many 
Americans will be more dependent on social security and less 
dependent on their own funds because they'll have fewer 
advisors in the market for them. My thought is that as we find 
this fiduciary rule going into force that you'll actually have 
fewer folks playing at the most important level of access, 
which is the minimum level of access, somewhere around the 
$100,000 to $200,000 accounts.
    I think you'll have more folks making their own investment 
decisions, hopefully on the internet, where they can have an 
advisor there. The fact of the matter is that too often, too 
many people will be making their own decisions, not based on 
expertise, not based on background, but based on what they hope 
is a good decision.
    Secretary Perez. I would respectfully disagree, sir, and 
there's a witness on the next panel who is doing a lot of work 
with small investors.
    Senator Scott. I'll be happy to continue the discussion.
    Senator Isakson. Senator Murray.

                      Statement of Senator Murray

    Senator Murray. Thank you very much, Chairman Isakson and 
Senator Franken, for holding this really important hearing.
    Thank you to the Secretary for coming to testify today, as 
well as our second panel.
    It seems to me that families have a lot to worry about 
today, and questioning the advice that they get for their 
retirement account shouldn't have to be one of those things. We 
should all be concerned that workers are losing money out of 
their pensions that they were counting on for a secure 
retirement, and making sure retirement advisors are working in 
the best interest of their customers is essential for retirees 
as well as for advisors and brokers.
    This best interest standard is what is best for our economy 
to help ensure more seniors have access to a secure retirement. 
It is important that we get this rule right, and I hope that 
all sides are going to participate in this process, submit 
their comments, and we make sure that the final rule reflects 
the important feedback that you have heard. I hope that our 
debate can really center on how to get the final language of 
this rule right.
    I know there's been an enormous amount of work put into 
this since the original version of 2010, and I've heard some 
critics say that this new rule is either worse than that or we 
didn't learn from the 2010 version. I wanted to ask you while 
you are here if you can walk us through some of the changes 
you've made since the 2010 proposal to make this one better.
    Secretary Perez. Sure. One of the critiques we heard was 
that there wasn't a sufficiently robust economic analysis. 
There is a much more robust economic analysis. One of the 
concerns that was echoed was about a provision we had to 
regulate ESOPs and appraisals, and we heard from a number of 
people that that should be removed. That has been removed from 
the proposed rule.
    We heard that we need to establish a vehicle to enforce the 
best interest requirement, and so the best interest contract 
vehicle is that vehicle. It was not there in the 2010 rule. We 
made a number of changes in response to feedback that we got 
from people about where the line between education and advice 
should be, so that's another example, Senator. There are 
others, but in the interest of time, I'll cite those four.
    Again, what we've said is give us feedback on how this 
works for you and how we can effectively implement it, and if 
there are changes that can be made, we're all ears.
    Senator Murray. Senator Franken asked you about what you 
were hearing. You cited a number of things, key data 
enrollment, point of sale discussion, a lot of things. I assume 
that you are remaining open to making appropriate and necessary 
adjustments to the rule to ensure that it both works and is 
workable as you get these comments back.
    Secretary Perez. Absolutely. Again, we've gotten great 
feedback from all stakeholders. We've had probably 50 meetings 
since the proposed rule came out with different industry 
stakeholders. I've been impressed by the get-to-yes attitude. 
They understand, as Brian Moynihan and others have said from 
the industry, that this is the right thing to do. They have 
questions and concerns about how we do it, and they've given us 
some great feedback.
    Senator Murray. I wanted to also just ask--the current rule 
was established about 40 years ago. How has the retirement 
market changed, if you could just define that for us, since 
then, that we should be conscious of?
    Secretary Perez. Right. In the Ozzie and Harriet world of 
yesteryear, again, people worked 30 years, usually at the same 
job, and at the end of it, they had their pin, their pension, 
their party. It was a defined benefit plan.
    Today, you have--the defined benefit world is shrinking. 
It's 20 percent of the market. You have between defined 
contributions, between IRAs and 401(k)'s--that's an $11 
trillion market, and you have roughly $2.8 trillion in the DB 
market. In a year from now, that disparity will continue to 
    People have to own--in the modern family universe, they 
have to own these decisions, and that's why a rule that was 
established 40 years ago when 401(k) was a rural highway in the 
Midwest and IRA was your elderly uncle--today, those are part 
of our lexicon. That's why today's rule--today's consumer 
protection framework needs to reflect today's realities.
    Senator Murray. Thank you, and thank you for all of your 
hard work on this and for your continuing work to make the rule 
work at the end of the day. I really do appreciate it.
    Mr. Chairman, I will yield back my time. I know you've got 
a second panel.
    Senator Isakson. Thank you, Senator Murray.
    Senator Baldwin.
    Senator Baldwin. Thank you, Mr. Chairman.
    Senator Isakson. Senator Cassidy, I was told you weren't 
ready. Are you ready now?
    Senator Cassidy. No. Go ahead with Senator Baldwin.
    Senator Isakson. Senator Baldwin.

                      Statement of Senator Baldwin

    Senator Baldwin. Thank you, Senator, for yielding. I want 
to thank the Chairman and Ranking Member both for convening 
today's discussion.
    Secretary, you just outlined some of the significant 
changes in the retirement marketplace. If you think about the 
ways in which it's changed since ERISA was passed in 1975, it's 
quite significant. I worry about what the future looks like for 
those trying to achieve the American Dream, living in the 
middle class, worked hard their entire life, but perhaps in the 
recession lost work, needed to dip into savings, needed to do 
so for sending their kids to college--all that would have 
otherwise gone toward retirement, in addition to any pension 
plan they had, but isn't available anymore.
    We know that workers are not saving enough for their 
retirement. We know, as you've outlined, that there has been a 
real shift from defined benefit to defined contribution plans. 
That shift puts more responsibilities on workers' shoulders to 
manage risks and to manage the decisions, oftentimes without 
having investment expertise.
    You've actually covered a lot of territory that I hope to 
cover in my questions with you, in particular, about how 
workers with smaller accounts, those who arguably need the 
retirement protection the most, will have access to high-
quality and affordable advice.
    I'm going to move to something a little bit more specific, 
given some of the proud traditions in my home State of 
Wisconsin. We actually have a real history of cooperatives and 
mutual ownership companies, so companies that are owned by----
    Secretary Perez. Northwest Mutual, for instance.
    Senator Baldwin. For instance.
    Secretary Perez. I got married 2 miles north of their 
    Senator Baldwin. I had a very good visit not too long ago. 
I would say, and I would just--while tooting the horn of my 
State--say that a lot of those traditions root back to 
Wisconsin's progressive era, when people like Senator Robert M. 
La Follette, Sr.--Fighting Bob as he's known in the State--
really laid the groundwork for the formation of a number of 
these companies.
    A lot of them have gained incredibly valuable experience 
that's sort of embedded into the products that they sell. I'd 
like you to talk about what assurances you can give to these 
sorts of companies that they will continue to be able to sell 
their own retirement products as we move forward.
    Secretary Perez. Sure. Those are sometimes referred to as 
proprietary products, and the rule is the same. Whether you're 
Northwest Mutual, which has a long and distinguished history--
and, again, I got married like a mile and a half north of their 
world headquarters in Milwaukee. The rule is, again, putting 
your customer's best interest first.
    Part of that is making sure you have policies and 
procedures in place to oversee your sales force. That's true 
whether it's Northwest Mutual. That's true whether it's the ABC 
Bank. A big part of what the best interest standard means is 
that you have those internal policies.
    For instance, you're insuring--in the case of like a 
Northwest Mutual that might want to sell a proprietary product, 
one thing I would suggest that might be a good idea to ask is 
that it ought to be a product that a reasonable independent 
person would recommend to the customer. One thing we've seen--
and I'm not saying we've seen it at Northwest Mutual--but one 
thing we've seen in the course of our outreach is that 
sometimes sale incentives become perverse. If you sell X number 
of one product, you get a trip to Hawaii. Or I've even heard 
about the trip to the Masters.
    When that person walks in to give me advice, I don't want 
them looking at me, thinking, ``You're the only thing between 
me and Hawaii with my family.'' That is when you have a 
misalignment of incentives, and that's what we're trying to 
address by making sure that we have the best interest standard 
in place.
    What the best interest standard does not mean is that you 
have to sell someone the lowest fee product, because I don't 
buy a Ugo because it's a crappy car, even though it's the 
lowest cost. That's why it's no longer on the market, I 
    The point is it's not about the lowest cost. It's all 
about--the north star is the best interest of the customer. I 
think places like Northwest Mutual or the ABC Bank or the 
broker dealer or the person who's working with the small 
business owner, like Ms. Miller--the north star is the same for 
all of them.
    Senator Isakson. Senator Warren.

                      Statement of Senator Warren

    Senator Warren. Thank you, Mr. Chairman. It is hard, really 
hard, to save for retirement, and the stats bear this out. 
Almost one-third of Americans on the edge of retirement have 
zero savings, and another third have less than a year's worth 
of income put away. That's why it is doubly important that 
every dollar that someone puts away for retirement is 
    Many Americans rely on investment advisors for guidance on 
how to save for retirement. Most of those advisors have their 
savers' best interest at heart. Not all advisors put their 
customers' interest first, and that's created a hole that's 
draining $17 billion a year in retirement savings, money that's 
going into some investment advisor's pocket instead of into the 
pockets of the people who are trying to save for retirement.
    Thankfully, that hole may soon be plugged with the new 
rules that would require brokers and advisors to put their 
customers' interests first. I have just two quick questions 
about this, Secretary Perez.
    As I understand it, several studies, in many of them, most 
Americans don't even realize that their investment advisors, 
their retirement advisors, aren't actually required to put the 
clients' interests first. They think that if they go to someone 
who advises them that their interests will be first.
    Can you explain just very briefly why it is legal today for 
advisors to steer clients into products that line the advisors' 
pockets while draining away the clients' savings?
    Secretary Perez. We have folks who are operating under the 
fiduciary model, like my--we go to a certified financial 
planner. That person is required to put our interests first.
    A very quick example: the first thing he said to me was, 
``Keep your thrift savings plan, your Federal stuff from your 
Federal employment--keep it in the thrift savings plan. I can't 
do any better.'' That's an example of putting our interests 
    Senator Warren. Even if he won't make any money from that 
    Secretary Perez. He didn't make a dime off of that. I've 
referred a number of clients to him because he looks out for 
    Senator Warren. There you go.
    Secretary Perez. That's why it's good for business. The 
person who is under a suitability standard--again, there are a 
number of products----
    Senator Warren. Let me stop you right there. I get the 
suitability standard. What I don't get is why--how did it turn 
out to be legal? What went wrong? Why is that legal, Mr. 
    Secretary Perez. It shouldn't be, and that's why we're 
trying to change it, because I think the suitability standard 
is facilitating this misalignment----
    Senator Warren. When was the last time we updated these 
    Secretary Perez. We haven't updated our laws in earnest in 
40 years.
    Senator Warren. We've got a problem with outdated laws, 
loopholes in the laws, and that's how we end up with these two 
different standards.
    Secretary Perez. Right. Again, we didn't think about IRAs 
and 401(k)s back in 1975. We were in the defined benefit world. 
This stuff just didn't matter because people had a guaranteed 
    Senator Warren. All right. You've proposed some commonsense 
rules to try to close these loopholes, to try to update the 
laws, just to make sure that all advisors are putting the 
customers' interests first. Lobbyists for some of the biggest 
financial companies and some investment advisors are fighting 
this proposal tooth and nail.
    Help me out here, Mr. Secretary. What is it they're so 
worried about?
    Secretary Perez. I'll let them speak for themselves. I can 
tell you--I guess I'll say two points. No. 1, I have been 
heartened by the remarkably constructive conversations I've had 
with so many industry stakeholders. As I said in my testimony, 
there has been an undeniable shift toward a recognition of the 
need for the best interest standard.
    Then there have been folks who have been out there since 
the outset--Merrill Lynch and B of A--and then there are others 
who are coming to us absolutely wanting to get to yes. Those 
who are perhaps in a different place--they tell me that they 
would like to think that they put their clients' best interests 
first now. My response to that is, ``There's good news, then, 
for you. This will be easy to comply with if you are, in fact, 
putting your customers' best interests first.''
    I think it is something that can be done. I hear from so 
many folks who are playing in this space day in and day out. We 
need a level playing field, because people go to their 
advisor--and, actually, there are some advisors that are dual 
hatted, depending on what part of the transaction it is. 
Sometimes they're a fiduciary, sometimes they're not. It's 
already confusing to begin with. That's stunningly confusing, 
and we need one standard, and it ought to be the best interest 
    Senator Warren. I love the one standard. I love the best 
interest test. I assume there are a lot of people, though, who 
are making a lot of money. That $17 billion is going somewhere. 
It's not staying with the retirees.
    I've got to say this one seems like a no-brainer to me. 
Hardworking Americans who manage to pull together some money 
for their retirement should be able to trust that their 
retirement advisors are looking out for them. Besides that, the 
thousands of honest, hardworking advisors and brokers around 
this country who already put their clients first every day 
shouldn't have to compete against those unethical advisors who 
    I understand why we're in this fight. I understand there 
are people who are making money from keeping the game rigged. 
We don't work for them. It's time to level the playing field.
    Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    Senator Isakson. In the interest of the four panelists who 
will testify afterwards, I want to introduce Senator Casey, who 
will be brief within his 5 minutes, and we'll go straight to 
the second panel, and I think we'll have enough time to hear 
from everybody.
    Senator Cassidy.
    Secretary Perez. Good afternoon, sir.
    Senator Cassidy. Hey, Secretary Perez.
    Secretary Perez. It's good to see you again.

                      Statement of Senator Cassidy

    Senator Cassidy. Good to see you. I don't pretend to 
understand this as you do. Let me just kind of channel that 
which people have asked of me and then ask you to comment upon 
    A fellow came and said,

          ``Listen. I have a client. He's pretty well off. I go 
        into his office, help him with his financial planning, 
        and he says, `Do you mind just speaking to my employees 
        and give them general advice about how to handle their 
        money?' ''

    And he goes,

          ``I do it as a favor to my client, but I think under 
        this rule I'd have to have each of those employees sign 
        a contract before I'd be able to give them the advice 
        I'm giving them.''

    Is that true or not? I don't know. I'm asking.
    Secretary Perez. I don't think that's true for the 
following reason. If you're sitting there telling workers,

          ``Here's what you need to think about, workers, to 
        have a healthy retirement. What's your risk-tolerance 
        threshold? If you're married, what's your wife's or 
        husband's risk tolerance''----

    Senator Cassidy. I think you may have gotten to the nubbin 
of where I was. You don't think so, or you know not?
    Secretary Perez. You need to give me more facts, Senator, 
and then----
    Senator Cassidy. I'm saying this not to be pedantic, but 
just because if he--unless he has clarity from DOL, he won't 
have clarity in terms of how he conducts himself. Would he say,

          ``OK. I want you to sit here, and I'm going to say 
        this is what you should do with your money. If you're 
        younger, put it in this. If you're older, put it in 
        that. First you've got to figure out your risk 
        tolerance, et cetera. Thank you. Good to see you. I 
        hope you're all well.''

    That's sort of general advice. Would that be something that 
they would need to sign a contract for?
    Secretary Perez. General advice that is not ``Go pick this 
product or that product,'' but ``Go into mutual funds, go into 
index funds, go into something like that''--that is advice in 
the area of education or asset allocation. That wouldn't cross 
the line of education.
    Senator Cassidy. Sounds great. I am told that the United 
Kingdom put in laws similar to this in 2013 and that banks 
stopped offering investment advice to customers with less than 
$80,000 in assets. It may be that the answer to Senator 
Warren's question is that this model works for those lower and 
moderate-income people, or at least those with moderate assets.
    Just comment on that again. I don't know whether it's true 
or not. Just your thoughts on that.
    Secretary Perez. It's not true, and let me give you the 
facts. After the United Kingdom put in place their regulation--
and, by the way, their regulation bans commissions. We don't 
ban commissions. Their advisors dropped 310,000 clients, and 
820,000 new clients came into the market. There was a net delta 
increase after the regulation of over half a million. Investors 
with low balance accounts continued to be served, because you 
were concerned about that.
    Here's the most interesting data point about the United 
Kingdom--I traveled there personally to meet with them, because 
I heard that feedback a lot. The most interesting point about 
what happened in the United Kingdom, Senator, is that more and 
more people are now getting in lower cost funds, because the 
problem with our system in the United States is it incentivizes 
complexity when simplicity is all too frequently what is called 
for. It incentivizes complexity because complexity generates 
more fees, just like the variable annuity I described.
    The U.K. experience--I welcome further inquiry into it, 
because there's been a fair amount of incorrect information 
surrounding it.
    Senator Cassidy. OK. The last thing, just to say, the DOL 
is estimating that the cost of the rule be between $2.4 billion 
and $5.7 billion over the next 10 years, and yet I'm given a 
study by Deloitte which suggests that over 10 years, it could 
exceed $15 billion. Any thoughts on that discrepancy?
    Secretary Perez. I think our cost-benefit analysis is quite 
strong. We estimate the benefit over the next 10 years to be 
$40 billion. In an $11 trillion market, the cost of conflicted 
advice--when you have a $50,000 loss for the Toffels, in an $11 
trillion market, it adds up fast. These are folks who can ill-
afford to lose this.
    The benefit I'm hearing from employers, like one of our 
next panelists, has been that market forces are working to the 
advantage of small investors. I hope you'll talk to some of 
these folks who are already fiduciary, Senator, and doing great 
    Senator Cassidy. I yield back. Thank you.
    Senator Isakson. One of our members is grossly late, but 
he's my dear friend. His staff has been doing a good job of 
convincing me he only has 2 minutes worth of questions. Is that 
    Senator Whitehouse. I am fully convinced, Chairman.
    Senator Isakson. We have four other people to testify 
before the 4 o'clock vote, so I'm going to recognize Sheldon 
Whitehouse, who will be brief.

