Dennis M. Kelleher
President and CEO
Better Markets, Inc.
United States House of Representatives Committee on Education and the Workforce
Subcommittee on Health, Employment, Labor, and Pensions
“Restricting Access to Financial Advice: Evaluating the Costs and Consequences for Working Families”
June 17, 2015
Good morning Chairman Roe, Ranking Member Polis and members of the Subcommittee. Thank you for the invitation to Better Markets to testify today.
I would like to discuss just a few points detailed in my written testimony.
First, it is as outrageous as it is unacceptable that brokers and others today are allowed to put their economic interest above their clients’ best interests. That conflict of interest is costing Americans saving for retirement tens of billions of dollars a year, every year.
Make no mistake about it: that is what is at stake here and ending that is what the Department of Labor’s proposed rule is all about.
Today, tens of millions of hard-working Americans are struggling to make ends meet, provide for their families and save a little for their retirement. Figuring out how to invest those retirement savings forces many to seek investment advice from a broker. But, that broker can put his or her own economic interest above that client’s best interests.
What does that mean? If there are 2 similar investments, but one pays the broker 5% and the other pays the broker 1%, then it is perfectly legal for that broker to advise his client to invest in the product that will cost his client FIVE times what it should.
Making matters worse, often the products that pay the brokers more don’t perform as well as other similar products. That means not only has the client paid FIVE times more up front, but he or she is ALSO stuck with a product that doesn’t perform as well over time. The client is doubly victimized, as famed Vanguard founded Jack Bogle has called it, by the “tyranny of compounding costs.”
That’s what happens every day in this country and it is costing Americans tens of billions of hard earned dollars.
For example, the DOL has detailed that these conflicts in the IRA area alone will cost savers as much as $430 billion over ten years or $43 billion a year.
Second, the rule governing retirement investment advice is 40 years old. It is outdated and incapable of properly protecting our workers and retirees in light of the dramatic and far-reaching changes in the way Americans now have to save for retirement.
When this rule was written 40 years ago, almost all retirement savings were in defined benefit plans, which were run by employers and managed by investment professionals who had fiduciary duties. 401ks did not exist and IRAs had just been created.
Today, 40 years later, 401ks have gone from zero dollars to $4.6 trillion and IRAs have gone from $3 billion to $7.4 trillion. By 2012, 90 million Americans, or more than 2/3rds of all workers with retirement plans, had individual contribution plans. They are all forced to figure out their own retirement investments.
This is a monumental and mind-boggling shift from 40 years ago and yet the rule has remained frozen in time as if nothing has changed, when everything has changed. As the world has changed, the rule must change also.
Third, the time is now for the Department of Labor to act. It has considered this proposed rule for years. It has sought and received input from all stakeholders, including in particular industry. It has addressed many of industry’s concerns and incorporated many of industry’s suggestions into the proposed rule.
Yet they continue to object, and the reason is clear: they simply do not want to change the status quo and work under a simple principle: put your client’s interest first. So they say that disclosure will be sufficient, or that the rule is just unworkable, or it should be the SEC’s job. But none of these excuses withstand independent scrutiny.
The industry’s complaints boil down to a false choice: either brokers’ get to put their interests above their clients’ best interests, or they won’t serve those clients at all.
But the real choice is this: Let the DOL act to protect 100 million workers and retirees across this country, or side with the brokers and other advisers who want to continue putting their interests ahead of their clients’. That’s the real choice.
If some brokers don’t want to do that or feel that they can’t make enough money doing that, then there are plenty of retirement investment advisors who will be more than willing to put the clients’ interests first. Frankly, there are tens of thousands of advisers doing that right now all across the country.
In conclusion, we have a very serious retirement crisis in this country. Not enough people are saving for retirement and too many of those that do aren’t saving enough. They need to keep every penny in their retirement accounts and not in their brokers’ pockets. That’s why updating a 40 year old rule is so important and why putting the clients’ best interests first is imperative.
Thank you and I look forward to your questions.
You can read the written testimony here.