Oxford Survey Finds DOL May Have Underestimated Compliance Cost of Fiduciary Proposal

A survey conducted by Oxford Economics Ltd. estimated that the compliance costs associated with the Department of Labor’s fiduciary proposal could grossly exceed the estimates provided by the DOL.

The fiduciary proposal, sometimes called the retirement security proposal, would extend fiduciary duties under the Employee Retirement Income Security Act to certain one-time, retirement-related transactions, such as rollovers, annuity sales and investment menu design. The DOL has unsuccessfully tried to regulate in this space in the past, including one final rule that was vacated by the U.S. 5th Circuit Court of Appeals in 2018.

The survey, commissioned by the Financial Services Institute, estimated that $2.77 billion would be required to come into compliance with the proposal in the first year, whereas the DOL estimated first-year costs to be about $253 million. Similarly, while the DOL estimated ongoing compliance costs to be $216 million per year, the survey’s researchers estimated ongoing costs to be $2.5 billion per year.

Oxford Economics is a commercial venture of Oxford University in the U.K., and the survey was commissioned by the FSI, which submitted a January 2 letter to the DOL arguing for the regulator to withdraw the proposal.

The findings were based on 15 survey responses from FSI member organizations received from November 20, 2023, through December 5, 2023. A total of 77 members were initially solicited for a response, and the 15 organizations that responded represent more than 26,000 financial advisers.

When asked if the 15 respondents made up a large enough sample to be representative of the industry, a representative from Oxford Economics replied, “We have no reason to believe the results are not representative. Of the 15 responses, seven were from large firms, six from medium firms and two from small firms. Collectively, these firms represent approximately over 26,000 financial advisors and had a total revenue of over $14.5 billion.”

The FSI members surveyed estimated the costs associated with reviewing the rule, updating their policies and training, and updating disclosure forms, among other items. The survey estimated that the largest cost, or about 77% of the upfront cost, would come from new disclosure requirements related to rollovers, which require advisers to document why a rollover was preferable to leaving the savings in the original account, among other items.

All costs in the survey were based on self-reported estimates from the 15 survey participants.

To come to its final numbers, Oxford Economics took the median self-reported costs from the respondents and divided them by the 26,000 financial advisers employed by the 15 firms to arrive at a per-adviser cost. This per-adviser cost was then multiplied by the total number of financial advisers in the retirement industry, about 393,546, according to data that the researchers obtained from FINRA.

The method produced cost estimates dramatically larger than those produced by the DOL by a factor of 11 for upfront costs ($2.77 billion to $253 million) and ongoing costs ($2.5 billion vs. $216 million).

The survey report warned that these higher costs would bear disproportionately on the ability of advisers to serve lower-balance, commission-based accounts, a common argument from opponents of the proposal. Higher compliance costs could make it economically prohibitive for financial advisers to serve smaller accounts that are unlikely to pay higher service fees.

Brad Campbell, a partner with Faegre Drinker and former assistant secretary of Labor, says that “it is not common for formal industry studies and EBSA studies to differ so significantly, but it has been the new normal for the fiduciary rule.”

Campbell adds that, “The fact is that DOL is ignoring the harm this proposal will do to small balance retirement savers while undercounting the significant costs it will impose, justifying massive change with rosy academic predictions based on old data.  This regulation is the poster child for how economic analysis is misused to prop up a pre-ordained policy conclusion rather than to inform the development of better policy.”

Many other opponents of the rule cite a study from August 2017 published by Deloitte, shortly after the vacated rule went into effect. That study surveyed 21 member firms of the Securities Industry and Financial Markets Association and found that 11 of 21 firms had to limit or even eliminate advisory services, such as removing advice from brokerage windows, as a consequence of the 2016 rule.

Four of the 21 firms also reduced access to rollover services by limiting their advice to educational information only. The other 17 required more disclosures and documents from participants before making a recommendation, which the study noted can be a deterrent to participants because of the time-consuming nature of producing plan documents.

The DOL has argued in its rollout and subsequent feedback that the proposal is intended to protect retirement savers from commission-based advice that may not be in the best interest of the end consumer.

The DOL declined to comment.