                    Statement of Senator Whitehouse

    Senator Whitehouse. Very well.
    Mr. Secretary, you can answer briefly, too. I have heard 
from companies who are major providers of services to investors 
who are totally on board with the notion that they should have 
the responsibility of meeting the fiduciary standard but are 
concerned that around the edges, things like the way in which 
they communicate with vast numbers of customers might be 
affected by this probably in ways that none of us would intend.
    I just want to make sure that you will be attentive to 
trying to make sure that there's not too much regulatory sprawl 
into areas outside of what we all expect, which is to keep them 
putting the interest of the client first.
    Secretary Perez. Absolutely. We had that conversation 
earlier, and we certainly had a number of very constructive 
meetings with firms who have addressed concerns, I think, 
similar to that, and it certainly wasn't our intent. Again, our 
question that we always ask is,

          ``Show us in the proposal where you think that 
        concern arises, and then give us some potential 
        solutions for that so that we can contemplate how to 
        make sure that we're getting to the right place.''

    Senator Whitehouse. Very good. Thank you very much.
    I'm well within my 2 minutes, Mr. Chairman.
    Senator Isakson. Let the record reflect that Sheldon 
Whitehouse was brief.
    Senator Whitehouse. You don't have to make it sound like 
that's a novelty.
    Senator Isakson. It was refreshing.
    Secretary Perez. Mr. Chairman, thank you for your courtesy, 
as always. It's always a pleasure to be with you.
    Senator Isakson. Thank you.
    Will our second panel please come forward?
    In the interest of time, I'll begin the introductions of 
our panelists so we can get straight to their testimony. First, 
Peter Schneider, who is the president of Primerica, which I'm 
proud to say is a Georgia-based company that I have visited 
    Thank you for being here today, Peter.
    They are a leader in financial services, providing services 
to the middle-income marketplace, offering retirement savings 
options and insurance to millions of Americans. Mr. Schneider 
became President and served before that as executive vice 
president for Primerica.
    We welcome you here today.
    We also have Scott Puritz. Is that correct? Scott is the 
managing director of Rebalance IRA in Bethesda, MD. He is a 
retirement expert, having been referenced previously by the New 
York Times, Forbes, and CBS. He is a graduate of Tufts 
Institute with a master's degree from Harvard University.
    Welcome and thank you for being here.
    At this time, I'd like to turn to Ranking Member Franken to 
introduce Ms. Miller, followed by Senator Roberts from Kansas 
to introduce Mr. Litan.
    Senator Franken. Thank you, Mr. Chairman. It's my pleasure 
to introduce Darlene Miller, who is joining us today from my 
home State. Ms. Miller is the president and CEO of PERMAC 
Industries in Burnsville, MN, a manufacturing company that 
provides precision small part machines to other industries.
    PERMAC was named the U.S. Chamber's Small Business of the 
Year in 2008, and in 2010, Ms. Miller herself was named by the 
Burnsville Chamber of Commerce as the Businessperson of the 
Year. I've had the good fortune of meeting Ms. Miller in 2012 
when we toured Burnsville Senior High School together to 
discuss the importance of STEM education. We have also 
discussed my Community College to Career Fund Act, which would 
create public-private partnerships to address the skills gap in 
    Ms. Miller, thank you for being with us today to discuss 
how you can best meet the needs of your employees.
    Thank you, Mr. Chairman.
    Senator Isakson. Thank you.
    Senator Roberts.

                      Statement of Senator Roberts

    Senator Roberts. Thank you, Mr. Chairman. It is my 
privilege to introduce Bob Litan, an impressive economist, 
attorney, and native Kansan. Growing up in Wichita, Bob has 
become a notable figure in the economics community. He brings a 
balanced perspective on this issue, and he has been an 
executive in private, public, and government sectors.
    His list of accomplishments, employments, and memberships 
on advisory boards reads more like a collection of several 
highly accomplished people rather than one man. He is a current 
resident senior fellow at the Brookings Institution, of counsel 
to a law firm based in St. Louis and Chicago, and is chief 
economic advisor at Patent Properties.
    I thank you for taking the time to come before this 
committee today to provide a viewpoint that, unfortunately, 
seems to be lost, if not solely ignored in this conversation. 
We look forward to hearing your testimony. We hope that you can 
offer us some solutions on how we can maintain access for 
middle- and lower-income families and businesses in regards to 
financial guidance and retirement planning.
    Thank you, sir.
    Senator Isakson. I hope all the panelists will try and 
limit their testimony to 5 minutes, and after that eloquent 
introduction, Mr. Litan, I think you should be first.


    Dr. Litan. Thank you very much, Mr. Chairman.
    Thank you also, Senator Roberts, for that very kind 
    Senator Isakson. Turn your mike on, the little switch 
    Dr. Litan. I'm thanking everybody again for their kind 
introductions and so forth, OK?
    Senator Roberts, I don't want you to choke on these words, 
but I'm a lifelong Democrat and a former Clinton administration 
official, but very proud to be from Kansas.
    Senator Roberts. That doesn't bother me one damn bit.
    Dr. Litan. OK.
    I say that because I come from a background where I was in 
an administration where we cared deeply about the kind of goals 
that the department is pursuing in this proposal. I want to 
respectfully disagree with the way the proposal has been 
outlined, and I'm going to make three quick points.
    No. 1, the correctly estimated benefits of Labor's proposed 
rule do not outweigh the cost. This is because Labor gives 
absolutely no credit or assigns no value to human investment 
advice, namely, encouraging clients to avoid trying to time the 
market, one of the worst decisions a long-term investor can 
make, and also helping clients re-balance their portfolios over 
    When these factors are taken into account, my colleague, 
Dr. Hal Singer of the Progressive Policy Institute, and I come 
to the conclusion that rather than generating $4 billion in 
annual benefits for investors, it would produce net harm of 
roughly $1 billion to $3 billion annually, depending on how 
many brokers are induced by the proposal to no longer serve the 
IRA mutual fund market.
    In fact, during a future market downturn, Dr. Singer and I 
estimate--and we actually show this in our comments that we 
submitted to DOL yesterday--that by causing many current 
accounts to be uneconomic to serve, the rule could cost 
investors as much as $80 billion, double the 10-year benefit 
estimate claimed by DOL.
    I should also mention this connection, that the $17 billion 
number that's been thrown about by the CEA estimate, in our 
opinion, is flawed. It's based on a flawed reading of the 
academic studies, and we show this in our report. In fact, not 
even Labor counts on the $17 billion. They only use a $4 
billion figure, and even that figure, we point out, is 
incorrect. All right. That's just important to keep in mind.
    A word about robo-advice, because I know it's coming up. 
With all due respect to robo-advice, which I think is an 
important addition to the market, I think we have to be careful 
about drawing too much of a conclusion from online or text 
    While robo-advisors can certainly help savers identify 
asset allocations and products to consider, an email or a text 
message during a market rout is not an adequate substitute for 
a human being on the other end of a telephone reminding 
investors of the clear evidence that it pays to stay put if 
you're a long-term investor, which, by definition, retirement 
savers are.
    No. 2, my second point. If you lose your broker, the only 
other source of human advice you're likely to go to is somebody 
who is providing advice on the basis of a wrap fee, which is a 
percentage of your account. We show in our report that for 
investors to choose that option, they'll end up paying more 
than they do under the current regime. This is for small 
    By the way, I want to underscore something about small 
investors. Secretary Perez started his testimony by talking 
about a $650,000 account. That is not a small saver account. 
There are millions of people here--and I think Senator Warren 
pointed this out. There are tons of people that have account 
balances of $10,000 or $20,000. That's all they've got. For 
those people, brokerage is a less expensive form of human 
advice than a wrap fee. That is just a fundamental fact.
    Third, my last point. The notion that all retirement 
investment advisors should be held to a best interest of client 
standard is not controversial. Let's just stipulate that as far 
as I'm concerned. Let's don't argue about that. It's the way we 
enforce it. Should we enforce it by potential class action 
litigation or by a body that we already have established to 
oversee the brokerage industry, which is FINRA?
    In fact, my bottom line suggestion, just to cut to the 
chase for DOL, is that what they ought to do is go back to the 
drawing board and go to FINRA--and FINRA, by the way, has 
offered comments just recently, saying the rule is unworkable 
and that, in fact, a lot of brokers are going to leave the 
market, the same conclusion that Hal and I reached.
    What Labor ought to do is go back to FINRA and say, ``Let's 
work together and figure out a way to actually administer a 
best interest rule that you, FINRA, could enforce.'' By the 
way, if the problem is insufficient disclosure about whose 
getting paid and how they're getting paid, there's a simple 
solution to that: better disclosure, simple disclosure. Just 
put a great big bold warning on the front of the document that 
says whose getting paid and how much.
    The only basis--and then I'll conclude, Mr. Chairman. The 
only basis for rejecting that idea, better disclosure, was one 
study that the Department of Labor cited that's based on 
experimental evidence, not real-world market evidence. I'm 
telling you if I were in the government, and I proposed to my 
superior or secretary or whoever it is that we ought to 
completely up-end an entire industry on the basis of one study 
on experimental evidence, I probably would have been told to go 
back to my office and find another job.
    There's absolutely no basis, in my opinion, for at least, 
at a minimum, not trying better disclosure before we go ahead 
with this massive undertaking. I think that concludes my 
    Thank you very much.
    [The prepared statement of Dr. Litan follows:]
                 Prepared Statement of Robert Litan\1\
    Mr. Chairman and members of the committee, thank you for inviting 
me to testify today about the Department of Labor's proposed new rules 
governing retirement savings investment advice.
    \1\ This testimony draws on a recent report, supported by the 
Capital Group, I have co-authored with Hal Singer: ``Good Intentions 
Gone Wrong: The Yet-To-Be Recognized Costs of the Department of Labor's 
Fiduciary Rule.'' The views expressed here are my own and do 
necessarily represent those of the Brookings Institution or the Capital 
Group, their officers, directors, trustees, or employees.
    My testimony is based on a study of the proposal with Hal Singer, a 
Principal at Economists, Inc, and a Senior Fellow at the Progressive 
Policy Institute.\2\
    \2\ The study was supported by the Capital Group, one of the 
largest mutual fund asset managers in the United States. Dr. Singer and 
I are solely responsible for the analysis and conclusions in the study.
    We reach two central conclusions in our report:

     First, contrary to what the Labor Department claims, the 
benefits of the rule do not outweigh its costs. In fact, during a 
future market downturn, we estimate the rule could cost investors as 
much as $80 billion. In part, this is because the benefits are 
overstated, based on a misreading of the academic research the 
Department cites. Even more important, the Department did not take 
proper account of the benefits to investors of brokers and advisers 
paid on a commission basis, and how investors would either lose those 
benefits or end up paying more for investment advice than they do now.
     Second, the notion that all retirement investment advisers 
should be held to a best interest of client standard is not 
controversial. It's the way the Department proposes to implement it, 
which because of its costs and risks, will lead to many clients going 
without an adviser, or if they are able to retain one, only at 
substantially higher costs, as I outline below. Meanwhile, the 
Department failed to adopt a simple straightforward fix to the problems 
of insufficient disclosure on which the proposal is based--namely, 
simpler and better disclosure. The one study it cites for not taking 
this obvious step is theoretical and has no empirical grounding in the 
real world of investing.
    To understand how we come to these conclusions, it is important to 
understand the essence of what the Department is proposing, as well as 
the February 2015 study of retirement advice by the Council of Economic 
Advisors which has been widely cited by supporters of DOL's 
    \3\ CEA, The Effects of Conflicted Investment Advice on Retirement 
Savings, (Feb. 2015), available at www.whitehouse.gov/sites/default/
    Both Labor and CEA believe that the way that many individual 
brokers and advisers serving those with modest retirement portfolios--
or small savers--are compensated generates ``conflicted advice,'' which 
can only be eliminated if commissions were prohibited. DOL's regulatory 
analysis claims that a 10-year phaseout of brokerage commissions on 
mutual funds IRAs would enable investors to earn about $4 billion more 
annually from their investments.
    Before I critique these claims, let's begin with a fundamental 
fact. It costs money to serve any client seeking retirement investment 
advice, and the mutual fund IRA market to which the Department devotes 
most of its attention has developed two basic ways those costs, plus 
some profit, are recovered:

    (1) through an up-front sales charge which the Department notes has 
been falling over time, but is now a bit less than 2 percent of the 
amount invested, coupled with a low annual ``12b-1'' charge, typically 
\1/4\ percent of the total invested; or
    (2) a higher annual ``wrap fee'', which typically is 1 percent or 
more of the assets invested.

    As it is now, many small savers pay brokers and advisers on a 
commission basis (method 1), while those with larger portfolios often 
pay a wrap fee, assuming they want any investment advice at all.
    If the DOL ends up effectively banning method (1), brokers and 
advisers have two choices: they can quit serving small savers or they 
can tell them: ``we will continue to serve you, but only with a wrap 
fee.'' Those brokers who choose and small savers who accept the second 
option will end up paying more in the medium to long run than they do 
now for investment advice. This should be obvious since even a 1 
percent annual fee on all amounts invested after 3 years (3 percent) 
will exceed the average up-front brokers' sales charge plus 2 years of 
the annual \1/4\ percent 12b-1 fee (2.75 percent).\4\
    \4\ In our report, we refer to an estimate by Oliver Wyman that an 
investor's costs associated with a forced transition to the wrap-fee 
model would increase by approximately 75 to 195 percent, depending on 
the size of the investor's assets.
    Small investors who lose their broker because of the rule--perhaps 
7 million or more--also will lose.\5\ This is because advisers now 
provide two very important kinds of advice to investors which also are 
not factored into DOL's analysis: encouraging clients to avoid trying 
to ``time the market,'' one of the worst decisions a long-term investor 
can make, and also helping clients re-balance their portfolios over 
    \5\ The Department's Regulatory Analysis breezily dismisses this 
estimate by claiming that brokers still can receive commissions under 
an exemption, presumably the new Best Investment Contract Exemption 
(BICE). But we show in our study, the BICE has numerous restrictions 
that make it unattractive, and thus not likely to be taken up by many, 
if not most, brokerage and advisory firms.
    There is a belief in some quarters that ``robo-advice'' delivered 
online can replace human advice from brokers and advisers who find it 
uneconomic to serve the small saver segment of the market if DOL's rule 
goes forward. While robo-advisors can help savers identify asset 
allocations and products to consider, it's a dangerous fallacy to 
believe that an email or text message during a market rout is an 
adequate substitute for a human being on the other end of a telephone. 
As famed Princeton professor Burton Malkiel has written: ``We know that 
investors generally move money to and out of the stock market at 
exactly the wrong times.'' \6\
    \6\ Burton G. Malkiel, Janet Yellen Is No Stock Market Sage, Wall 
Street Journal, June 2, 2015, at A13 (emphasis added), available at 
    More investors, especially small savers, are likely to make that 
mistake if they no longer have a human broker to serve them when they 
are most needed, which is a likely outcome if the DOL is implemented. 
In our study, we estimate that the cost of depriving clients of human 
advice during a future market correction--just one of the many costs 
not considered by DOL--could be as much as $80 billion, or twice the 
benefits the administration claims for the rule over the entire next 
decade. Put differently, if investors holding only $1 in $7 invested in 
mutual fund IRA accounts now are persuaded by their brokers or advisors 
to hold on through the next major stock market correction and rebound, 
the gains from doing so would totally offset the 10-year benefits DOL 
claims for its rule.
    As if all this weren't enough, we show in our study that DOL 
actually overstates the benefits of its rule, and CEA likewise 
overstates the costs of conflicted advice, by selectively and 
inappropriately drawing from the academic literature. In addition, we 
show the weaknesses in DOL's studies purporting to rebut our study's 
analyses that brokers help clients avoid market timing or help them re-
balance their portfolios.
    The bottom line from a careful analysis of DOL's proposal is that 
rather than generating benefits for investors, it would produce net 
harm of $1-$3 billion annually, depending on how many brokers are 
induced by the proposed rule to no longer serve the IRA mutual fund 
market. These dollar cost estimates are conservative.
    Fortunately, there is an easy and obvious way to avoid this adverse 
outcome. If the problem is insufficient disclosures of how brokers are 
paid, then why not require better, simpler disclosure? Our report gives 
a one sentence example, and also points to one chart that the 
Department itself proposes as an Appendix to its proposed BIC exemption 
as a possible solution.
    The Department's only basis for rejecting this idea is one academic 
paper reporting results from a lab experiment--not from the real 
investing world--in which more disclosure didn't work well. But these 
very same authors elsewhere endorse disclosure as an appropriate remedy 
for information failure under certain conditions, which Hal and I note 
in our report are present in the investment advice market.
    Even if the study the Department cites were based on real world 
empirical data--which it is not--using a single study is an extremely 
thin reed on which to adopt a rule that would fundamentally change the 
internal compensation systems of many, if not most, brokerage and 
advisory firms, while imposing massive new paperwork and contracting 
requirements for millions of clients, all under an impractical 8-month 
deadline. On top of this, do policymakers in a presidential election 
year want to face potentially millions of small savers when they 
receive notices they are being dropped by their longtime advisors or 
forced to pay much more via fee-based accounts in order to keep them?
    Doesn't it make far more sense at least to try better disclosure 
before risking any of this? I trust the question answers itself.

