The high cost of conflicted advice to retirement savers

Annual cost to retirement savers from “conflicted” financial advice (in millions) What the 60-day delay to the “fiduciary” rule already will cost savers over the next 30 years (in millions)
U.S. $17,000.0 $3,700.0
Alabama 64.3 14.0
Alaska 32.7 7.1
Arizona 366.2 79.7
Arkansas 107.8 23.5
California 1,874.4 408.0
Colorado 301.1 65.5
Connecticut 298.5 65.0
Delaware 79.8 17.4
DC 48.1 10.5
Florida 971.0 211.3
Georgia 363.0 79.0
Hawaii 47.3 10.3
Idaho 126.8 27.6
Illinois 931.9 202.8
Indiana 258.7 56.3
Iowa 205.3 44.7
Kansas 157.5 34.3
Kentucky 270.6 58.9
Louisiana 153.4 33.4
Maine 73.3 16.0
Maryland 385.7 83.9
Massachusetts 491.1 106.9
Michigan 499.2 108.6
Minnesota 544.2 118.4
Mississippi 54.0 11.8
Missouri 337.4 73.4
Montana 29.7 6.5
Nebraska 118.3 25.8
Nevada 104.3 22.7
New Hampshire 187.9 40.9
New Jersey 610.0 132.8
New Mexico 74.2 16.1
New York 945.2 205.7
North Carolina 427.0 92.9
North Dakota 33.0 7.2
Ohio 707.1 153.9
Oklahoma 137.1 29.8
Oregon 297.3 64.7
Pennsylvania 782.8 170.4
Rhode Island 86.7 18.9
South Carolina 202.4 44.0
South Dakota 73.2 15.9
Tennessee 242.0 52.7
Texas 1,007.0 219.2
Utah 104.5 22.7
Vermont 112.8 24.5
Virginia 553.3 120.4
Washington 618.6 134.6
West Virginia 29.1 6.3
Wisconsin 449.2 97.8
Wyoming 24.2 5.3

Note: The data in column one quantify the annual costs to retirement savers of the underperformance of IRA assets that are invested in products for which savers received conflicted advice. Conflicted advice is advice provided by financial advisers whose earnings depend on the actions taken by the client. Underperformance of investment returns in which savers received conflicted advice can be due to a wide range of factors, including high fees, high trading costs, poor market timing, and increased risk exposure without increased returns. The data in column two quantify the losses retirement savers will incur over the next 30 years because the administration imposed a 60-day delay of the conflict of interest (“fiduciary”) rule, which requires that financial advisers act in the best interests of clients saving for retirement. [See extended notes.]

Both sets of state breakdowns are based on a single methodology. In particular, we used Survey of Income and Program Participation (SIPP) data to calculate the state distribution of the market value of IRA accounts in which investors hold stocks or mutual funds. We then applied that distribution to the national figures provided in this table. In these calculations, we used the latest complete panel of the SIPP, the 2008 panel. The questions related to the market value of IRA accounts were asked in waves 4, 7, and 10.

One may wonder why the cost of the 60-day delay is not simply the annual cost of conflicted advice divided by 6. Though the two measures are based on similar assumptions, the first is the current (annual) cost of past investment decisions negatively affected by conflicted advice, while the second is the future (30-year) cost of investment decisions negatively affected by conflicted advice during a delay in implementing the rule.

  • The two measures have in common a narrow focus on rollovers into IRAs, ignoring, among other things, costs associated with conflicted advice aimed at 401(k) participants and plan administrators. They also both assume, per the academic literature, that investment returns are one percentage point lower net of fees in high-cost funds recommended by conflicted advisors. Finally, both measures assume that savings rolled over into high- or low-cost funds remain in these funds.
  • The simplifying assumption of inertia on the part of savers has little effect on our estimate of the annual cost of investments in high-cost funds due to the shorter time frame. The effect on our estimate of the cost of delay is potentially larger but theoretically ambiguous. On one hand, it assumes that implementing the rule will have no effect on existing IRA investments—only on new rollovers—which will tend to underestimate the beneficial effect of implementing the rule and the negative effect of delaying it. On the other hand, it assumes that there’s no trend toward lower-cost investments that would continue even in the absence of the rule, which will tend to exaggerate the benefits of implementation and the cost of delay. On balance, we believe that implementing the rule will significantly speed the shift to lower-cost investments and that our measure underestimates the negative effect of delaying the rule.

Sources: The $17 billion figure is from The Effects of Conflicted Investment Advice on Retirement Savings (White House Council of Economic Advisers, February 2015); the $3.7 billion figure is from Addendum: Methodology for Estimating the Losses to Retirement Investors of Fiduciary Rule Delay (Economic Policy Institute, March 17, 2017); state breakdowns are based on Survey of Income and Program Participation (SIPP) data from the U.S. Census Bureau, 2008.

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