Fiduciary Duty, Financial Regulation, and the Market for Retirement Products

Northwestern University, Evanston IL

Investigators

Abstract

The total amount of assets in retirement accounts exceeds $25 trillion, and there is rightly a large amount of policy discussion surrounding regulating the market for retirement products. The primary goal of this research is to focus on fiduciary duties -- regulations designed to ensure that agents act in their clients' best interest -- imposed on various agents in the retirement system. This research aims at (1) providing empirical evidence on the effects of the efficacy of these regulations and (2) studying the effects of alternate regulatory proposals on the structure of the retirement market. The investigators first study the market of financial advice. The United States is in the middle of a protracted debate over the merits of imposing fiduciary duty on broker-dealers selling retirement products, which partially involves trading off the potential for aligning incentives of the clients with those of the adviser with the costs of an excessive regulatory burden. The investigators also study the market of employer-provided defined contribution plans, like 401(k) plans, when plan managers for certain plans are subject to fiduciary duties imposed through the Employee Retirement Income Security Act (ERISA). This research studies how employer-trustee bargaining can influence the fees and plan offerings and examines regulations to restrict either fees or plan offerings, which can have important distributional consequences for a market in which investment options and costs are directly tied to one's place of employment. The investigators bring previously unexplored data to these questions and develop new methods for studying choices in the presence of multiple decision makers. This research has three prongs. First, the investigators leverage a transactions-level dataset from a major financial services provider to study the effects of fiduciary duty on product choice. This research utilizes a differences-in-differences approach, comparing across states that impose differential fiduciary duties on broker-dealers and using investment advisers regulated at the federal level as a control. The investigators then supplement this reduced-form analysis with a model of selective entry into the market for financial advice. Second, this project develops a structural model of discrete choice in which choices are determined not just by consumer utility but also by (possibly biased) advice. Estimates from this model will help decompose the mechanisms through which fiduciary duty operates and also provide guidance on alternate reforms; it will also provide a framework for analyzing advice in other markets. Finally, the investigators use data on the fee structure and plan offerings of the universe of ERISA-compliant defined contribution plans to develop a model of bargaining between employers and plan providers to quantify the level to which various parties internalize plan costs. The model also allows for studying the effect of imposing most-favored-nation clauses on fees or plan offerings. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.