    Thank you.

    Senator Isakson. Thank you.
    Mr. Schneider.

                           DULUTH, GA

    Mr. Schneider. Mr. Chairman, Ranking Member Franken, and 
members of the subcommittee, I appreciate being here today. The 
Department of Labor's proposed rule is of enormous consequence 
to the middle-income families we serve every day and in each of 
your States. Please allow me to tell you a little bit about 
Primerica, and I like talking about it.
    We were founded almost 40 years ago on a central mission, 
that middle-income families require someone to help them to 
focus on their financial needs. That was true then and it's 
just as true today, and we feel like at Primerica we've made 
some headway.
    We insure 4 million lives with our term life insurance. 
This year, we will pay $1.2 billion in death benefits to 
families. Those checks, which we deliver every day--and will 
deliver multiple checks today--keep a personal tragedy from 
becoming a financial one.
    We've helped our clients save almost $50 billion in our 
investment accounts. Most of our accounts are very small by 
industry standards, but they're hugely important to the 
families who opened them.
    Investment choices with us are very simple and appropriate 
for our market. We do no individual stocks, we do no options, 
we do no commodities, but mainly mutual funds and annuities. 
You can't buy Google from us, but you can buy 700 mutual funds 
from top companies, like Invesco and Legg Mason.
    Our clients' household income is between $30,000 and 
$100,000 a year. There's usually two parents working in those 
homes, and, frankly, all too often, the homes are headed by a 
single mother.
    We strongly believe in retirement savings, and our clients 
have opened 1.2 million IRAs with us. You can start one with 
Primerica for as little as $50 a month. Even that amount is 
hard to find in the families that live paycheck to paycheck. 
What we sometimes say is they have too much month at the end of 
the money.
    We provide face-to-face help from licensed representatives 
who live and work in the communities. These representatives 
begin with education. They teach the fundamentals of how money 
works, dollar cost averaging, time in the market, emergency 
cash accounts. That's all important. Oliver Wyman's study, just 
released, found that advised individuals accumulate 38 percent 
more assets than the non-advised, and at age 65, they have 114 
percent more.
    Our clients benefit from our presence in their financial 
lives. A comment letter was submitted by Shelly Rosen, one of 
our reps. Fifteen years ago, she sat down with a railroad 
worker and his wife. They had a lot of debt and no savings, and 
they were very generous, so generous that they ran up debt on 
credit cards buying gifts for their friends. We helped teach 
them other ways to be generous. Today, they're debt free and 
financially independent.
    The Department of Labor rule will stop Shelly Rosen from 
helping folks like that railroad engineer. The proposal 
subjects our client interactions to the prohibited transaction 
rules in ERISA and the IRS code, which effectively make the 
brokerage model, chosen by 98 percent of accounts under 
$25,000, illegal.
    The department tried to write an exemption in their best 
contract exemption. It's so complex, so onerous, and so costly 
that it's unworkable. They attempted to make it principal-
based, but instead introduced uncertainty, which makes the 
exemption unusable in a world of ERISA, where there is strict 
liability. No firm we know of intends to use it. That makes 
this rule more punishing than the one that was withdrawn in 
    In prior testimony, the Department of Labor has suggested 
these robo-advisors will fill the gap and help the millions 
stranded by the rule. We disagree. Our company believes in 
biorhythms, not algorithms. They need a person, not a personal 
computer, to navigate a financial landscape that's unfamiliar 
to them. Without a helping hand, they worry about a mistake, 
and they won't hit the send button.
    In the households we serve, there is a struggle going on. 
It's not between Investment A or B or C. It's a fight between 
saving and spending, a fight to put an extra $50 away. We all 
agree we must act in a client's best interest. Inadequate 
retirement savings is the overriding issue facing the middle 
class, and this rule is another obstacle.
    We don't doubt the DOL's good intentions. It's such an 
important issue, everyone needs to be involved, and we look 
forward to working with everyone, and we're glad the Senate is 
involved with this issue.
    Thank you very much for listening to me.
    [The prepared statement of Mr. Schneider follows:]
                 Prepared Statement of Peter Schneider
    Mr. Chairman, Ranking Member Franken and members of the 
subcommittee, my name is Peter Schneider and I am president of 
Primerica, Inc., headquartered in Duluth, GA. Thank you for inviting me 
to testify today about the U.S. Department of Labor's (Department) 
proposed new rules governing retirement savings investment advice 
(Proposed Rule). This is an issue of enormous consequence to our 
representatives and clients. Having access to quality help in managing 
household finances is critical in the middle income communities we 
    Primerica is a leading distributor of basic savings and investment 
products to middle-income households throughout the United States. Our 
representatives educate their Main Street clients about how to better 
prepare for a more secure financial future. We address clients' needs 
through term life insurance, which we underwrite, and mutual funds, 
annuities and other financial products, which we distribute. We conduct 
our securities business through PFS Investments Inc. (``PFSI''), a 
registered broker-dealer and an indirect wholly-owned subsidiary of 
Primerica, Inc. As of December 31, 2014, Primerica insured more than 4 
million lives and had over 2 million client investment accounts. This 
year we will pay approximately $1.2 billion in death claims to the 
beneficiaries of our policies and over time have assisted our clients 
to save about $50 billion in their accounts. Though most of these 
accounts are relatively small by industry standards, they are hugely 
important to the families who have opened them.
    Primerica's typical clients are squarely situated in this country's 
middle class, defined by us as households with an annual income of 
$30,000 to $100,000, a category that represents approximately 50 
percent of all U.S. households. Our business model is designed to allow 
us to provide exceptional client service to the middle-income families, 
and to do so in a sustainable manner. Our representatives are able to 
concentrate on the smaller-sized transactions typical of middle-income 
consumers. We will gladly open an Individual Retirement Account (IRA) 
account for an individual with as little as $250 to invest or $50 per 
month. We maintain over 1.2 million IRAs.
    We offer investment products that are most appropriate for our 
middle-income clients. We offer open-end mutual funds and variable and 
fixed annuities, all from well-known and respected companies, as well 
as different savings vehicles, including non-qualified accounts, IRAs, 
and college savings plans. Our platform includes off-the-shelf products 
with commissions on par with commissions paid to other product 
    We are believers in educating the households we serve about 
fundamental financial concepts. Our investment education and philosophy 
is geared toward the needs of middle-income households, who often are 
new or less-experienced investors. In that regard, we produce easy to 
understand educational pieces teaching fundamental investing concepts 
including the critical importance of taking the steps needed to start 
along the path of financial security. Our primary investing principle 
is the long-term benefit of dollar cost averaging through systematic 
investing into a diversified investment portfolio. We also teach the 
importance of starting an investment plan early and sticking to it. The 
issue for our clients is time in the market, not timing the market.
    At Primerica, our representatives reflect and serve the communities 
in which they live. Accordingly, they are well-acquainted with the 
financial challenges facing the middle-income households. The diversity 
of our sales force, which mirrors the demographics of the middle class, 
continues to be a primary strength of our company.\1\
    \1\ As of January 2013, both our sales force and our customer base 
are generally more diverse than the U.S. general population. 
Approximately half of our life insurance customers and a quarter of our 
securities customers are either African American or Hispanic American. 
Mirroring the population we serve, a slight majority of our securities 
customers are female.
    This afternoon, PFSI will be filing comments in connection with the 
Proposed Rule. Our comments make clear that we agree that financial 
service firms and their representatives should act in each client's 
best interest and frankly that is why we believe the rules needs to be 
withdrawn. We respectfully submit that the Proposed Rule would cause 
significant harm to middle-income individuals and families by 
restricting their ability to save for retirement through IRAs.
    We draw this conclusion first and foremost because the Department's 
expanded definition of fiduciary turns into a fiduciary act in almost 
every conversation about an IRA that a financial professional might 
have. ERISA and the Internal Revenue Code prohibit fiduciaries from 
receiving commissions and other traditional forms of variable 
compensation in connection with a covered benefit plan such as an IRA 
unless what is known as a ``prohibited transaction exemption'' applies 
and provides relief. Effectively, the DOL's expanded definition of 
fiduciary makes an exemption from the prohibited transactions rules 
necessary to continue to effectively serve individuals investing in 
IRAs. Unfortunately, the exemption the Department has proposed to 
preserve the commission-based services for IRAs--the Best Interest 
Contract Exemption (BIC)--is not operational.
    Our concern is not the imposition of a ``best interest standard.'' 
We agree that firms and their representatives should always act in 
their clients' best interests. In fact, we believe that acting in 
clients' best interests is critical to our business's long-term 
success. When our clients can see that they are on the path toward 
achieving their retirement and other goals, they are more likely to 
return to us and our representatives, and are more likely to refer 
their friends and family members to us.
    Instead, our primary concern is that the requirements and 
uncertainties of the BIC exemption are so complex and burdensome that 
the exemption is neither administratively nor operationally feasible. 
The trouble is that, from start to finish, the BIC exemption fails to 
offer certainty. In operating our business, ``certainty'' with respect 
to regulatory compliance matters is critical because a failure to 
satisfy the proposed exemption may result in steep prohibited 
transaction penalties, including the forfeiture of compensation and 
excise taxes, as well as consumer lawsuits for breaches of contract, 
and potentially even class action lawsuits. Critically, the technical 
implementation of the exemption promises to be a substantial burden, 
and to cause a significant disruption of services to our clients, with 
no true added benefits in the way of investor protections. As a result, 
we believe firms will not use it. Instead, they will restructure their 
businesses because they cannot rely on the BIC exemption.
    This restructuring will mean most firms will move their commission-
based brokerage IRAs to fee-based accounts, known as advisory accounts, 
or sometimes as ``wrap accounts'' or ``managed accounts''. Fee-based 
accounts typically have account minimums, usually beginning at $25,000, 
and the annual fees are costlier for buy and hold investors than fees 
associated with commission-based accounts. These higher costs for 
advisory accounts are due to the higher attendant legal liability, more 
active nature of portfolio management and greater reporting analytics 
provided to advisory clients. Further, these higher costs will be 
imposed on clients who have already determined that they neither want 
nor need fee-based advisory relationships. They have the choice now of 
one or the other or both. But 88 percent of all IRA clients, and 98 
percent of the smaller ones, prefer brokerage relationships.\2\
    \2\ Oliver Wyman, Standard of Care Harmonization: Impact Assessment 
for SEC (October 2010) (stating 88 percent of investors choose 
commission-based services).
    This shift to advisory services is likely to cause millions of 
small balance IRA owners to lose access to the financial professional 
of their choice, or any at all. Those with enough investments to meet 
the account minimums will face higher costs and experience losses in 
retirement savings. These resulting losses by some estimates could be 
as high as $68-$80 billion each year.\3\
    \3\ Quantria, Unintended Consequences: Potential of the DOL 
Regulations to Reduce Financial Advice and Erode Retirement Readiness, 
at 29. See also, NERA, Comment on the Department of Labor Proposal and 
Regulatory Impact Analysis, (July 20, 2015) at 17 (finding that, based 
on a conservative estimate of the minimum balance for advisory accounts 
being $25,000, the new fiduciary standard would cause a loss of access 
to professional advice for 40.49 percent of retirement account holders 
resulting in an aggregate cost of $46 billion per year.)
    There is no doubt that the consequence will be negative to Main 
Street retirement savers, particularly to long-term buy and hold 
retirement investors and those with smaller accounts.
    We note that our securities regulator, the Financial Industry 
Regulatory Authority (FINRA), recently stated that,

          ``Many broker-dealers will abandon--small accounts, convert 
        their larger accounts to advisory accounts, and charge them a 
        potentially more lucrative asset-based fee.'' \4\
    \4\ FINRA, Comment on Proposed Conflict of Interest Rule and 
Related Proposals, RIN-1210-AB32 (July 17, 2015).

    FINRA's Chairman and CEO, Richard Ketchum also has observed the 
exemption's conditions that the DOL imposes on commission-based 
accounts ``are very narrow from the standpoint of broker-dealer 
activity, and don't really describe a broker-dealer model that I'm 
aware of from the standpoint of safe harbors.'' \5\
    \5\ Waddell, Melanie, FINRA's Ketchum Criticizes DOL Fiduciary 
Plan, Think Advisor (May 1, 2015).
    We note that this would not be the first time the DOL has put forth 
an exemption with conditions so impractical as to be unusable. In 2011, 
the Department finalized rules for the 408(g) statutory exemption that 
were intended to provide prohibited transactions relief for the 
thousands of investment fiduciaries. Though the DOL predicted that 
``quality, affordable expert investment advice [would] proliferate'' as 
a result of the 408(g) exemption, to our knowledge, firms have not 
chosen to rely on the rule.
    The reality is that Main Street consumers--families saving what 
they can each month--will lose access to the beneficial commission-
based business services for retirement savings accounts that have 
benefited them so well and to their chosen financial professional. Tax-
advantaged IRAs may no longer be readily available for those with less 
than $25,000 to invest. As the Proposed Rule only applies to qualified 
accounts, these households are likely to be limited to investing in 
non-qualified accounts, or be left with no in-person financial 
professional to encourage them to save at all.
    For a Main Street saver, this will not be good news. Non-qualified 
savings accounts lack the tax advantages of IRAs, though they are 
preferable to not saving at all. As a result, middle-income savers will 
experience lower retirement savings, all else being equal. In fact, in 
a comment to the DOL, Compass Lexecon, one of the world's leading 
economic consulting firms, reports that a median 30-year-old investor 
would experience a 62.6 percent greater effective tax rate relative to 
a Roth IRA and a 158.0 percent greater rate relative to a traditional 
IRA if the DOL's Proposed Rule caused him to save for retirement in a 
taxable savings account. Compass Lexecon provides a rough estimate that 
across the potentially 7.0 million households that could effectively be 
cut off from access to IRAs as a result of the Proposed Rule, the total 
reduction in retirement savings would be between $147 and $372 billion 
if they all opened taxable savings accounts. This calculation 
illustrates that the Proposed Rule may have very substantial costs 
which the DOL did not consider. Having one standard for individual 
retirement accounts and a different standard for all other individual 
investment accounts will create even more confusion and complexity for 
individuals than already exists.
    The irony is that the Department is missing an opportunity to truly 
help middle-income families. Our experience in serving middle-income 
families has shown us that the issue for them is not one of conflicted 
advice. Rather, it is that far too many of them simply have failed to 
take the critical ``first steps'' necessary to accumulate meaningful 
retirement savings. The real conflict they face is between spending and 
    Saving for retirement is for most people a hard choice, especially 
for people with finite disposable income, where the decision to 
allocate a portion of limited resources to saving often means passing 
on some other purchase or activity. Busy workers and families also 
often lack the time or confidence to navigate their finances. Yet the 
DOL's Proposed Rule will make it more difficult for our 
representatives--who are on the frontlines and living in these most 
affected communities--to continue to effectively educate middle-income 
families on the benefit of retirement saving and how to take these 
important steps toward retirement security.
    The value that face-to-face financial assistance can bring to a 
household is substantial. In a recent study, Oliver Wyman\6\ found that 
advised individuals with $100,000 or less in annual income have at 
least 38 percent more assets saved than non-advised individuals, and 
those of retirement age have more than double the assets of the non-
advised. These differences translate into significant improvements in 
retirement living. The same study also reported that advised 
individuals more often display investing practices associated with long 
term investing success. Again, we believe that the Proposal will harm 
middle-income savers by unnecessarily disrupting the relationship 
between the client and her chosen financial professional.
    \6\ Oliver Wyman, ``The role of financial advisors in the US 
retirement market,'' July 6, 2015. (p.3).
    In fact, the Department repeatedly, and again today, has dismissed 
the Proposed Rule's potential to cut off help for small savers by 
suggesting that self-help online investment tools--what the Department 
refers to as ``innovation''--are a satisfactory alternative to personal 
help. We disagree.
    Studies consistently confirm that the percent of Americans 
comfortable obtaining financial products online is quite low, typically 
below 10 percent.\7\ Even younger generations strongly prefer personal 
interactions when it comes to retirement investing.\8\
    \7\ EBRI 2012 Retirement Confidence Survey--``. . . just 10 percent 
of [workers and retirees] say they are comfortable obtaining advice 
from financial professionals online.'' http://www.ebri.org/pdf/surveys/
rcs/2012/EBRI_IB_03-2012_No369_RCS.pdf (See last bullet point on page 
    \8\ Matthew Greenwald Survey--``Despite their familiarity with 
technology, the Generation X and Generation Y populations prefer 
traditional means when it comes to retirement education.'' ``Younger 
Workers Want In-person Education.'' http://www.benefitnews.com/news/
    Also troubling is that nearly 60 million Americans remain without 
access to online investment options,\9\ and these are predominantly 
lower wealth families and minorities, yielding some disturbing 
differences that should be concerning to policymakers. Internet usage 
by Hispanic and African American households still lags behind white and 
Asian households.\10\ There is also a notable geographic gap among 
rural versus urban households.
    \9\ ``The 60 million Americans who don't use the Internet, in six 
charts'' https://www.washingtonpost.com/blogs/the-switch/wp/2013/08/19/
    \10\ Pew Internet & American Life Project Surveys, March 2000-May 
2013; Pew 2012 Research Report ``Digital Differences''--20 percent of 
U.S. Adults Do Not Use the Internet . . . Senior citizens, Spanish-
speaking adults, the disabled, the less educated, and lower earners are 
among the least likely to go online. Forty percent of Americans do not 
have broadband access at home. http://www.pewinternet.org/2012/04/13/
    While we acknowledge that a computer may be immune to human self-
interest, we are puzzled as to why the Department seems to believe that 
computer-generated recommendations, calculated without knowing the 
client, are in the client's ``best interests'' and lack bias. For 
example, Wealthfront asks investors five questions before its software 
makes a wrap account recommendation. Absent from these are questions 
regarding short-term liquidity needs, life cycle events, lifetime 
income options, employment, short- and long-term goals, need for 
qualified retirement savings vs. taxable investments, and a host of 
others personal to each family.
    Unfortunately, the Department's cost/benefit analysis of the 
Proposed Rule failed to take into account the real-world unintended 
consequences we are discussing here today that can serve to 
substantially increase costs. Compass Lexecon, in a report it is filing 
with the Department, found the Department's conclusions as to the costs 
of the Proposal to be ``fatally flawed.'' \11\ It also determined that 
the Department's economic analysis of the Proposed Rule ``grossly 
overstates the benefits it purports to measure.'' \12\ Importantly, the 
Department also failed to acknowledge that the costs likely will be 
passed on to investors in the form of higher fees, particularly to IRA 
investors with account balances under $25,000.
    \11\ Compass Lexecon, An Evaluation of the Department-Impact 
Analysis of Proposed Rules Relating to Investment Advisor Fiduciary 
Status, (July 20, 2015) at Par 3.
    \12\ Ibid, at Par. 33.
    We would like to note that among the unintended consequence could 
be the elimination of variable annuities as an option for IRAs. The BIC 
exemption does not provide a practical pathway for firms to offer 
variable annuities to IRAs if they also offer any other products, such 
as mutual funds. Variable annuities typically come with both living and 
enhanced death benefits. These lifetime benefits are often critical to 
protecting the best interests of retirement investors. During the 
market upheaval of the recent recession, they saved many of our 
clients' retirements. We are greatly concerned about the potential 
elimination of this important investment option for retirement 
    As we have explained, the high cost of compliance with the Proposed 
Rule, and the substantial time and resources required to develop and 
implement the Proposed Rule, will have broad consequences by affecting 
the decisions firms make in responding to the rule. While we do not 
have time to discuss those costs in detail, we do not believe that the 
marginal fixes that the Department now seems open to considering will 
sufficiently ease those enormous burdens. For example, even if the DOL 
makes some adjustments to the rule such as changing the timing of when 
newly required contracts must be signed, those contracts would have to 
be prepared for new and existing clients, new systems would have to be 
developed and integrated (in some cases with third-parties) to create 
and manage new disclosures, and compliance policies and procedures 
would need to be updated. At our firm alone, over 80,000 
representatives would need to be trained to comply with the rule. Nor 
would we expect the changes to resolve the numerous ambiguities within 
the Impartial Conduct Standards that give rise to potential forfeiture 
of compensation and excise taxes, as well as consumer lawsuits for 
breaches of contract and class action lawsuits.
    In his testimony today, the Secretary drew the analogy of 
investment professionals to doctors and lawyers. While we agree that 
many people regard their financial professional highly, we think it is 
useful to draw the analogy out to fit the circumstances. We question 
what doctors or lawyers would do if faced with similar regulation. As 
with the financial industry, we would not expect the objections to be 
to the standard of care. But would doctors continue to serve patients 
if they were required to sign a contract guaranteeing fees and 
projecting results over 1, 5 and 10 years, give warranties on loosely 
defined standards that could be challenged by trial attorneys in 
hindsight, and report volumes of personal patient data, as well as 
their own compensation, so that it is publicly displayed? We think they 
would not. We also wonder whether the Department would believe that on-
line medical services would be a sufficient alternative for those who 
were cut off from face-to-face interaction as a result of their rule.
    As indicated, a possible outcome of the Proposed Rule is that 
nearly half of middle-income consumers--those with amounts to invest 
below advisory account minimums--will be left with no option to save in 
an IRA.\13\ For many families this may result in decisions to spend 
rather than to save. For those who choose saving, only a few can be 
expected to use online investment options. The others may unknowingly 
forgo the tax benefits available to IRAs and instead invest through 
non-qualified accounts. Obviously, this would be contrary to 
congressional intent of encouraging retirement savings.
    \13\ NERA, at 28.
    Overall, we believe that the Proposed Rule will harm rather than 
help middle-income retirement investors. The added litigation and 
penalty risks will drive increased compliance costs and lead financial 
institutions and representatives to curtail the services they offer to 
those families with more limited means.
    For the record, we favor a single best interest standard for all 
the types of accounts and clients we serve. The best policy is a best 
interest standard that respects the different choices broker-dealers 
and registered investment advisers offer Americans. In short, it is a 
standard that helps people save rather than one that sets up narrow 
guardrails in the middle of the road that effectively serve as a 
retirement roadblock for the middle-class.
    We believe the DOL is sincere in trying to help protect investors 
from conflicts of interest. That is a goal we share. But the DOL lacks 
the tools to do the job right. The authority it has to define the word 
``fiduciary'' is insufficient to rewrite the rules governing the entire 
securities industry in this area.
    You should know that it will be the clients, not the companies that 
are hurt most by this rule. Companies are resilient, and many firms 
will figure out how to go upscale and focus on a new customer base. The 
clients are the ones who will lose most. The war being waged every day 
in the homes we serve--by people not robots--is where the family can 
find $100 a month, $50 even, to start saving for college and 
retirement. The real problem with the Proposed Rule is it makes what is 
now an extremely difficult task into an impossible one.
    On behalf of Primerica's 101,000 representatives and 2,000 
employees dedicated to providing a more secure financial future to our 
clients, I'd like to thank you for letting me share our perspectives on 
this critically important matter.

