Will Regulations to Reduce IRA Fees Work?

As a result of rollovers from 401(k) plans, Individual Retirement Accounts (IRAs) have become the biggest form of retirement savings – bigger than 401(k)s. This development raises concerns because, compared to 401(k) regulatory safeguards, IRA investments have fewer protections. One consequence is that IRAs tend to be invested in mutual funds with higher fees. And fees have a significant effect on how much an individual will have at retirement. Regulators contend that part of the explanation for the high fees on IRA investments is that third-party incentive payments, such as 12b-1 fees, encourage the selling of more expensive mutual funds. In response, in 2010, the U.S. Department of Labor (DOL) proposed to eliminate these incentive payments for anyone who gives advice to IRA holders (banks, insurance companies, Registered Investment Advisers, and broker-dealers). The focus here is broker-dealers because they account for the bulk of IRA investments. The DOL proposal has met with a storm of criticism from the investment industry, which contends that eliminating fees could force brokers to charge directly for their advice and that raising the visibility of the cost of advice would result in less advice being provided to low- and moderate-income IRA holders. This brief, which is based on a new study, examines the tradeoff between lower fees and industry allegations of harm.