Obama's new retirement rule is a big mistake

As the saying goes, if you like your financial advisor, you should be able to keep your financial advisor. But that's not the likely future for millions of families now that the Department of Labor (DOL) has finalized its proposed "fiduciary rule" – the Obama administration's regulatory onslaught on retirement saving advice. Hiding behind the high-minded notion of a "fiduciary" standard that purports to put customers' interests first is a regulation that is expensive and onerous, and not a favor to investors in the end.

Most, 86.2 percent, of the $7.3 trillion in retirement assets is in commission-based accounts. That means that instead of paying high fees directly to the adviser for his or her advice, the adviser is taking a smaller fee that is a portion of the gains in the account. When DOL's fiduciary rule is enacted, each of those accounts – totaling $6.3 trillion – will be moved to a fee-based account. Even with a fee of just 1.2 percent that's $75.6 billion in duplicative fees on American retirement accounts, or about $1500 per household. This cost is an unneeded tax on people saving for retirement who should not be forced into fee-based accounts that they don't want.

President Barack Obama speaks following a meeting with his economic team in the Roosevelt Room of the White House on March 4, 2016 in Washington, DC.
Mandel Ngan | AFP | Getty Images
President Barack Obama speaks following a meeting with his economic team in the Roosevelt Room of the White House on March 4, 2016 in Washington, DC.

As it turns out, these may be the lucky "winners." A majority (51 percent) of retirement accounts have balances less than $25,000, and, for small funds, it will simply make no sense to pay the fees. These retirement savers will be cut off entirely from retirement saving advice.

Among the key moments for retirement savers is when they change jobs or retire. At this moment, the best advice is to roll over their 401(k)s into an IRA. Unfortunately, with the heightened disclosure, reporting, and compliance burdens, it looks like these retirement savers will have a hard time finding advice and knowing to roll over their accounts. This is bad news for savers. The American Action Forum has done the math. Let's walk through it in 7 easy steps:

  1. Approximately 10,000 people retire every day, or 300,000 per month.
  2. In March of 2016, 3 million people quit their job and 1.7 million were fired or discharged, but did not leave the job market and therefore eventually switched or are attempting to switch jobs.
  3. About 75 percent of all workers have access to defined contribution plans, like a 401(k), and 61 percent of all workers participate in those plans.
  4. Combining this information, it implies that of the 5 million people who change jobs or retire every month, roughly 3 million have some sort of retirement plan that they can and should be rolling over.
  5. The average 401(k) balance is $91,800 (according to Fidelity) and the average 401(k) annual fee is between 1 and 2 percent. Simply to get a sense of magnitudes, let's say that's an average of 1.5 percent – or about $1,400 annually on the average balance.
  6. Most IRAs through brokerages like Fidelity and Schwab charge no annual fee. However, if a consumer has their IRA directly through the funds themselves, they'll be charged a low annual fee like the $10 fee charged by American Funds or the $20 fee charged by Vanguard (for account balances under $10,000). Again, to get the order of magnitude right, lets' use the average of a $15 annual fee.
  7. Combining these rough estimates, if each of those 3 million Americans who change jobs or retire every month have the average of $91,800 in their 401(k), they would lose approximately $1,375 each year by not rolling over their existing 401(k)s into an IRA. That's a total of about $4 billion lost each year simply by retirement savers being unaware or unable to roll over 401(k)s into IRAs.

The fiduciary rule is a mistake. At best it is a well-intentioned overreach in which the desire to improve the investment advice for a few means no advice for the masses. At worst, it is a classic case of burdensome, top-down regulation that ends up harming the very consumers that it is purported to help. In either event, it is a step in the wrong direction.

Commentary by Douglas Holtz-Eakin, the president of the American Action Forum, and former Director of the Congressional Budget Office. Follow him on Twitter @djheakin.