    Senator Isakson. Thank you, Mr. Schneider.
    Ms. Miller.

                   INDUSTRIES, BURNSVILLE, MN

    Ms. Miller. Thank you, Chairman Isakson and Ranking Member 
Franken--and thank you for the kind introduction--and members 
of the Subcommittee on Employment and Workplace Safety and 
members of the full committee. I am here representing myself 
and my employees and also the Chamber of Commerce, of which I 
am a board member, and I chair the U.S. Chamber's Small 
Business Council.
    Permac opened in 1966, and I purchased it in 1993 and 1994 
and started with seven employees. We now have almost 30, and 
we're looking to expand. In order to expand, my company must be 
able to compete with much larger companies for talented 
employees. One way we're able to do so is by offering employee 
benefits, including a retirement savings plan.
    As an owner of a business, I am very focused on the details 
of my core business function, and I use outside professionals 
to help me with supplemental business functions. For example, I 
use a CPA to assist me with tax issues, an attorney to assist 
me with legal issues, and a financial advisor to help me with 
my retirement savings plan.
    In 1999, Permac implemented a SARSEP, now known as a SEP-
IRA. The plan was recommended to me by an advisor who I had 
worked with previously to provide medical benefits for my 
    Several years later, my advisor advised me that I was in 
danger of violating the 25-employee limit for a SARSEP. At that 
point, I worked with him to determine how to continue to 
provide retirement benefits for my employees. We decided a 
401(k) plan was the best option for my company, and in 2008 we 
implemented that plan.
    We have a 96 percent enrollment rate in our plan. Almost 
all of our employees participate in that plan. Of the eligible 
ones, there is only one who is close to retirement who does not 
participate, and a couple that are part-time are not quite yet 
    Under the 401(k) plan, employees receive a matching 
contribution equal to 100 percent of their first 3 percent that 
they contribute, and then 50 percent of the next 2 percent of 
contributions. Also and just as important is Permac provides 
substantial investment education to all of its employees.
    I look forward to continuing to provide competitive 
benefits. My current employees are like family to me, and I 
want to be able to help them, especially with their retirement. 
Just as importantly, I want to be able to attract new 
employees. Eighty-two percent of our association, PMPA, 
Precision Machined Products Association, say that they also 
need to be able to provide this benefit to their prospective 
new employees. I am very concerned that the proposed rule will 
impact our ability to do so.
    Last week, the Chamber submitted a comment letter to the 
Department of Labor enumerating many ways in which the proposed 
rule is unworkable. In my testimony, I'd like to highlight 
three issues that will have a particularly negative impact in 
small business plans.
    First, the seller's carve-out discriminates against small 
businesses and will decrease access to much-needed guidance. 
Under the proposal, there is a carve-out for the advisors that 
are selling or marketing materials. However, that carve-out 
does not apply to advisors to small businesses. The DOL seems 
to believe that small business owners, such as myself, are not 
as sophisticated as large businesses and, therefore, need 
additional protection.
    When I work with my financial advisor, I am aware that he 
is providing a service for a fee and selling a product. I 
wouldn't be able to run a successful business if I were not 
able to understand when I'm involved in a sales discussion.
    Second, the changes to the education carve-out will 
restrict access to investment education for both small business 
owners and their employees. My employees really truly value the 
investment education provided to them, specifically providing 
investment recommendations in various asset classes. This 
information allows them to make informed investment decisions, 
and many of my employees could not afford to pay for this 
investment education separately and might be discouraged from 
investing in the plan at all if my company did not provide this 
    And, third, the best interest contract exemption will 
increase the cost of services to small businesses and possibly 
eliminate access. There is some question about whether advisors 
to small business plans are even able to use the BIC exemption. 
Even assuming that they are, there are certain to be additional 
costs associated with these changes. As a business owner who 
relies on outside professionals to help me manage my plan, any 
additional cost imposed by the regulation will be passed on to 
    In conclusion, I'm very concerned that the proposal will 
not achieve the department's goals of better protecting workers 
and retirees but will instead make it harder for small business 
employers and employees to access the financial advice and 
increase their retirement services.
    Thank you for the opportunity to testify before you today, 
and I look forward to any questions you might have.
    [The prepared statement of Ms. Miller follows:]
                  Prepared Statement of Darlene Miller
    Thank you Chairman Isakson, Ranking Member Franken and members of 
the Subcommittee on Employment and Workplace Safety and members of the 
Senate Committee on Health, Education, Labor, and Pensions.
    I am Darlene Miller, president and CEO of Permac Industries in 
Burnsville, MN. I am here representing the U.S. Chamber of Commerce of 
which I am a board member and chairperson of the U.S. Chamber Small 
Business Council.
    Permac Industries is a precision machining manufacturer that 
services the global aerospace, defense, medical, high-reliability 
industrial and commercial industries. When I purchased Permac in 1993 
there were 7 employees. We now have almost 30 employees and are looking 
to expand. In order to expand, my company must be able to compete with 
much larger companies for talented employees. One way that we are able 
to compete is by offering employee benefits, including a retirement 
savings plan. As the owner of a business, I am focused on the details 
of my core business function--sales, finance, and manufacturing 
oversight--and use outside professionals to help me with supplemental 
business functions. For example, I use a CPA firm accountant to assist 
with tax issues, attorneys to assist with legal issues, and a financial 
advisor to help me with my retirement savings plan.
    In 1999, Permac implemented a SARSEP--a Simplified Employee Pension 
plan which is now known as a SEP-IRA. The plan was recommended to me by 
a broker whom I worked with to provide medical benefits for my 
employees. This broker was a trusted adviser that I had worked with 
previously and had provided valuable assistance. Several years later, 
my broker advised me that I was in danger of violating the SARSEP rules 
because my employee population was exceeding the 25 employee limit. At 
that point, I worked with him to determine how to continue to provide 
retirement benefits for my employees. We decided that a 401(k) plan was 
the best option for my company and in 2008 we implemented the new plan. 
Through the 401(k) plan, Permac provides the opportunity to save, a 
matching contribution, and investment education. There is 93 percent 
participation in the plan and, annually, the company provides an 
investment seminar. All employees--even those who don't participate in 
the plan--are encouraged to participate in the investment seminar.
    My broker helped me implement the SARSEP, notified me when I was 
about to be in violation of the rules and guided my transition to a 
401(k) plan. My current employees are like family and I want to be able 
to help them. Just as importantly, I want to be able to attract new 
employees. Providing retirement benefits has been important to help my 
current employees and to attract new employees. As my company continues 
to grow, I look forward to providing competitive benefits. I am very 
concerned that the proposed rule will prevent my ability to do so.
    The Chamber has earlier submitted a comment letter to the 
Department of Labor enumerating many ways in which the proposed rule is 
unworkable. In my testimony, I would like to highlight three issues 
that will have a particularly negative impact on small business plans:

    1. The seller's carve-out discriminates against small businesses 
and will decrease access to much-needed guidance.
    2. The changes to the education carve-out will restrict access to 
investment education for both small business owners and their 
    3. The Best Interest Contract Exemption will increase the costs of 
services to small businesses and possibly eliminate access.

    The seller's carve-out discriminates against small businesses and 
will decrease access to much-needed guidance. Under the proposal, there 
is a carve-out for advisors that are selling or marketing materials 
(``Seller's Carve-Out''). However, this carve-out does not apply to 
advisors to small businesses. The DOL seems to believe that small 
business owners, such as me, are not as sophisticated as large 
businesses and, therefore, need additional protections. The validity of 
this rationale is based on faulty assumptions, and does not justify 
discriminatory treatment. When I work with my financial adviser, I am 
aware that he is providing a service for a fee and selling a product. I 
would not be able to run a successful business if I were not able to 
understand when I am involved in a sales discussion--particularly, if 
it follows a basic disclosure that an advisor is selling a proprietary 
financial product, that the advisor is paid to sell the product, and 
the advisor is not providing fiduciary advice. This disclosure, similar 
to that the Department requires in the large plan carve out, is readily 
understandable to any recipient.
    The assumption that small plans, participants and IRA owners cannot 
understand the difference between sales and advice does not match my 
real world experience. The Department can protect participants, IRA 
owners and small plans with the same kind of disclosures that it 
requires of large plans under the large plan carve out, but without 
eliminating their right to choose the services and products that best 
fit their needs.
    The changes to the education carve-out will restrict access to 
investment education for both small business owners and their 
employees. While the Proposal expressly permits education to be 
provided to plans, participants, and IRAs, the redefinition of asset 
allocation models that reference the plan's investment options as 
fiduciary advice will significantly disrupt plan sponsor efforts to 
educate their plan participants and retirees about investment options. 
Many small businesses, including mine, rely on trusted third parties to 
provide investment education to their employees. These efforts include 
providing asset allocation models that provide a recommendation on 
investments in various asset classes based on a plan participant's age, 
expected retirement and risk tolerance. However, under the Proposal, 
any party who provides specific investment options for each asset class 
would be deemed an ERISA fiduciary. This significant modification from 
current rules, which allows for such information on a non-fiduciary 
basis, would harm investors, and particularly small business plan 
participants that likely have access to fewer resources.
    My employees value the investment education provided to them--
specifically providing investment recommendations in various asset 
classes. This information allows them to make informed investment 
decisions. Many of my employees cannot afford to pay for investment 
education separately and might be discouraged from investing in the 
plan at all if the company did not provide this benefit. By disallowing 
any party to make the link between asset classes and specific 
investment options, the Department of Labor is forcing plan 
participants into the tenuous position of figuring out how to invest 
their own retirement savings and risk making poor choices.
    The Best Interest Contract Exemption will increase the costs of 
services to small businesses and possibly eliminate access. Because 
advisors to small businesses are not carved out of the fiduciary 
definition, they must change their fee arrangements, or qualify for a 
special rule called an ``exemption'' in order to provide services on 
the same terms as before.\1\ The reason the DOL regulatory package 
causes such significant change is that a fiduciary investment advisor 
under ERISA generally has engaged in a prohibited transaction if the 
advisor recommends investments that either pay the advisor a different 
amount than other investments, or that are offered by affiliates (for 
example, the advisor is connected with the insurance company that 
offers the investment). There are certain exceptions to these rules, 
called ``prohibited transaction exemptions'' but as DOL has proposed 
the new rules, the exemptions generally won't help financial advisors 
who are working with small businesses to set up plans. Therefore, it 
may be illegal for those advisors to get commissions or to recommend 
certain investments.
    \1\ However, the new exemption proposed by DOL may not apply to 
small business plans. It does apply to individual owners of IRAs, but 
it is not clear whether this exemption is available for retirement 
plans--including SEP and SIMPLE IRAs--that are being offered by the 
employer. Further, even if it does apply, the new exemption--called the 
Best Interest Contract (``BIC'') Exemption--would itself substantially 
increase costs for advisors due to its many conditions and 
    This problem is highlighted in services for SEP and SIMPLE IRAs. 
One way advisors might try to comply is by charging a flat fee for 
their SEP or SIMPLE IRA services. Even though Permac no longer provides 
a SEP-IRA, we might never have offered one if the fees had been too 
high. Without that introduction into providing a retirement savings 
program, we might not have moved onto a 401(k) plan. Consequently, it 
is extremely important to consider the negative impact that increased 
costs will have--particularly in the small business plan market.
    In conclusion, for the reasons stated above, we are very concerned 
that the Proposal will not achieve the Department's goals of better 
protecting workers and retirees, but will instead make it harder for 
small business employers and employees to access financial advice and 
to increase retirement savings. I appreciate that the DOL is looking to 
work with the industry to resolve our concerns. However, I am very 
concerned that the current timeline does not allow enough time for 
proper discussions. If the final rule does not properly resolve the 
issues raised above, the unintended consequences will have substantial 
negative repercussions on my employees, as well as the employees of 
many other small businesses.
    Thank you for the opportunity to testify before you today and I 
look forward to any questions you may have.

