Do Biden's claims about 'junk fees' add up? Depends who you ask

White House retirement security rule proposal event
President Joe Biden unveiled the Labor Department’s “retirement security rule” proposal at an Oct. 31 event in the State Dining Room of the White House.
Al Drago/Bloomberg News

President Joe Biden's administration is calling for tougher fiduciary standards in retirement savings and investment advice using statistics that are sure to get the industry's attention.

In rolling out the "retirement security rule" proposal on Oct. 31, President Biden slammed "bad annuities" and "junk fees" that he said are shrinking Americans' retirement nest eggs, exploiting seniors and distorting the advice and wealth management marketplace for "many trustworthy financial advisors out there who are doing the right thing." The rare speech by a president discussing wealth management policy included estimates of the cost of conflicts of interest.

"All told, bad financial advice, peddled by unscrupulous financial advisors driven by their own self-interest, can cost a person — a retiree up to 1.2% per year in lost investment," Biden said

"That doesn't sound like much, but if you're living long, it's a lot of money. Over a lifetime, that can add up to 20% less money when they retire. For a middle-class household, that can amount to tens of thousands of dollars over time. Imagine the difference the money would make for retired families all across America if that wasn't the case. So, here's what my administration is doing to protect seniors from this kind of financial fraud. Today, the Department of Labor is proposing a new rule, meaning that when you pay someone for retirement advice, they must give you advice that's in your best interest, not whether it gets them the best payday."

Acting Secretary of Labor Julie Su
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The origin of the statistical claims
Those figures, as well as a Council of Economic Advisers finding that the conflicts in sales of fixed index annuities alone cost retirement savers as much as $5 billion a year, displayed the stakes of the looming debate about the rule and the inevitable industry pushback. For anyone recalling the Obama administration "fiduciary rule" vacated by a trade-group court challenge in 2018, the numbers likely sounded comparable to an earlier study by the council calculating the total annual cost of conflicted retirement advice at $17 billion. 

To Mark Egan, the author of the academic study cited by the White House in the stats about the new proposal, the Biden team's calculations correctly used the model suggested by his  research paper accepted for publication in the Journal of Finance.

"I was surprised. I did not know about it," Egan said in an interview. An associate professor of business administration at the Harvard Business School who has also studied the impact of the prior fiduciary rule proposal on variable annuity sales, the extent of advisor misconduct and FINRA arbitrator selection, Egan was unaware the administration was going to base its numbers on his model. "It was a pleasant surprise when Biden was talking about those numbers," he said. "I was like, 'Oh, those numbers sound very familiar.'"

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The administration's stats came from the conclusion of Egan's paper: Investors' returns would jump by 95 to 120 basis points "if we were to align the incentives of brokers and consumers." The White House multiplied the low end of that range by the total of $559 billion held in fixed index annuities at the end of 2021 and rounded down from the result, $5.3 billion, to arrive at the figure tracking the cost of conflicts. The academic paper had studied the sales, expenses and returns of fixed-income products called reverse convertible bonds using the net present value of the fees, Egan noted. Biden's team used "quite conservative" assumptions from the model examining the bonds, where there could be "no debate" about whether one product provided greater returns after fees, he said.

"Doing this [net present value] calculation is Finance 101 — there isn't any dispute about it," Egan said, describing the administration's calculation of the retirement savings losses to industry conflicts of interest as a valid figure based on his paper's statistical model. "You might want to even use a higher number, in terms of that 20% could be even larger."

The industry's response
Critics could question whether extrapolating the model from one research paper dealing with a specific product across all fixed index annuities in a given year or the entirety of a client's retirement savings over their whole life truly reflects an accurate assessment. Other studies favored by the industry have concluded that the Obama administration proposal caused more than 10 million retirement account holders to lose access to professional advice and would expand the racial wealth gap if the rule were to be reinstated, according to a column in response to Biden's comments by Wayne Chopus, CEO of the Insured Retirement Institute, a trade group.

