The Labor Department misstated the findings of several academic studies it used to justify a proposed new rule to regulate retirement investment funds, according to scholars who have analyzed the rule.
"I won't get into the motives of why DOL would overclaim what the studies represent, just note that the conclusions drawn from them generate overstatements of the [proposed rule's] benefits," Robert Litan, senior fellow in the Economic Studies Program at the Brookings Institution, a Washington think tank, told the Washington Examiner.
Litan co-authored an analysis released this month with Hal Singer, a senior fellow at the Progressive Policy Institute, a left-leaning think tank, laying out in detail the department's misreading of the studies.
The department's proposed rule would require advisers to disclose any commissions they might receive from selling them certain retirement plans and make them legally liable for their clients' losses. That would prevent clients from being harmed when advisers have conflicts of interest, the department argues.
Business groups and Republican lawmakers have been critical of the proposal, arguing it is overly broad and that the department is the wrong agency to enforce it. The rule is set to be completed later this year.
A spokesman for the department declined to comment.
Labor Secretary Tom Perez justified the proposed rule in testimony before the Senate Health Education and Labor Committee Tuesday, citing an analysis by the Council of Economic Advisers that found "this kind of conflicted advice" costs IRA investors about $17 billion every year.
At the same hearing, Litan told senators, "The $17 billion figure that has been thrown about ... is based on a flawed reading of the academic studies."
The council, Litan and Singer note, assumes that typical investors in 401(k) retirement savings plans pay fund expenses of 20 basis points, but that investors rolling over their assets pay 130 basis points, a difference of 110 points. But data from the Investment Company Institute says the difference is just 17 basis points. This "casts doubt on CEA's $17 billion cost estimate," the authors state.
The department also cites studies that it says shows that the proposed rule would provide $4 billion in annual savings for investors.
"The [department] misuses these studies, however, and in the process, substantially overstates any benefits claimed from them," the authors note.
One major study used to justify the rulemaking is a 2013 analysis from the Journal of Finance, which the department says shows that funds managed by advisers with a conflict of interest under-perform by 100 basis points. But that's not really what the report says, the scholars note.
"In fact, this estimate pertains only to the year in which the fund is purchased, but the authors provide no estimate of underperformance during all years for which the fund is held," Litan and Singer note.
That is significant, they say, because retirement funds are by definition long-term investments. Reliable conclusions cannot be drawn from one-year losses.
Litan and Singer say the department also incorrectly cites a 2009 Review of Financial Studies paper, claiming it found that funds sold by brokers under-perform some types of investment funds. However, the same study also found that funds sold by brokers also out-perform other kinds of funds. In addition, the study covers funds sold by banks and other institutions, not just the ones targeted by the department's rule.
"[B]y combining a variety of distribution channels, the study does not permit one to isolate the effects of broker involvement alone," Litan and George note.
The department's rulemaking discounts the possibility that the problem of brokers with conflicts of interest can be addressed just by requiring the brokers to disclose all such conflicts, citing a 2011 study in the American Economic Review.
"[T]his 'study' in fact is no study at all, but a theoretical paper advancing one hypothesis, without any real world empirical support. This is an extremely slim reed upon which to base an entire rule that could radically change the way investment advice is provided in a $1 trillion mutual fund market," the scholars note.
Litan added that an even bigger flaw in the department's regulatory analysis is that it was one-sided, giving "no weight to the benefits of human advice" from brokers. The advice prevents investors from taking actions such as overacting to downturns in the markets rather than sticking to long-term plans.