    Senator Isakson. Thank you, Ms. Miller.
    Before we go to Mr. Puritz, I want to apologize. Senator 
Roberts and I both have an Ethics Committee hearing which 
involves nobody on the dais, I might add, at 4 o'clock. We have 
to be there. Showing the good-natured spirit that I am and also 
a spirit of bipartisanship, I'm going to turn over the rest of 
the hearing to our acting chairman but Ranking Member, Al 
    Senator Roberts. Good grief.
    Senator Franken [presiding]. Unprecedented.
    Senator Roberts. Mr. Acting Chairman, I don't know what to 
say. You again.
    Senator Franken. May I help you? OK. This is an old Jack 
Benny thing. Let's just go right to Mr. Puritz.

                          BETHESDA, MD

    Mr. Puritz. Thank you, Chairman Isakson, Ranking Member 
Franken, and members of the subcommittee, for this opportunity 
to provide Rebalance IRA's views about the Department of 
Labor's proposed conflict of interest rules.
    I'm Scott Puritz, the co-founder and managing director of 
Rebalance IRA. My firm is a registered investment advisor with 
approximately $275 million of assets under management, and we 
serve approximately 500 clients. Rebalance IRA is a relatively 
new national investment advisory firm that combines top-quality 
retirement expert investment advisors, real human beings, with 
low-cost, highly diversified retirement portfolios for everyday 
    Our firm's Investment Committee includes financial 
luminaries, Professor Burton Malkiel from Princeton; Dr. 
Charlie Ellis, who chaired the famed Investment Committee at 
the Yale Endowment; and Jay Vivian, who managed IBM's $100 
billion corporate pension fund.
    Rebalance IRA embraces a fiduciary legal standard, and we 
always put the interest of our clients front and center. We 
provide retirement investment advice without commissions and 
without conflicts. This makes it very easy to embrace a 
fiduciary standard.
    Rebalance IRA is part of a broad trend of investment 
advisory firms that seek to provide consumers with a 
fundamentally better set of retirement investment options. This 
new generation of firms is offering retirement investment 
advice to clients at all income levels for very modest fees. 
The group of innovators includes new firms, such as my own, 
Rebalance IRA; Wealthfront; and Personal Capital, but also 
includes established industry players such as Vanguard and 
    This trend of retooling the financial service industry is 
about 3 years old and has met with considerable success in the 
marketplace. Tens of thousands of clients have switched over. 
This group of investment innovators is growing very fast and 
manages over $15 billion of client assets. Imagine what would 
happen if there was a level playing field. Imagine.
    These investment innovators have three common features. 
First, we harness technology to make the process more 
efficient. Second, we harness new business models. And, 
finally, we deploy new investing vehicles, typically best-of-
breed, proven, endowment-style investing portfolios of low-cost 
ETFs. The results are considerable--lower cost, superior asset 
allocation, superior investment vehicles, superior 
transparency, and, finally, we are building profitable, 
successful business models.
    At Rebalance IRA, our clients seek our help because they 
need advice about how to manage their retirement savings and 
how to better understand the increasingly complex world of 
investment products. Our clients come from all walks of life--
nurses, school teachers, plumbers, lawyers, welders, 
professors, police, firemen, government employees--regular 
    We're in the marketplace every day dealing with everyday 
Americans as they struggle to find the best way to manage their 
retirement investment savings. If you will, we see how the 
sausage is made, and sometimes, frequently, it is not a pretty 
sight. Over 30 percent of our clients come to us directly from 
having, for lack of a better phrase, a suboptimal relationship 
with a brokerage firm. At our firm, we sometimes refer to these 
clients as brokerage refugees.
    The story we see over and over again is all too familiar: a 
client at a brokerage firm who is stunned to find out that 
their so-called trusted retirement investment advisor does not 
have a fiduciary responsibility. In addition, the vast majority 
of these clients are surprised, and shocked, to discover that 
there is almost always a second layer of fees at the investment 
management level which frequently adds 1 percent or more to the 
fee burden.
    The brokerage refugees that we see at our firm average 2.37 
percent of fees all in per year. That may not sound like a lot 
of money. But over several decades, that extra fee burden can 
eat away at over half, half of a consumer's retirement nest 
egg, over half.
    When Rebalance IRA takes on these brokerage refugees as 
clients of our firm, we immediately reduce their retirement 
investment fee structure by an average of 68 percent. In 
addition, we put in place for these clients a comprehensive 
retirement plan, and we provide our clients with best-of-breed, 
endowment-style, retirement investment portfolios. And, 
finally, we pair all of our clients with a highly qualified, 
two-person--real heartbeat--retirement investing team.
    American inventiveness and entrepreneurial spirit are alive 
and well in the financial services industry. For all consumers 
to reap the full benefit of this truly extraordinary surge of 
innovation, there needs to be three things: greater 
transparency; greater flow of information, particularly 
regarding cost; and a greater alignment of economic interests.
    We believe that a regulatory level playing field will 
dramatically accelerate the retooling of the financial services 
industry and provide everyday Americans with a fundamentally 
cheaper and fundamentally better way to save for retirement. 
It's time to hold all financial professionals accountable by 
consistently requiring them to act in the best interest of 
their clients and establish a level playing field. This is what 
the Department of Labor's rule can do.
    Americans struggling to save for a dignified retirement 
should no longer be subjected to the conflicts of interest that 
are draining their retirement investments. If the traditional 
brokerage firms cannot live by a simple fiduciary standard and 
refuse to serve modest savers, so be it. Other firms who 
embrace this client-first approach stand ready to help----
    Senator Franken. Mr. Puritz, I would ask you to wrap up.
    Mr. Puritz [continuing]. All Americans at all income levels 
prepare for a secure retirement.
    Thank you.
    [The prepared statement of Mr. Puritz follows:]
                   Prepared Statement of Scott Puritz
    Thank you Chairman Isakson, Ranking Member Franken, and members of 
the subcommittee for the opportunity to provide Rebalance IRA's views 
about the Department of Labor's proposed Fiduciary Duty Rule.
    I am the co-founder and managing director at Rebalance IRA. There, 
I have assembled the infrastructure and service delivery methods that 
bring our firm's clients sophisticated retirement investment advice and 
the personalized treatment offered by top-tier wealth management firms, 
for a fraction of the cost. I also am a long-time member of the board 
of directors of the North Carolina Outward Bound School, sitting on its 
Finance Committee, which oversees the School's $14 million endowment. 
In addition, I helped establish an Outward Bound scholarship program 
for inner-city teens, giving them the opportunity to develop critical 
life skills. I received my B.A. in economics, with distinction, from 
Tufts University, and an M.B.A. from Harvard Business School. I am a 
registered Investment Representative and I hold a Series 65 securities 
    Rebalance IRA is a registered investment advisor firm with 
approximately $275 million AUM, and serves more than 500 clients. It is 
a relatively new, national investment advisory firm that combines top-
quality retirement expert investment advisors with low-cost, highly 
diversified retirement portfolios for everyday Americans. Our firm's 
Investment Committee includes Professor Burton Malkiel (Princeton 
University), Dr. Charles Ellis (who chaired the Investment Committee of 
the famed Yale Endowment), and Jay Vivian (who managed IBM's $100+ 
billion corporate pension fund). Our firm embraces a fiduciary legal 
standard, always putting the interest of our clients front and center. 
We provide retirement investment advice without commissions and without 
conflicts between our interests and those of our clients.
    Rebalance IRA is part of a broad trend of new investment advisory 
firms that seek to provide consumers with a fundamentally better set of 
retirement investment options, offering retirement investment advice to 
clients at all income levels for very modest fees. This trend of 
disrupting the established investing order is about 3 years old and has 
met considerable success in the marketplace. Tens of thousands of 
clients have switched over to firms like ours from brokerage firms and 
others. These ``investment innovators'' are growing quickly, and, by 
some measures, to date this group of firms collectively manages more 
than $15 billion in client assets.
    I would like to share the Rebalance IRA perspective on the 
Department of Labor's proposed update to its fiduciary duty rule, 
discussing our clients' experiences, the problem in the retirement 
investment advice industry, the need for an updated fiduciary duty 
rule, and our firm's business model.
                              who we serve
    At Rebalance IRA, our clients seek our help because they need 
advice about how to manage their retirement savings and how to 
understand the increasingly complex world of investment products. Our 
clients come from all walks of life including nurses, school teachers, 
plumbers, lawyers, welders, professors, police, doctors, farmers, 
government employees--i.e., regular Americans.
    We are in the marketplace every day, dealing with everyday Americas 
as they strive to find the best way to manage their retirement 
investing savings. We see firsthand the shortcomings of the current 
regulations governing advice given to retirement savers.
    I would like to begin by telling a story about one of our clients, 
and her experience with conflicted advice. She is a 37-year-old woman 
from California, married with three children. In managing her family's 
retirement investments, she had ``inherited'' a stockbroker from her 
family. She used this broker for some time, believing she was only 
paying the typical 1 percent fee for investment advice and entrusted 
him with her family's retirement nest egg.
    Later she was introduced to Rebalance IRA, and reached out to learn 
more about our firm's services. Upon our review of her retirement 
investment statements, we found that her broker had invested her 
retirement funds in actively managed mutual funds, which contained a 
significant second level of fees. In addition, her stockbroker had 
recommended a new actively managed mutual fund, with a front-end load 
that took 5 percent off the top. When all was said and done, she was 
paying over 2.3 percent in annual fees, not the typical 1 percent. 
What's worst--she had no idea. Her broker never disclosed the fees or 
conflicts to which her accounts were subject. In the end, Rebalance IRA 
was able to reduce the annual ``all-in'' cost for this client's 
retirement accounts by nearly 70 percent, or by over $5,000 per year. 
We also invested her funds in a more appropriate diversified set of 
retirement investment portfolios and implemented a disciplined risk 
management rebalancing system.
    This client isn't alone. In fact, more than 30 percent of the 
Rebalance IRA client base comes to our firm directly following a 
``suboptimal'' relationship with a brokerage firm. We refer to these 
clients as ``brokerage refugees.'' Just like her, these clients usually 
are shocked to find out that their ``trusted'' retirement investment 
advisor does not have a fiduciary obligation. In addition, these 
brokerage refugees consistently are surprised to discover that the 
investments in their retirement accounts frequently are burdened with a 
second level of fees at the investment vehicle level or fund-level 
fees. The brokerage refugees that we see at our firm average over 2.37 
percent per year of total (all-fee) fees in their brokerage retirement 
    It is important to keep in mind that, as with investment returns, 
investment fees compound over time and can eat away at retirement 
savings. While 2.37 percent per year may not sound like a large amount 
of money, over several decades this increasingly compounding fee burden 
can reduce a consumer's retirement nest egg by half if not more.
    When Rebalance IRA takes on these brokerage refugees as clients of 
our firm, we immediately reduce their retirement investing fee 
structure by an average of 68 percent. In addition, our firm provides 
meaningful retirement investment advice to all of our clients. 
Rebalance IRAs' advisors put in place a comprehensive retirement 
investing plan, and we provide our clients with best-of-breed, 
endowment-grade, low-cost retirement investment portfolios. And 
finally, we pair all of our clients with a highly qualified, two-person 
retirement investing team.
                        the heart of the problem
    The lack of a consistent best interest advice is at the heart of 
the debate that we are having today. We have seen it firsthand, and we 
are troubled that others in the advisory industry are legally allowed 
to act in this manner, sometimes putting their own interest, or their 
firm's, ahead of their clients.
    Consumers that we see typically thought that their investment 
advisor was acting in their best interest, which studies have 
supported. One study found 49 percent of investors assumed that 
investment advisors were required to act under a fiduciary standard, 
while 59 percent believed ``financial advisors or financial 
consultants'' had the same requirement.\1\ Inconsistent and weaker 
standards should not be the norm for retirement savers, yet they are.
    \1\ Angela Hung, et al., Investor and Industry Perspectives on 
Investment Advisers and Broker-Dealers 89 (2008).
    The current rules governing the standards for investment advice 
under the Employee and Retiree Income Security Act (ERISA) are outdated 
and filled with shortcomings and loopholes. These rules, first 
promulgated 40 years ago in 1975, were written when the retirement 
landscape consisted primarily of defined benefit plans, also known as 
traditional pensions. At that time IRAs had just been created a year 
prior and 401(k)s had yet to exist. Advice was not something that was 
in demand, because pensions were managed professionally for employees 
through their employer.
    Today, that is not the case. Plans available to workers and 
retirees are dominated not by pensions, but by defined contribution 
plans such as 401(k)s and IRAs. These plans require workers and 
retirees to invest their savings on their own, yet many lack the level 
of expertise necessary to properly manage their retirement savings. 
This is why we are here--and why many others are in this industry--to 
specialize in providing people with advice necessary to invest and 
manage their retirement savings.
    Unfortunately, the ``help'' many receive often is not in their best 
interest. The 40-year-old rules allow brokers, insurance agents, and 
others offering retirement investment advice to put their own interest 
ahead of their clients. The investment products sold to retail 
investors can generate attractive commissions for these firms, yet has 
the potential to leave clients with underperforming investments and 
layers of fees.
                              the solution
    The Department of Labor has proposed a ``fiduciary rule'' requiring 
all financial professionals to avoid and mitigate conflicted advice 
when it comes to retirement investments. The proposed rule would better 
cover advice largely unprotected today--especially in the $7 trillion 
individual retirement account (IRA) market. Expectedly, this has 
generated strong opinions on both sides of the issue, with a portion of 
the advisory industry who provide conflicted advice endeavoring to make 
this much-needed rule update a difficult battle.
    Rebalance IRA strongly supports the proposed rule because it 
successfully follows a fiduciary standard that we feel investors and 
firms across the board should embrace. Committing to a best interest 
standard can be done, and it should be done, because American workers 
and retirees deserve advice given in their best interest.
    Rebalance IRA provides retirement investment advice without 
commissions and without conflicts, which allows our firm to put each of 
our clients front and center. That is why we find it troubling that 
many who label themselves as financial advisors find this standard a 
difficult one to adopt, call the rule ``unworkable,'' and claim that 
they are for a best interest standard without willing to commit to one 
at the end of the day. Unfortunately, this segment of the advice 
industry defends the status quo.
    Millions of hardworking Americans simply want to be sure that they 
can make ends meet during their golden years. The Labor Department's 
proposed rule would give them the chance to do that by requiring those 
giving retirement investment advice to act in the best interest of 
their clients and comply with the fiduciary standard already embraced 
by Rebalance IRA and other investment innovators. A universal fiduciary 
standard, combined with full and fair disclosure, will help consumers 
make truly informed decisions about how best to manage their retirement 
                        our business model works
    Currently, many brokerage firms and others providing retirement 
investment advice outside of a fiduciary standard are structured to 
maximize the sale of investment ``products'' and maximize profits, 
regardless of the implications for their clients. Often, they claim 
that small savers and small businesses will be the ones who lose out on 
the retirement investment advice that they need. Yet this ignores the 
fact that what small savers often get from brokers is not true advice, 
but rather a sales pitch disguised as advice. And, because retail 
investors by and large are not financial experts, they often cannot 
tell the difference between the two and, as a result, are susceptible 
to suffering harm from the recommendations they receive. Industry 
claims that small savers and small businesses will lose out on 
retirement investment advice also ignore the ever-growing options 
available today for individuals.
    Rebalance IRA and other investment innovators such as Wealthfront, 
Personal Capital, and Financial Engines, are striving to provide 
retirement investors with fundamentally different and better investing 
options. Established industry companies, such as Vanguard and Schwab, 
are joining in this movement to find innovative ways to deliver high-
quality, low-cost options to retirement savers to make the best of 
their nest egg.
    This investment innovation trend already is delivering tangible 
benefits to consumers. For example, at Rebalance IRA our services are 
50-75 percent lower than traditional brokerage models. It must be noted 
that costs are the most accurate predictor of investment success over 
time. The second predictor of success is asset allocation. At Rebalance 
IRA, our highly skilled financial advisors spend considerable time with 
new clients to strive for the optimal balance of risk and reward, 
unbiased by commissions. Third, our firm provides a high level of 
transparency, regarding ``all-in'' investing costs to consumers and 
fiduciary responsibilities to clients. And finally, we pair all of our 
clients with a highly qualified, two-person retirement investing team. 
Put together, this has resulted in a business model that is successful 
for investors, as well as profitable. Bottom line: Advisors can provide 
best interest advice to investors of all incomes and run a successful 
    Because our firm runs free of conflicts, we do not have concerns 
about litigation. We believe that when we put our clients front and 
center, without conflict, and provide them with high caliber services 
under our business model, we can leave concerns about regulatory risk 
at the door. We take our fiduciary obligation seriously, just as any 
advisor should, and that results in relief from worries of legal costs.
    It is time to hold all financial professionals accountable by 
consistently requiring them to act in the best interests of their 
clients, and establish a level playing field. That is what the 
Department of Labor's rule can do. Americans struggling to save for a 
dignified retirement should no longer be subjected to the conflicts of 
interest that are draining their retirement investments. And, if 
traditional brokerage firms cannot live with the simple fiduciary 
standard and refuse to serve modest savers, so be it. Other financial 
firms who embrace the client-first approach, new and established, stand 
ready to help all Americans prepare for a secure retirement.
    Thank you again for the opportunity to appear before you today. I 
look forward to answering your questions.