"We were shocked and disillusioned by many of the President's remarks," Chopus wrote. "It was a speech filled with unsubstantiated rhetoric and devoid of factual evidence rationalizing a new rule imposing unnecessary regulatory burdens on investment advice. Rather than explain why the rule is necessary, the President demonized and joked about the insured retirement industry and our products to justify a misguided and previously failed investment advice regulation."

READ MORE: A new DOL fiduciary rule? 26 key excerpts from the proposal

Other industry groups took issue with Biden's comments as well.

"While we believe there will always be room for improvement in transparency, disclosure and the application and enforcement of fiduciary standards that ensure advice is provided in the best interest of investors, we feel the rhetoric of 'junk fees' by President Biden based upon arguably questionable analysis by the Council of Economic Advisors was ill-advised, unwarranted, and lacking in perspective and the inclusion of differences of opinions," American Retirement Association President-elect Jeffrey Acheson and CEO Brian Graff wrote in their own blog post last week.

"Fixed index annuities offering both upside investment opportunities, even if capped, and downside protection to avoid deep losses of capital are naturally going to cost more than a product just offering one or the other," they continued. "To label these increased fees as being 'junk' infers the increased fees bring no value and are only meant to enrich the product manufacturer or the product distributor at the expense of the investor, and further fails to acknowledge the goals and objectives of the typical annuity buyer profile."

Representatives for the American Retirement Association declined a request for an interview about the administration's statistics. Representatives for the Financial Services Institute, another trade group that has criticized the proposal, didn't respond to an email seeking comment.

"The Biden administration's misrepresentations about annuities seem to assume that a consumer is unaware of a product's costs despite requirements that they be disclosed," Dan Zielinski, the Insured Retirement Institute's chief strategic communications officer, said in a statement. "The administration appears to further assume that a comparative cost difference between an annuity and an alternative investment product does not include a value for the cost. The popularity of certain annuity products based on an ability to both accumulate assets and protect against market losses plus deliver income would seem to counter that assumption."

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Backing up the stats
On the other hand, the council's blog post cited four other studies that had similar conclusions to Egan's, and advocates for tougher rules protecting retirement investors found the administration's calculations to be sound. The stats are "based on rigorous academic work analyzing the costs of conflicts of interest in various investment markets," Micah Hauptman, the director of investor protection for the Consumer Federation of America, said in an email.

"I think it is fair to apply these estimates to the fixed indexed annuity market, based on similar conflicts of interest," Hauptman said. "If anything, the costs that investors pay for fixed indexed annuities are likely to be higher, given the fact that there is little meaningful regulation or enforcement in non-securities insurance markets (relative to in securities markets) and fixed indexed annuities have features that often impose additional costs of investors, including spreads, participation rates, use of bespoke and opaque indexes that are impossible to decipher and can further reduce returns, and surrender charges."

READ MORE: Labor Department proposal kicks off industry's next fiduciary fight

Other supporters of the administration's proposal, such as Knut Rostad of the Institute for the Fiduciary Standard, are trying to figure out "what can we do to do a better job of responding" to the industry claim that the rule could make advice more expensive and otherwise reduce access, Rostad said in an interview.

"They are entirely full of nonsense, because the premises that are used in making that assertion are fallacious on the surface," Rostad said. "The industry makes no acknowledgment that conflicts of interest are a problem, and that is a key premise of their argument. If you agree that conflicts of interests are not a problem, then you've got an argument that has legs. But that defies history and common sense and law, for starters."

For his part, Egan expressed a measure of surprise at the level of industry opposition for the proposal "because it levels the playing field" by harmonizing more types of products and advice under the same fiduciary standard, he said. He stopped short of making "a blanket statement" as to whether so-called junk fees are hurting all investors.

"There's a cost involved with these products, and there's a cost of giving financial advice," Egan said. "In my research, brokers are incentivized to sell products with excessive fees. The market wouldn't work without any fees. They're providing a service. They need to be compensated."

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Politics and policy Regulation and compliance Retirement DoL Joe Biden
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