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Article

The Economic Implications of the
Department of Labor’s 2010 Proposals
for Broker-Dealers

Alicia H. Munnell, Anthony Webb and Francis M. Vitagliano
The Journal of Retirement Summer 2013, 1 (1) 38-54; DOI: https://doi.org/10.3905/jor.2013.1.1.038
Alicia H. Munnell
is the director of the Center for Retirement Research at Boston College in Chestnut Hill, MA.
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  • For correspondence: munnell@bc.edu
Anthony Webb
is a research economist at the Center for Retirement Research at Boston College in Chestnut Hill, MA.
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  • For correspondence: webbaa@bc.edu
Francis M. Vitagliano
is a research consultant at the Center for Retirement Research at Boston College in Chestnut Hill, MA.
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  • For correspondence: vitaglif@bc.edu
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Abstract

In 2010, the Department of Labor proposed changes that would eliminate third-party incentive payments, such as 12b-1 fees, that may encourage broker-dealers to sell highfee mutual funds to Individual Retirement Account (IRA) customers. The investment industry argues that eliminating these fees could force broker-dealers to charge directly for advice, which could result in less advice being provided and customers making poor investment decisions. This article examines the trade-off between lower fees and poor investment decisions. Our best estimate is that the elimination of 12b-1 fees would reduce IRA customer costs by 4 basis points. If broker-dealers responded by moving customers from high-cost, actively managed funds into low-cost index funds, IRA customers could save another 7 basis points. Broker-dealers are unlikely to change their business model with respect to the provision of advice as a result of the loss of 12b-1 fees. The article also uses an inter-temporal optimization model to quantify the potential benefits and costs of reform to households. This exercise points to relatively modest potential benefits, but even more modest costs under plausible assumptions. Several more extensive reforms are suggested to ensure that IRA savings are invested more effectively.

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The Journal of Retirement: 1 (1)
The Journal of Retirement
Vol. 1, Issue 1
Summer 2013
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The Economic Implications of the
Department of Labor’s 2010 Proposals
for Broker-Dealers
Alicia H. Munnell, Anthony Webb, Francis M. Vitagliano
The Journal of Retirement Jun 2013, 1 (1) 38-54; DOI: 10.3905/jor.2013.1.1.038

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The Economic Implications of the
Department of Labor’s 2010 Proposals
for Broker-Dealers
Alicia H. Munnell, Anthony Webb, Francis M. Vitagliano
The Journal of Retirement Jun 2013, 1 (1) 38-54; DOI: 10.3905/jor.2013.1.1.038
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  • Article
    • Abstract
    • THE NATURE OF THE PROBLEM
    • THE CURRENT REGULATORY ENVIRONMENT AND PROPOSED CHANGES
    • ASSESSING THE IMPACT
    • THE OPTIMIZATION MODEL
    • BOLDER PROPOSALS
    • CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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  • Editor’s Letter
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