    Senator Franken. Thank you. Since I'm, I guess, the acting 
chairman now, I will be here until the end. I'll go to Senator 
Warren to ask her questions.
    Senator Warren. Thank you, Mr. Acting Chairman. As we have 
discussed, it is now perfectly legal for retirement advisors to 
give advice that boosts their own incomes by selling lousy 
products to their clients. According to the best available 
data, data that are not paid for by the industry, this bad 
advice costs Americans about $17 billion a year. The Department 
of Labor has proposed a rule that would put a stop to this 
retirement savings drain and require all investment advisors to 
put their customers first--a level playing field.
    Mr. Schneider, you're the CEO of Primerica, a large 
investment advisory firm, and you've testified today that the 
Department of Labor's rule is--and I think these are your 
words--complex and burdensome, and you said that one thing 
that's ``critical'' to your success is that Primerica always 
operates in its clients' best interests.
    I was interested to read a news report this morning that 
outlines lawsuits brought against your advisors in Florida. 
According to the article, at least 238 firefighters, teachers, 
and other career public workers who were near retirement age 
accused your company of providing bad advice that drained their 
retirement savings. You did it by advising them to move their 
retirement savings out of a guaranteed government pension into 
riskier private investments.
    Primerica was poised to make a lot of money, but only if 
you could convince Florida firefighters who were near 
retirement age to cash out their guaranteed pensions. Mr. 
Schneider, I just want to understand your company's advice in 
these cases. Do you believe that people like these firefighters 
from Florida who are near retirement and have secure pensions 
with guaranteed monthly payments should move their money into 
riskier assets with no guarantees just before they retire?
    Mr. Schneider. First of all, Senator Warren, I appreciate 
the promotion. I'm actually the president of the company, not 
the CEO.
    Senator Warren. Oh, OK.
    Mr. Schneider. I'm familiar with the matter of which you 
speak, and it doesn't have any application, actually, to the 
rule before the committee, because in that particular case, 
none of those individuals were clients of Primerica.
    Senator Warren. Whoa, whoa, whoa.
    Mr. Schneider. They paid us no compensation. Let me go to--
    Senator Warren. No, no. Let's just stop right there, Mr. 
Schneider. The article didn't say the workers were your 
retirement clients. It says you gave them bad advice, and here 
exactly is the quote.

          ``Once these workers retired and moved out of their 
        government plans, Primerica agents stood to profit from 
        managing their retirement assets. Had they stayed in 
        the pension programs, retirees would have simply 
        collected their monthly payments, leaving nothing for 
        Primerica to manage and no commissions for Primerica 
        agents to harvest.''

    My question is not how you were paid. My question is 
whether you think it is sound investment advice to encourage 
public employees to move their money out of their pensions and 
into riskier assets with no guarantees just before they retire.
    Mr. Schneider. Senator, in that particular matter, first of 
all, regulators looked at that. They found the firm had acted 
properly, and the case was dismissed by the court.
    Senator Warren. Let me stop you right there. The question 
about the regulators is the question about is it legal to do 
that, and that's exactly the problem we've got. It is legal to 
do that, and I think that's what the regulators say. It's 
    My question, once again, is about the advice that Primerica 
agents gave. Is it a good idea for firefighters on the front 
edge of retirement to move out of a guaranteed benefit plan 
that was going to cover them for all their lives and move into 
a risky investment that would make a lot of fees for your 
    Mr. Schneider. Each situation is really very different. If 
you are in a defined benefit plan, and you're sick, what 
happens is in the State of Florida, for example, were you to 
retire and then die 2 or 3 weeks later, you have no ability to 
leave your money to your loved ones.
    Senator Warren. I'm sorry. Are you suggesting that these 
238 people were weeks away from dying and that's why they all 
got this advice?
    Mr. Schneider. Senator, the courts dismissed those cases, 
and, frankly, this illustrates one of the problems----
    Senator Warren. Because it is legal activity. I think we've 
established that, Mr. Schneider, that no one broke the law. The 
question is whether the law should be changed.
    Mr. Schneider. It illustrates one of the issues, though, 
with the rule, because we're here to talk about the rule. One 
problem with the rule is, as everyone in the financial services 
industry knows, especially after the financial crisis, you can 
be sued, sometimes appropriately, but also sometimes 
    Under the best interest contract exemption, you enter into 
a contract with the client, and they can sue you, and you can 
lose the benefit of the exemption. It's not just a contract----
    Senator Warren. I understand, Mr. Schneider, that you don't 
want to be sued. I totally get that. The question I keep trying 
to ask is whether it's generally a good idea for workers like 
firefighters and teachers on the eve of their retirement to 
move their money from guaranteed defined benefit plans into 
riskier investments.
    Let me ask you that question, Mr. Puritz. You're the 
managing director of Rebalance IRA. You have a large investment 
management firm. Would you advise 50-year-old, 60-year-old 
clients to cash out of a defined benefit pension plan and move 
money into an IRA managed by your company?
    Mr. Puritz. As a general rule, the answer is no.
    Senator Warren. So you'd say no. Why not?
    Mr. Puritz. In a traditional pension, a defined benefit 
plan, there's safety and predictability. My answer would be 
different if it was a defined contribution plan.
    Senator Warren. That's not what we have here. We have a 
defined benefit plan that guarantees that these people are 
going to be covered for their entire lives. Is that right? 
There's a lot of research around this, I understand. Are there 
circumstances in which it is a good idea for someone right on 
the threshold of retirement to move from a defined benefit plan 
that will protect them for the rest of their lives to a much 
riskier plan?
    Mr. Puritz. There are circumstances, but they're very rare.
    Senator Warren. You would describe them as very rare. I 
must say I took a look at the research on this and wanted to 
get some more experts' opinions on this. It seems to me the 
research is pretty clear.
    Alicia Munnell, the director of the Center for Retirement 
Research at Boston College, has said,

          ``Only those with serious illnesses who believe they 
        do not have much time left should even consider cashing 
        out a defined benefit pension,''

and even that isn't obvious, because, as she puts it, even sick 
people may live longer than they think.
    Mr. Puritz, let me ask you one more question. Do you think 
it is--and I want to use the correct quote here--``complex and 
burdensome'' to offer advice that is in the best interest of 
the client, as Primerica claims?
    Mr. Puritz. No.
    Senator Warren. I didn't think so. Frankly, the suggestion 
that it's too expensive to provide people with sound financial 
advice is ridiculous. Millions of financial advisors do it 
every day. Hardworking Americans like the Florida firefighters 
and teachers who devoted their careers to protecting the public 
and who were targeted by Primerica shouldn't have to worry 
about whether their financial advisors are planning to get rich 
by playing roulette with their customers' retirement savings.
    Hardworking advisors, like Mr. Puritz, shouldn't have to 
compete with these schemes. I am glad the Department of Labor 
is working to fix this problem.
    Thank you, Mr. Chairman.
    Senator Franken. Thank you, Senator.
    Mr. Puritz, in both your spoken testimony and your written 
testimony, you referred to something called a brokerage 
refugee. I think that's someone who fled a brokerage and had a 
bad experience, I guess, right?
    Mr. Puritz. That's right.
    Senator Franken. OK. You mentioned in your written 
testimony a married 37-year-old mother of three who was paying 
excessive fees on a new mutual fund recommended by a broker she 
inherited from her family. How do the services you provide and 
the fees you charge under your duty as a fiduciary differ from 
those that this woman experienced with her inherited broker?
    By that--it was that her family had been using this broker 
for years or something. What does that mean for retirement 
investors' nest egg or their ability to retire after, say, 30 
years of working and saving?
    Mr. Puritz. Senator, that's a great question. It really 
gets to the heart of the issue----
    Senator Franken. She literally means raising the microphone 
to your lips or to your mouth, not to your lips, but----
    Mr. Puritz. How's that? Is it on?
    Senator Franken. Thank you. There we go.
    Mr. Puritz. Senator, thank you. That's an excellent 
question, and it really gets to the heart of this matter from 
an economic point of view, from a return point of view. In the 
example that we cited of a client, we're talking about an extra 
fee burden.
    Charlie Ellis, who is a member of our Investment Committee, 
has a phrase he says, that ``the dirtiest word in finance is 
only,'' only 1 percent. We think of 1 percent as--what's the 
big deal? We pay 15 percent for tips, 20 percent if you're 
generous. One percent seems inconsequential.
    In the scenario that we've run into consistently with 
clients who come from brokerage relationships, that extra fee 
burden is 2.37 percent. If you trend line that out over 30 
    Senator Franken. That's additional, or that's what they're 
    Mr. Puritz. That's what they're paying per year.
    Senator Franken. OK. I got it.
    Mr. Puritz. In the current environment with plenty of good 
lower-cost alternatives, it's really an unnecessary fee burden.
    Senator Franken. Isn't that essentially--that's compounded? 
Is that the----
    Mr. Puritz. Fees compound just like return, exactly, 
Senator. I'll give you an example. If someone had $100,000, and 
they were in an all growth stock, which historically has 
returned--our magic number is 7.2 percent a year. At that 
number, in a tax deferred account, that account would double 
every 10 years. In the 30-year timeframe, $100,000 would become 
$800,000--real considerable wealth creation.
    By contrast, if you reduce that down to 5 percent, which is 
really the fee delta that we see in the marketplace, that 
$100,000 only grows to $400,000 or half the amount of money. 
That's what's at stake here. It's about a doubling of the 
    Senator Franken. OK. How are you able to provide your 
service at such a lower--my computations--32 percent of 2.37 
percent is about .75 percent.
    Mr. Puritz. That's correct.
    Senator Franken. How do you do that?
    Mr. Puritz. We use technology to make everything we do more 
productive. We use exclusively low-cost ETFs, index funds----
    Senator Franken. Is that what was called, disparagingly, I 
think, robo?
    Mr. Puritz. Robo is a phrase for a new generation of 
investment advisors who use technology. There are some advisors 
who are 100 percent computerized, and that's where the term, 
robo, comes from. There are some very successful ones, 
including Wealthfront--that is the market leader--and they're 
really targeting millennials and people in their 20s and 30s, 
for whom----
    Senator Franken. They're familiar with working----
    Mr. Puritz. They're familiar with computers, and their 
retirement is a relatively small part of their overall life. 
Their whole career is ahead of them.
    By contrast, there's other firms, such as Personal Capital 
and my own firm, Rebalance IRA, where we have similar 
investment philosophies and similar use of technology, but we 
have real live investment advisors who deal extensively with 
clients and match them with the right asset allocation, low-
cost underlying portfolios, very low-cost, and disciplined 
rebalancing, which is really an essential risk management and 
return tool.
    Senator Franken. I have a lot of questions, but I'll submit 
them for the record.
    We'll keep this open--I would imagine--I didn't come here 
thinking I would adjourn this. When I say we'll keep it open--
for a certain period of time. Is that 10 days? Ten business 
days. I was right. I was in the majority on one point.
    Thank you all for your testimony, and this hearing is 
    [Additional Material follows.]

                          ADDITIONAL MATERIAL*

      DOL Fact Sheet--Employee Benefits Security Administration, 
                        U.S. Department of Labor
 Department of Labor Proposes Rule to Address Conflicts of Interest in 
  Retirement Advice, Saving Middle-Class Families Billions of Dollars 
                               Every Year
          ``Today, I'm calling on the Department of Labor to update the 
        rules and requirements that retirement advisors put the best 
        interests of their clients above their own financial interests. 
        It's a very simple principle: You want to give financial 
        advice, you've got to put your client's interests first.''--
        President Barack Obama, February 23, 2015
    * Due to the high cost of printing, the White House Counsel of 
Economic Advisors (CEA) report: The Effects of Conflicted Investment 
Advice on Retirement Savings to be included for the record can be found 
at: https://www.whitehouse.gov'sites/default/files/docs/cea_coi_report_
        Summary of Today's Action to Protect Retirement Savers 
                       By the Department of Labor
    Today, the Department of Labor issued a proposed rulemaking to 
protect investors from backdoor payments and hidden fees in retirement 
investment advice.

     Backdoor Payments & Hidden Fees Often Buried in Fine Print 
Are Hurting the Middle Class: Conflicts of interest cost middle-class 
families who receive conflicted advice huge amounts of their hard-
earned savings. Conflicts lead, on average, to about 1 percentage point 
lower annual returns on retirement savings and $17 billion of losses 
every year.
     The Department of Labor is protecting families from 
conflicted retirement advice. The Department issued a proposed rule and 
related exemptions that would require retirement advisers to abide by a 
``fiduciary'' standard--putting their client's best interest before 
their own profits.
     The Proposed Rule Would Save Tens of Billions of Dollars 
for Middle Class and Working Families: A detailed Regulatory Impact 
Analysis (RIA) released along with the proposal and informed by a 
substantial review of the scholarly literature estimates that families 
with IRAs would save more than $40 billion over 10 years when the rule 
and exemptions, if adopted as currently proposed, are fully in place, 
even if one focuses on just one subset of transactions that have been 
the most studied.
     The Administration Welcomes Feedback: The issuance of a 
notice of proposed rulemaking and proposed exemptions begins a process 
of seeking extensive public feedback on the best approach to modernize 
the rules of the road on retirement advice and set new standards, while 
minimizing any potential disruption to the many good practices in the 
marketplace. The proposal asks for comments on a number of important 
issues. We look forward to hearing from all stakeholders. Any final 
rule and exemptions will reflect this input.
    Middle class economics means that Americans should be able to 
retire with dignity after a lifetime of hard work. Loopholes in the 
retirement advice rules have allowed some brokers and other advisers to 
recommend products that put their own profits ahead of their client's 
best interest, hurting millions of America's workers and their 
    A system where firms can benefit from backdoor payments and hidden 
fees often buried in fine print if they talk responsible Americans into 
buying bad retirement investments--with high costs and low returns--
instead of recommending quality investments isn't fair. A White House 
Council of Economic Advisers analysis found that these conflicts of 
interest result in annual losses of about 1 percentage point for 
affected investors--or about $17 billion per year in total. To 
demonstrate how small differences can add up: A 1-percentage point 
lower return could reduce your savings by more than a quarter over 35 
years. In other words, instead of a $10,000 retirement investment 
growing to more than $38,000 over that period after adjusting for 
inflation, it would be just over $27,500.
    In February, the President directed the Department of Labor to move 
forward with a proposed rulemaking to require retirement advisers to 
abide by a ``fiduciary'' standard--putting their client's best interest 
before their own profits. Today, the Department of Labor is taking the 
next step toward making that a reality, by issuing a Notice of Proposed 
Rulemaking (NPRM) to require that best interest standard across a 
broader range of retirement advice to protect more investors.
    Today's proposal is the result of years of work and reflects 
feedback from a broad range of stakeholders--including industry, 
consumer advocates, Congress, retirement groups, academia, and the 
American public. The proposal includes broad, flexible exemptions from 
certain obligations associated with a fiduciary standard that will help 
streamline compliance while still requiring advisers to serve the best 
interest of their clients.
    In the coming months, the Administration welcomes comments on the 
proposal and looks forward to working with all stakeholders to achieve 
the commonsense goals of the rule while minimizing disruptions to the 
many good practices in industry. Many advisers already put their 
customers' best interest first. They are hardworking men and women who 
got into this work to help families achieve retirement security. They 
deserve a level playing field, and their clients deserve the quality 
advice that this rule will ensure.
              updating our outdated retirement protections
    Since 1974, the Employee Retirement Income Security Act (ERISA) has 
provided the Department of Labor (DOL) with authority to protect 
America's tax-preferred retirement savings, recognizing the importance 
of consumer protections for a basic retirement nest egg and the 
significant tax incentives provided to encourage Americans to save for 
retirement. The basic rules governing retirement investment advice have 
not been meaningfully changed since 1975, despite the dramatic shift in 
our private retirement system away from defined benefit plans and into 
self-directed IRAs and 401(k)s. That shift means good investment advice 
is more important than ever. Today, DOL is proposing a new rule that 
will seek to:

     Require more retirement investment advisers to put their 
client's best interest first, by expanding the types of retirement 
investment advice covered by fiduciary protections. Today large 
loopholes in the definition of retirement investment advice under 
outdated DOL rules expose many middle-class families, and especially 
IRA owners, to advice that may not be in their best interest. Under 
DOL's proposed definition, any individual receiving compensation for 
providing advice that is individualized or specifically directed to a 
particular plan sponsor (e.g., an employer with a retirement plan), 
plan participant, or IRA owner for consideration in making a retirement 
investment decision is a fiduciary. Such decisions can include, but are 
not limited to, what assets to purchase or sell and whether to rollover 
from an employer-based plan to an IRA. The fiduciary can be a broker, 
registered investment adviser, insurance agent, or other type of 
adviser (together referred to as ``advisers'' here). Some of these 
advisers are subject to Federal securities laws and some are not. Being 
a fiduciary simply means that the adviser must provide impartial advice 
in their client's best interest and cannot accept any payments creating 
conflicts of interest unless they qualify for an exemption intended to 
assure that the customer is adequately protected. DOL's regulatory 
impact analysis estimates that the rule and related exemptions would 
save investors over $40 billion over 10 years, even if one focuses on 
just one subset of transactions that have been the most studied. The 
real savings from this proposal are likely much larger as conflicts and 
their effects are both pervasive and well-hidden.
     Preserve access to retirement education. The Department's 
proposal carefully carves out education from the definition of 
retirement investment advice so that advisers and plan sponsors can 
continue to provide general education on retirement saving across 
employment-based plans and IRAs without triggering fiduciary duties.
    As an example, education could consist of general information about 
the mix of assets (e.g., stocks and bonds) an average person should 
have based on their age, income, and other circumstances, while 
avoiding suggesting specific stocks, bonds, or funds that should 
constitute that mix. This carve-out is similar to previously issued 
guidance to minimize the compliance burden on firms, but clarifies that 
references to specific investments would constitute advice subject to a 
fiduciary duty.
     Distinguish ``order-taking'' as a non-fiduciary activity. 
As under the current rules, when a customer calls a broker and tells 
the broker exactly what to buy or sell without asking for advice, that 
transaction does not constitute investment advice. In such 
circumstances, the broker has no fiduciary responsibility to the 
     Carve out sales pitches to plan fiduciaries with financial 
expertise. Many large employer-based plans are managed by financial 
experts who are themselves fiduciaries and work with brokers or other 
advisers to purchase assets or construct a portfolio of investments 
that the plan offers to plan participants. In such circumstances, the 
plan fiduciary is under a duty to look out for the participants' best 
interest, and understands that if a broker promotes a product, the 
broker may be trying to sell them something rather than provide advice 
in their best interest. Accordingly, the proposed rule does not 
consider such transactions fiduciary investment advice if certain 
conditions are met.
     Lead to gains for retirement savers in excess of $40 
billion over the next 10 years, even if one focuses on just one subset 
of transactions that have been the most studied, according to the 
regulatory impact analysis released with the NPRM. These gains would be 
particularly important for the more than 40 million American families 
with more than $7 trillion in IRA assets, as advice regarding IRA 
investments is rarely protected under the current ERISA and Internal 
Revenue Code rules. Moreover, hundreds of billions of dollars are 
rolled over from plans to IRAs every year. Consumers are especially 
vulnerable to bad advice regarding rollovers because they represent 
such a large portion of their savings and because such transactions are 
also rarely covered under the current rules.
                    complying with the proposed rule
    At present, individuals providing fiduciary investment advice to 
employer-based plan sponsors and plan participants are required to act 
impartially and provide advice that is in their client's best interest. 
Under ERISA and the Internal Revenue Code, individuals providing 
fiduciary investment advice to plan sponsors, plan participants, and 
IRA owners are not permitted to receive payments creating conflicts of 
interest without a prohibited transaction exemption (PTE). Drawing on 
comments received and in order to minimize compliance costs, the 
proposed rule creates a new type of PTE that is broad, principles-based 
and adaptable to changing business practices. This new approach 
contrasts with existing PTEs, which tend to be limited to much narrower 
categories of specific transactions under more prescriptive and less 
flexible conditions. The ``best interest contract exemption'' will 
allow firms to continue to set their own compensation practices so long 
as they, among other things, commit to putting their client's best 
interest first and disclose any conflicts that may prevent them from 
doing so. Common forms of compensation in use today in the financial 
services industry, such as commissions and revenue sharing, will be 
permitted under this exemption, whether paid by the client or a third 
party such as a mutual fund. To qualify for the new ``best interest 
contract exemption,'' the company and individual adviser providing 
retirement investment advice must enter into a contract with its 
clients that:

     Commits the firm and adviser to providing advice in the 
client's best interest. Committing to a best interest standard requires 
the adviser and the company to act with the care, skill, prudence, and 
diligence that a prudent person would exercise based on the current 
circumstances. In addition, both the firm and the adviser must avoid 
misleading statements about fees and conflicts of interest.
    These are well-established standards in the law, simplifying 
     Warrants that the firm has adopted policies and procedures 
designed to mitigate conflicts of interest. Specifically, the firm must 
warrant that it has identified material conflicts of interest and 
compensation structures that would encourage individual advisers to 
make recommendations that are not in client's best interests and has 
adopted measures to mitigate any harmful impact on savers from those 
conflicts of interest. Under the exemption, advisers will be able to 
continue receiving common types of compensation.
     Clearly and prominently discloses any conflicts of 
interest, like hidden fees often buried in the fine print or backdoor 
payments, that might prevent the adviser from providing advice in the 
client's best interest. The contract must also direct the customer to a 
Web page disclosing the compensation arrangements entered into by the 
adviser and firm and make customers aware of their right to complete 
information on the fees charged.

    In addition to the new best interest contract exemption, the 
proposal proposes a new, principles-based exemption for principal 
transactions and maintains or revises many existing administrative 
exemptions. The principal transactions exemption would allow advisers 
to recommend certain fixed-income securities and sell them to the 
investor directly from the adviser's own inventory, as long as the 
adviser adhered to the exemption's consumer-protective conditions.
    Finally, the proposal asks for comment on whether the final 
exemptions should include a new ``low-fee exemption'' that would allow 
firms to accept payments that would otherwise be deemed ``conflicted'' 
when recommending the lowest-fee products in a given product class, 
with even fewer requirements than the best interest contract exemption.
           strengthening enforcement of consumer protections
    Existing loopholes mean that many retirement advisers do not 
consider themselves fiduciaries. As a result, consumers have limited, 
if any, recourse under ERISA and the Internal Revenue Code if their 
retirement adviser recommends products that are in the adviser's 
interest rather than the consumer's. The proposal will not only make 
more advisers fiduciaries but also ensure they are held accountable to 
their clients if they provide advice that is not in their client's best 
interest, because:

     DOL currently has the right to bring enforcement actions 
against fiduciary advisers to plan sponsors and participants who do not 
provide advice in their client's best interest. As under current law, 
the plan sponsor or plan participant harmed by the bad advice can also 
bring their own action.
     The ``best interest contract exemption'' allows customers 
to hold fiduciary advisers accountable for providing advice in their 
best interest through a private right of action for breach of contract. 
In other words, if an adviser isn't putting their client's interest 
first, the client can take action to hold them accountable. This option 
is especially important for advice regarding IRA investments because 
otherwise neither DOL nor the saver who is harmed can hold the adviser 
accountable for the losses the saver suffered. The contract can require 
that individual disputes be handled through arbitration but must give 
clients the right to bring class action lawsuits in court if a group of 
people are harmed. This feature of the best interest contract exemption 
is modeled on the rules under FINRA, which is a non-governmental 
organization that regulates advice by brokers to invest in securities 
but not other types of retirement savings covered by ERISA.
     The IRS can impose an excise tax on transactions based on 
conflicted advice that is not eligible for one of the many proposed 
exemptions. As under current law, the Internal Revenue Code imposes an 
excise tax and can require correction of such transactions involving 
plan sponsors, plan participants and beneficiaries, and IRA owners.
                         process going forward
    The Administration invites stakeholders from all perspectives to 
submit comments during the 75-day notice and comment period or through 
the public hearing to be scheduled shortly after the close of the 
initial public comment hearing. The public record will be reopened for 
comment after the public hearing is held. Only after reviewing all the 
comments will the Administration decide what to include in a final 
rule--and even once the Department of Labor ultimately issues a final 
rule, it will not go into effect immediately.
         how is this rule different from the proposal in 2010?
    In 2010, DOL put forward a proposal to require more retirement 
investment advice to be in the client's best interest. While many 
championed the goals of the proposal, some stakeholders expressed 
concerns during the notice and comment period and at a public hearing.
    Mindful of these criticisms, and wanting to arrive at the right 
answer, DOL decided to withdraw the rule and go back to the drawing 
board. Since 2011, both DOL and the White House have engaged 
extensively with stakeholders, meeting with industry, advocates, 
academics--anyone who can help us figure out the best way to craft a 
rule that adequately protects consumers and levels the playing field 
for the many advisers doing right by their clients, while minimizing 
compliance burdens.
    The proposal released today has improved upon the 2010 version in a 
number of ways, both in process and substance:

     DOL has improved the process to better incorporate 
stakeholder feedback.

          DOL is issuing proposed exemptions simultaneous with 
        the proposed rule. Responding to comments received in 2010, DOL 
        is publishing the proposed exemptions alongside the rule so 
        interested parties have a better sense of how the fiduciary 
        requirements and exemptions work together.
          DOL has consulted extensively with the Securities and 
        Exchange Commission (SEC) and other Federal stakeholders. 
        Secretary Perez and Chair White have had numerous meetings and 
        conversations, and SEC staff has provided technical assistance 
        and will continue these discussions.
          DOL is releasing a more rigorous analysis of the 
        anticipated gains to investors and costs of the rule. Since 
        2010, the body of independent research on the costs and 
        consequences of conflicts of interests in retirement investment 
        advice has grown significantly. Today, DOL is releasing a 
        Regulatory Impact Analysis (RIA) alongside the rule that 
        reflects that substantial body of research and estimates the 
        gains to investors and costs of the proposed rule.

     The rule's substance has changed based on comments 
received since 2010. Specifically, the proposal:

          Provides a new, broad, principles-based exemption 
        that can accommodate and adapt to the broad range of evolving 
        business practices. Industry commenters emphasized that the 
        existing exemptions are too rigid and prescriptive, leading to 
        a patchwork of exemptions narrowly tailored to meet specific 
        business practices and unable to adapt to changing conditions. 
        Drawing on these and other comments, the best interest contract 
        exemption represents an unprecedented departure from the 
        Department's approach to PTEs over the past 40 years. Its broad 
        and principles-based approach is intended to streamline 
        compliance and give industry the flexibility to figure out how 
        to serve their client's best interest.
          Includes other new, broad exemptions. For example, 
        the new principal transactions exemption also adopts a 
        principles-based approach. DOL is asking for comments on 
        whether the final regulatory package should include a new 
        exemption for advice to invest in the lowest-fee products in a 
        given product class, that is even more streamlined than the 
        best interest contract exemption.
          Includes a carve-out from fiduciary status for 
        providing investment education to IRA owners, and not just to 
        plan sponsors and plan participants as under the 2010 proposal. 
        It also updates the definition of education to include 
        retirement planning and lifetime income information. In 
        addition, the proposal strengthens consumer protections by 
        classifying materials that reference specific products that the 
        consumer should consider buying as advice.
          Determines who is a fiduciary based not on title, but 
        rather the advice rendered. The 2010 rule proposed that anyone 
        who was already a fiduciary under ERISA for other reasons or 
        who was an investment adviser under Federal securities laws 
        would be an investment advice fiduciary.
           Consistent with the functional test for determining 
        fiduciary status under ERISA, the proposal looks not at the 
        title but rather whether the person is providing retirement 
        investment advice.

          Limits the seller's carve-out to sales pitches to 
        large plan fiduciaries with financial expertise. This responds 
        to comments that differentiating investment advice from sales 
        pitches in the context of investment products is very difficult 
        and, unless the advice recipient is a financial expert, the 
        carve-out would create a loophole that would fail to protect 
          Excludes valuations or appraisals of the stock held 
        by employee-stock ownership plans (ESOPs) from the definition 
        of fiduciary investment advice. The proposed rule clarifies 
        that such appraisals do not constitute retirement investment 
        advice subject to a fiduciary standard. DOL may put forth a 
        separate regulatory proposal to clarify the applicable law for 
        ESOP appraisals.
                Prepared Statement of Financial Engines
restricting advice and education: dol's unworkable investment proposal 
                   for american families and retirees
    Thank you for the opportunity to submit this statement for the 
record. We appreciate the committee's and subcommittee's interest in 
the important topic of investment advice and education.
    The American retirement landscape has changed dramatically. 
Updating the current retirement plan rules crafted 40 years ago is 
critical to improving protections for retirement investors. In this 
regard, Financial Engines supports the Department of Labor's (``DOL'') 
proposal to update the definition of fiduciary (``fiduciary 
proposal''). Since it launched its first service in 1998, Financial 
Engines has provided high quality services in a fiduciary capacity to 
large numbers of plans and participants; we are proud to serve as an 
example that it can be done. We believe that the proposed rule is 
workable--for providers of advice services, and beneficial--for 
recipients of those services.
                           financial engines
    Financial Engines was founded to accomplish the vision of its co-
founder and Nobel Prize winner Bill Sharpe: To provide high-quality 
independent investment advice to everyone, regardless of their wealth 
or investment experience. Today, Financial Engines provides 
personalized investment advice to 9.6 million employees of large 
employers, including 146 companies of the Fortune 500. Financial 
Engines is not affiliated with any other financial services entity, 
does not manufacture or sell products, and does not accept commissions.
    Financial Engines assists individuals with developing a 
personalized and comprehensive savings, investing, and retirement 
income plan. For example, Financial Engines provides advice to 
individuals near retirement on the advantages of delaying social 
security in order to maximize monthly benefits. Financial Engines uses 
sophisticated technology to deliver services that help individuals set 
a risk level appropriate for when they plan to retire, and to design a 
diversified investment portfolio from among the investment choices 
available in their employer's 401(k) plan to help them reach their 
retirement income goals. Financial Engines can also manage the 
employee's, or their spouse's, IRA assets, affording holistic 
management of all sources of retirement income.
    Financial Engines can either professionally manage an employee's 
account or provide online advice through expert recommendations and 
interactive tools. Financial Engines provides a retirement-readiness 
assessment, including estimated annual retirement income from Social 
Security, their 401(k), IRAs, and pension, if applicable, to all 
employees in the plans we serve. With the Income+ feature of Financial 
Engines' Professional Management service, Financial Engines will manage 
the portfolio to be ready to generate retirement income, and can 
generate steady payouts that are designed to last for life (with the 
purchase of an optional out-of plan fixed annuity). Members are not 
locked in, can vary the amount of payouts to suit changing 
circumstances, and can cancel at no charge at any time.
             critical need for retirement investment advice
    The American retirement landscape has changed dramatically since 
the current retirement plan rules were crafted 40 years ago. 
Professionally managed pension plans have given way to individually 
managed 401(k) and Individual Retirement Accounts (``IRAs''). 
Individual investors with these accounts need help, and with more than 
88 million individual investors now largely responsible for managing 
their own retirement assets, there has never been greater demand for 
high-quality investment advice.
    The need for new rules is clear since potential conflicts of 
interest do exist in the retirement business. Financial ``advisors'' 
too often steer investors toward products that offer higher fees and 
commissions for the ``advisor,'' not what will provide the best 
retirement outcome for the investor. Complex fee-sharing arrangements, 
commission structures, and other conflicts of interest create 
pressures--sometimes overt, sometimes subtle--to shade recommendations 
in the interests of the ``advisor.'' Often investors are unaware that 
these conflicts of interest even exist. Workers end up with investments 
that have lower returns and higher fees, siphoning off tens of 
thousands of dollars in savings from the average person's retirement 
account. Advisors may also have incentives to move investors from low-
cost 401(k) plans to more expensive retail IRAs.
    The potential harm to consumers from these conflicts of interest is 
significant. A 2013 study published in the Journal of Finance entitled 
``What do Consumers' Fund Flows Maximize? '' showed that even brokers 
who are unaffiliated with a mutual fund company--whom you might expect 
to be unbiased--steer their clients toward mutual funds that pay the 
brokers more, but that underperform by over 1 percent annually on 
average. While 1 percent might not sound like much, this annual 
underperformance can translate into a retirement balance that is tens 
of thousands of dollars lower over a 30-year career.
                         dol fiduciary proposal
    Given the changes in the retirement arena, Financial Engines 
supports the DOL's fiduciary proposal. Current regulation may not 
adequately protect the interests of retirement investors and may limit 
unnecessarily the scope of ERISA's fiduciary protections. ERISA's 
fiduciary standards provide important protections against conflicts of 
interest and self-dealing and, particularly in light of changes in the 
financial industry, it is crucial now more than ever to re-examine the 
types of relationships that should give rise to fiduciary duties under 
ERISA and to apply these protections broadly.
    Moreover, our experience has demonstrated that financial advisors 
can provide independent, conflict-free investment advice, putting the 
interests of customers first, even when investors have smaller balances 
and still produce solid business results. Technology has allowed for 
the provision of high-quality, objective, and personalized investment 
advice at a much lower cost and much broader scale than was possible 40 
years ago. Financial Engines is now the Nation's largest independent 
registered investment advisor, a public company, and an industry leader 
managing over $100 billion in retirement assets, providing personalized 
investment advice to millions of 401(k) investors. It is important to 
note that half of the 9.6 million participants with access to Financial 
Engines' services have less than $32,000 in retirement savings. Some 
have as little as a few hundred dollars in their accounts. We are proud 
to serve as an example that it can be done.
    We appreciate the opportunity to submit this statement for the 
record. We look forward to working with the committee and subcommittee 
as they consider the important issues of retirement security.

                    [Huffington Post, July 20, 2015]

        Senate Republicans Think Herbalife Is A Good Model For 
                        Your Retirement Savings

          (By Zach Carter, Senior Political Economy Reporter)

      gop hearing showcases president of primerica, a multi-level 
                           marketing company
    Washington--In 2010, Citigroup decided to sell what was widely 
regarded as one of its dodgiest operations. The struggling Wall Street 
titan was trying to streamline its management structure and upgrade its 
reputation after a massive government bailout, and one line of business 
its executives could live without was Primerica.
    Primerica, now an independent company, is a financial services 
operation modeled on multi-level marketing enterprises like Amway, Nu 
Skin and Herbalife. Unlike traditional retirement and insurance firms 
that employ a relatively small number of highly paid financial 
professionals, Primerica had more than 98,000 people enlisted in its 
sales force last year, recruited through feel-good videos and pitches 
to the family and friends of existing salespeople.
    If you're willing to work hard enough, Primerica tells prospective 
``entrepreneurs,'' you can run your own successful business selling 
insurance or retirement packages. Primerica agents get paid a 
commission on each sale, and--just like Amway and Herbalife--also earn 
commissions for sales their recruits make. A commission on their 
recruits' recruits, and their recruits' recruits recruits. And so on.
    Like other multi-level marketing operations, Primerica holds huge 
splashy motivational conferences for its sales team, where executives 
fete top earners amid fireworks and flowers. As with Herbalife, Nu Skin 
and similar platforms, the pitch to prospective Primericans is a vague, 
highly emotional appeal that suggests not only financial rewards, but 
the revitalization of a lifestyle. In one promotional video, Rob Cooper 
of Fort Worth, TX, encourages his audience not to settle for ``a 
mediocre life like everybody else does.''
    ``One of the greatest thing[s] Primerica has to offer is they 
encourage goals, they encourage dreams,'' Cooper says. ``And you really 
know--man, if you're willing to go out there and work hard, then you 
can actually achieve everything you ever wanted to achieve.''
    ``The same life. The same boring routine,'' says Houston's David 
Farmer in another video. ``I didn't want that life . . . I saw 
Primerica as my way to take back control of my life.''
    ``I always wanted to be somebody,'' says Jeff Fieldstad of Las 
Vegas in another. ``I always wanted to do something great.''
    Of course, for most people, it doesn't quite work out that way. 
More than 190,000 new recruits paid a fee to sign up for Primerica in 
2014, according to the company's annual report with the Securities and 
Exchange Commission. Primerica only boosted its total licensed sales 
force by 3,700 that year, and each member of the sales team earned an 
average of $6,030.
    Senate Republicans are apparently sold. The GOP has called on 
Primerica President Peter Schneider to testify against a new Obama 
administration retirement security proposal at a Tuesday hearing before 
the Senate Committee on Health, Education, Labor, and Pensions.
    The Department of Labor rule would impose a ``fiduciary duty'' on 
investment advisers, requiring them to act in the best interests of 
their clients. It would bar account managers from steering people into 
financial products that maximize benefits for investment specialists, 
rather than retirees. The Obama administration calculates that 
Americans lose $17 billion a year to hidden fees and conflicted 
investment advice.
    In other words, the rule is designed to prevent exactly what 238 
Florida workers said Primerica did to them in the years leading up to 
the financial crisis--steer them into inappropriate financial products 
for the personal financial gain of the sales team.
    In 2012, lawsuits began pouring in, alleging that Primerica reps 
had convinced Florida firefighters, teachers and other public workers 
to invest in inappropriate retirement products. Even though the workers 
were near retirement, Primerica representatives encouraged them to 
ditch their government pension plans for much riskier government 401k 
accounts, which do not guarantee a minimum monthly payout in 
retirement. Dumping a pension plan for a 401k on the verge of 
retirement is frowned upon in the investment advice world. It 
needlessly jeopardizes retirement security, while offering little 
potential benefit.
    The scheme posed major potential profits for Primerica's sales 
reps. Once these workers retired and moved out of their government 
plans, Primerica agents stood to profit from managing their retirement 
assets. Had they stayed in the pension programs, retirees would have 
simply collected their monthly payments, leaving nothing for Primerica 
to manage, and no commissions for Primerica agents to harvest. In 
January 2014, Primerica set aside $15.4 milliom to settle allegations 
involving 238 such cases.
    Primerica told HuffPost that Florida State regulators did not 
object to its agents' actions. The company also said that the retirees 
it settled with never actually signed up for Primerica products after 
taking the company's investment advice. Indeed, the workers were so 
steamed by the lousy advice that they did not ultimately ask Primerica 
to manage their now-diminished assets in retirement.
    It's not terribly shocking that a financial company run like Amway 
would run into trouble. It is perhaps surprising that Senate 
Republicans seem to think Primerica makes for a sympathetic ally in 
their public campaign against a financial reform proposed by President 
Barack Obama.
    ``The unintended consequences of the DOL's proposed rule will be to 
make it more difficult for these households to receive desperately 
needed retirement guidance,'' Primerica told HuffPost in a written 
    The GOP's disdain for the fiduciary duty rule is clear from the 
hearing's title: ``Restricting Advice and Education: DOL's Unworkable 
Investment Proposal for American Families and Retirees.'' Unworkable, 
apparently, because Americans might miss out on the opportunity to 
receive investment advice from someone looking to cash in on a get-rich 
quick operation.

                 [The Wall Street Journal, May 4, 2015]

               Creative Destruction at a Broker Near You

                 (By Burton G. Malkiel and Adam Nash)*

  technology is changing the game for small investors. here's hoping 
                that regulation doesn't derail progress
    Technology is fundamentally altering the investment landscape, and 
it may have a profound influence on the quality of service that 
individual investors receive. This change also is relevant for 
evaluating the controversy currently roiling the securities industry.
    * Mr. Malkiel is the chief investment officer and Mr. Nash is chief 
executive officer of Wealthfront, an automated investment service.
    After 4 years of study, the Labor Department announced in April a 
proposed amendment to the definition of ``fiduciary'' under the 
Employee Retirement Income Security Act. The rule would impose a strict 
fiduciary standard on those providing retirement advice to individual 
retirement account (IRA) holders, and also clarify and add to existing 
standards for advisers to 401(k) and other retirement plans.
    In short: Anyone who receives compensation for providing retirement 
advice must put their clients' ``best interest'' first, as opposed to 
recommending products that are deemed to be broadly ``suitable'' but 
that compensate advisers more than competing low-fee investment funds. 
While it might seem obvious that investors deserve advice that puts 
their interests first, the proposal has engendered a storm of protest.
    The guiding principle of the Labor Department's proposal is 
absolutely correct and long overdue. All too often investors in 
retirement plans pay higher fees than they should, and their accounts 
contain high-cost funds that reward the provider of advice rather than 
the client.
    Still, the devil is in the details--and the Labor Department's 400-
plus page proposal requires careful scrutiny. The government must be 
careful not to prevent institutions from giving investment advice as 
long as all conflicts and fees are revealed to clients. It also is 
important to consider if there are unintended consequences that could 
leave some investors less well off.
    The U.S. Chamber of Commerce and Sifma (the Securities Industry and 
Financial Markets Association), along with others, see significant 
problems with the Labor Department's proposal. They argue that the new 
fiduciary standard will force investors to move from commission-based 
accounts to costlier, fee-based advisory accounts. The result, they 
believe, is that investor choice and access to financial education 
regarding retirement accounts will be limited--and that small investors 
will be badly harmed.
    Currently a broker may recommend a high-expense mutual fund for a 
client investing in a 401(k) rollover or a new IRA. The broker is 
compensated by receiving a commission for selling the fund, and is only 
required to ensure that the fund is a ``suitable'' investment. Many 
fee-based advisers require minimum investments in the six figures, and 
they charge fees that would be prohibitively expensive for small and 
medium-size investors. Large brokerage and insurance firms argue that 
only a commission-based model can work for the average investor.
    Missing in this controversy is how technology will upend the 
current brokerage model. The only question is whether technology also 
will be the bridge that allows the industry to adapt to new fiduciary 
rules and provide individual investors low-cost advice that does not 
pit the interests of advisers against clients.
    Over the past few years a number of software-based, automated 
investment advisers have been established, and they are growing 
rapidly. Firms such as Future Advisor, Rebalance IRA, and our own firm, 
Wealthfront, now provide low-cost, high-quality alternatives to 
antiquated investment models. Even large traditional incumbent firms, 
like Charles Schwab and Vanguard, are investing heavily in technology 
to provide high-quality, fiduciary service to small investors.
    These automated investment services are able to provide 
sophisticated portfolio management to small investors at incredibly low 
cost by leveraging the same type of technology that has helped 
companies like Facebook and Google scale to billions of users. Some 
automated advisers will even manage accounts of less than $10,000 
without charging any advisory fee. Accounts over $10,000 might pay a 
management fee of only 25 basis points (one-quarter of 1 percent), a 
fraction of the typical 1 percent that traditional investment managers 
    Investments are made in portfolios of low-cost, exchange-traded 
index funds tailored to the needs and risk tolerance of the client. No 
trading commissions are charged, and conflicts of interest can be 
avoided. If we are in an era of future low-gross investment returns, as 
many investment managers believe, rock-bottom fees are especially 
    The services offered by the new computer-based advisers are not 
second rate. Client accounts can receive daily monitoring and 
management rather than the quarterly or annual reviews provided by many 
traditional advisers. Accounts can be automatically rebalanced and 
moved to somewhat safer asset-class allocations as the investor's 
financial situation evolves. Every trade is automatically vetted 
against the investment strategy promised to the client.
    The securities industry is correct to worry that a strict fiduciary 
standard is likely to result in massive changes in traditional ways of 
doing business. Business models that depend on selling high-cost, low-
value proprietary products to clients will be threatened, with the 
result that there may be fewer broker-dealers and investment advisers 
to choose from.
    The best firms will invest heavily in the technology to better 
address the needs of small investors. Investors will pay less, not 
more, for the services they receive, and what they get will be better, 
not worse. Capitalism has always involved a painful process of creative 
destruction. The financial-services industry will be stronger and more 
effective because of innovation, and the fiduciary standard will 
accelerate the process of changing outmoded and ineffective financial 
business models.

                               Save Our Retirement,
                                             July 20, 2015.
Hon. Lamar Alexander, Chairman,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC. 20510.
Hon. Patty Murray, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC. 20510.

    Dear Chairman Alexander and Ranking Member Murray: As organizations 
that want to see protections for retirement savers strengthened, we 
write to express support for the Department of Labor's proposed rule--
now out for public comment--that would close loopholes and update the 
standards for retirement investment advice under the Employee 
Retirement Income Security Act (ERISA).
    Americans who save and invest for a secure and independent 
retirement should be able to trust that the retirement investment 
advice they receive is in their best interest. Workers and retirees are 
more dependent than ever on financial professionals to help them 
navigate the complex decisions they must make to fund a secure and 
independent retirement. Unfortunately, because of loopholes in rules 
specifying who is a ``fiduciary'' under ERISA, many of the financial 
professionals whom retirement savers rely on for advice are legally 
allowed to put their own financial interests ahead of the interests of 
their customers. While many of these professionals nonetheless seek to 
do what is best for their customers, others take advantage of gaps in 
the regulations to steer their clients into high-cost, substandard 
investments that pay the adviser well but eat away at retirement 
savers' nest eggs over time. This is a particular problem for small 
savers who are disproportionately served by nonfiduciary advisers and 
receive conflicted advice.
    After years of thoughtful analysis and consultation with all 
stakeholders, the Department of Labor has drafted a comprehensive 
proposal that closes loopholes in the definition of investment advice 
so that anyone who provides individualized investment recommendations 
to retirement savers--whether they are saving through a traditional or 
defined contribution pension plan, such as a 401(k), or an Individual 
Retirement Account (IRA)--would be required to provide best interest 
advice to their clients. Importantly, the proposed rule would eliminate 
outdated requirements that advice must be ``regular'' or serve as the 
``primary basis'' for an investor's decision, before the best interest 
standard applies. In a significant improvement over the 2010 proposal, 
it covers advice about recommendations to roll money out of a pension 
or 401(k) plan and into an IRA. This is the most important financial 
decision many people will ever make, with a potential to seriously 
affect their standard of living in retirement, and is a special area of 
concern given extremely troubling practices identified in a GAO report.
    By updating these standards and closing these loopholes, retirement 
savers will undoubtedly experience better investment outcomes. At the 
same time, the proposed rule would provide sufficient flexibility for 
financial professionals and their firms so they can continue to charge 
commissions and other sales-based compensation. This reflects a 
balanced approach that preserves the broker-dealer business model while 
ensuring that retirement investors of all incomes and portfolio sizes 
will receive advice that is in their best interest.
    We encourage you to stand with your constituents--who are saving 
for retirement and deserve to have the best financial advice for their 
future--and support the Department of Labor's rulemaking process as it 
moves forward.

    AARP; AFL-CIO; Alliance for Retired Americans; American Association 
for Justice; American Association of University Women (AAUW); American 
Federation of Government Employees (AFGE); American Federation of 
State, County and Municipal Employees (AFSCME); Americans for Financial 
Reform; Better Markets; Center for Community Change Action; Center for 
Economic Justice; Center for Global Policy Solutions; Center for 
Responsible Lending; Certified Financial Planner Board of Standards; 
Consumer Action; Consumer Federation of America; Consumers Union; 
Financial Planning Association; Fund Democracy; Garrett Planning 
Network, Inc.; International Association of Machinists and Aerospace 
Workers; International Union, United Automobile, Aerospace & 
Agricultural Implement; Workers of America (UAW); Justice in Aging; 
Leadership Conference on Civil and Human Rights; Main Street Alliance; 
National Active and Retired Federal Employees Association (NARFE; 
National Association of Social Workers; National Committee to Preserve 
Social Security and Medicare; National Consumers League; National 
Council of La Raza; National Employment Law Project; National Women's 
Law Center; Pension Rights Center; Personal Capital; Public Citizen; 
Public Investors Arbitration Bar Association; Rebalance IRA; The 
Committee for the Fiduciary Standard; U.S. PIRG; Wider Opportunities 
for Women.
       Response by Scott Puritz to Questions of Senator Isakson 
                          and Senator Franken
                            senator isakson
    Your testimony says:

          ``Our clients come from all walks of life including nurses, 
        school teachers, plumbers, lawyers, welders, professors, 
        police, doctors, farmers, government employees--i.e., regular 

    Question. As noted, these regular Americans must have at least 
$100,000 in savings in order to be a customer. Also, Rebalance IRA says 
that it has approximately $275 million in assets on behalf of more than 
500 clients. That is an average account size of $550,000, not exactly 
average Americans. Your client base appears to be significantly more 
financially sound, than those who DOL's proposal purports to protect.
    Why would you so outspokenly support a proposal which your clients 
have such an ability to absorb if they were to lose access to advice or 
    Answer. Rebalance IRA is part of a broad trend of new investment 
advisory firms that seek to provide consumers with a fundamentally 
better set of retirement investment options, offering retirement 
investment advice to clients at all income levels for very modest fees. 
Several of these advisory firms have account minimums as low as $500. 
Generally, those requiring the lowest minimums rely on software to lead 
the advisory process, with human input as a secondary feature as 
    At Rebalance IRA, our clients seek the added assurance of human-led 
advice enhanced by technology because they feel they need advice about 
how to holistically manage their retirement planning and how to 
understand the increasingly complex world of investment products. Our 
clients do come from all walks of life, including nurses, school 
teachers, plumbers, lawyers, welders, professors, police, doctors, 
farmers, and government employees--i.e., regular Americans. Averages, 
as you know, can be misleading. Our target client has considerably less 
than the figure cited. In fact, 43 percent of the Rebalance IRA-client 
base has retirement account balances in the range of between $100,000 
and $250,000.
                            senator franken
    Question. How would you respond to claims that: the new 
technologies that have produced low-cost, computer-generated retirement 
investment models have only operated during the bull market of recent 
years, and their ability to manage funds, or respond to investor 
concerns when the market changes has yet to be tested?
    Answer. Rebalance IRA is part of a broad trend of new investment 
advisory firms that seek to provide consumers with a fundamentally 
better set of retirement investment options, offering retirement 
investment advice to clients at all income levels for very modest fees.
    Rebalance IRA and many of the other ``investment innovators'' 
harness an investment methodology known as modern portfolio theory 
(MPT). Developed through finance research dating back decades and 
across multiple bear markets of the past, MPT seeks to increase 
investment return while lowering risk. The heart and soul of the 
concept is diversification. The idea is to own a variety of asset 
classes, thus avoiding the concentration of risk into any given single 
    MPT has been the gold standard for prudent institutional investment 
for decades. Finance research experts, major endowments, pension funds, 
and private investment professionals broadly agree that MPT is a safe, 
solid, repeatable method for managing an investment portfolio in both 
bull and bear markets.
    Diversification is more than simply putting your eggs into 
different baskets. It actively lowers risk. That is because asset 
classes generally are ``uncorrelated,'' that is, as one declines in 
value, another rises. The stabilizing effect of diversification is 
amplified by adding up to six asset classes to an investment portfolio. 
A thoughtful collection of asset classes thus offers a lower investment 
risk than any single asset. Interestingly, research shows that adding 
asset classes that some might perceive as ``risky'' in fact lowers the 
overall risk in a portfolio. For this reason, diversification rightly 
has been described as ``the only free lunch in the investment game.''
    Using MPT, investments are statistically measured in terms of both 
their expected long-term rate of return and their short-term 
volatility. A portfolio is then created that combines assets in such a 
way that the return is the weighted average of the assets held within.
    In a given year, different asset classes perform differently, 
making it difficult to predict which asset will perform best. By 
combining assets whose returns are uncorrelated, MPT seeks to reduce 
the total variance of the portfolio. A reliable return with lower risk 
and lower cost, compounding over time, creates a winning retirement 
    In practice, MPT is the opposite of ``stock picking.'' Analysts who 
pick stocks attempt to find a small group of stocks or bonds that they 
believe will outperform entire markets represented by a corresponding 
index, such as the S&P 500. Instead of analyzing and purchasing single 
companies or sectors, however, MPT counsels investors to buy the index 
    Dr. Charles D. Ellis is a highly respected investment expert, a 
former chairman of the Yale Endowment, a former board member of 
Vanguard Group and today a member of the Rebalance IRA Investment 
Committee. In August 2014, Dr. Ellis published a landmark article in 
the well-respected Financial Analysts Journal entitled ``The Rise and 
Fall of Performance Investment'' in which he documents the fact that 
the majority of active investment managers now underperform the market. 
This powerful conclusion is corroborated by decades of academic 
research. He makes the case for a viable alternative to active 
management--MPT implemented using low-cost index funds.
    Historically, however, MPT-based advice has been available only 
through high-end financial advisors who typically require minimum 
account sizes of $1 million and who charge annual fees of at least 1 
percent of assets under management. Rebalance IRA, and other investment 
innovators seek to democratize modern portfolio theory by bringing this 
level of investment advice to everyone for a fraction of the cost.

    [Whereupon, at 4:17 p.m., the hearing was adjourned.]