ECONOMIC REPORT OF THE PRESIDENT

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Box 6-5: Addressing the Problem of Conflicted Investment Advice for Retirement Savings In April 2016, the Department of Labor (DOL) finalized a rule that substantially expanded the number of providers of financial advice required to adhere to a fiduciary standard, which requires them to put their clients’ best interest before their own profits. The rule makes considerable progress in upholding consumer protections in the retirement savings marketplace. Individuals saving for retirement usually make use of one or more of three major types of retirement plans. First, defined benefit (DB) plans provided by many public and private employers promise specified payments to the retiree that depend on characteristics of their work history, such as age, years of service and salary of the employee. The employer that sponsors the plan is typically responsible for making contributions to the plan adequate to finance the promised payments. If investment returns are less than expected, the plan sponsor is required to make up the difference. Another type of employer-sponsored plan is the defined contribution (DC) plan, such as a 401(k), which pays a retiree an amount based on how much the beneficiary and employers have contributed in his or her working years and the investment return earned on those contributions. The beneficiary typically has several investment options to choose from within the plan but bears the risk of lower retirement income if the investment returns are less than expected. Lastly, Individual Retirement Accounts (IRA) are savings accounts composed solely of an individual’s contributions during his or her working years. IRAs require individuals to make all investment decisions. In terms of investing retirement savings, employer-sponsored defined benefit (DB) plans generally delegate retirement savings of all participants to investment professionals who must serve the best interests of their clients. Employer-sponsored defined contribution (DC) plans typically give employees a list of investment options from which to choose. While IRAs offer individuals the most freedom to invest their retirement assets, it also means they must interact directly with those who provide investment products and investment advice. This has become more important as IRA assets have grown from 2 percent to 31 percent of all retirement assets from 1978 to 2015 (Figure 6-xii) During this period, the investment landscape has become much more complex and as a result, financial advice has become increasingly important to individual’s investment strategies. One survey found that roughly half of households that own a traditional IRA have a retirement strategy created with the help of an investment adviser (Holden and Schrass 2015). Strengthening the Financial System | 409
Figure 6-xii U.S. Retirement Assets by Type, 1978–2015 Percent of Total Retirement Assets 100 80 Government DB Plans 60 Private DB Plans 40 20 Annuities DC Plans IRAs 0 1978 1983 1988 1993 1998 2003 2008 2013 Source: Investment Company Institute. A growing body of academic and industry literature shows that such investment advice is not always in the best interest of clients. Table 6-i shows that savers may obtain advice from one of two main types of investment professionals: registered investment advisers (RIA), who have a fiduciary duty to clients; and broker-dealers, who are required to give only “suitable” investment advice. In addition, only registered investment advisers may give holistic advice on a client’s investments, whereas broker-dealers primarily transact in financial markets and may provide only incidental advice to clients (SEC 2011). Compensation structures for professionals who give financial advice often introduce conflicts of interest. Some investment advisers receive conflicted payments, which is compensation that depends directly on the actions taken by the advisee, such as trading shares of a company or selling shares of a fund. Certain types of mutual funds share a higher proportion of their revenues with advisers that sell them, or pay advisers relatively high fees per share that they sell to clients. These types of compensation structures incentivize advisers to steer investors into such products even if they are not optimal for a client’s investment needs. Alternative compensation schemes such as an hourly rate or a yearly management fee charged as a percentage of assets provide payments that depend less on investment decisions and provide less opportunities for conflict of interest. Advisers not subject to a fiduciary standard may direct clients into funds that while meeting a “suitability” standard, are not in the best interests of the client. 410 | Chapter 6
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ECONOMIC REPORT OF THE PRESIDENT To
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C O N T E N T S ECONOMIC REPORT OF
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economic report of the president To
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eforms in history. Banks have sharp
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the annual report of the council of
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C O N T E N T S CHAPTER 1: EIGHT YE
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. THE ECONOMIC RATIONALE FOR FEDERA
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2.4. Government Purchases as Share
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4.iii. Premium for the Benchmark Pl
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6.18. Systemic Risk (SRISK) 2005-20
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C H A P T E R 1 EIGHT YEARS OF RECO
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Figure 1-1 Actual and Consensus For
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Figure 1-3 Real Hourly Wage Growth
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Figure 1-4 Real GDP per Capita: Eur
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Figure 1-6 Household Net Worth in t
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Figure 1-8 Global Trade Flows in th
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Subsequent revisions to fourth-quar
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Percent 6 Figure 1-9 Fiscal Expansi
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substantial costs to the Federal Go
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worked to promote innovation and in
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expansion, a period of low producti
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The 2017 Economic Report of the Pre
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Chapter 4: Reforming the Health Car
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to the ACA and other factors. The A
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than 98 percent of Americans should
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Figure 1-13 Borrowers in Income Dri
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success of the financial rescue and
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einforced U.S. leadership in the ru
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Partnership (OGP), a global partner
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Figure 1-16 Labor Productivity Grow
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Labor Force Participation Household
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number of steps to ensure that econ
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C H A P T E R 2 THE YEAR IN REVIEW
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Percent 11 Figure 2-1 Unemployment
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allowing for additional investments
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Percentage Point 0.6 0.4 Figure 2-3
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public, largely highway constructio
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The size of the Federal Reserve’s
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Figure 2-5 Private-Sector Payroll E
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fell 80 percent from September 2014
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Figure 2-8 Rates of Part-Time Work,
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Figure 2-v Prime-Age Male Labor For
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Output Real GDP grew 1.6 percent ov
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Figure 2-11 Compensation and Consum
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Table 2-i Optimal Weighting for Hou
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esults suggest that, to a first app
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Figure 2-viii Real GDP, Average and
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Figure 2-13 Consumer Sentiment and
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Figure 2-xi Household Debt Service,
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Ratio to Annual DPI 1.10 1.05 Figur
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Figure 2-17 National House Price In
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Index 220 Figure 2-19 Housing Affor
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Figure 2-21 Composition of Growth i
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Figure 2-23 Capital Services per Un
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Box 2-7: Explanations for the Recen
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Figure 2-xv Business Fixed Investme
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Figure 2-26 Foreign Real GDP and U.
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somewhat generalizable (Box 2-8), b
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prices weakened and the global econ
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inadequate demand has contributed t
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Figure 2-31 Nominal Wage Inflation
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Figure 2-33 Real Hourly Wage Growth
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Index 6 Figure 2-36 Financial Condi
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Percent 4.0 Figure 2-38 Nominal Lon
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Dollars per Barrel 80 Figure 2-40 B
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Figure 2-41 IMF World Real GDP Grow
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against the Mexican peso, the Chine
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United Kingdom It has been a turbul
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for example, Japan has grown almost
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Figure 2-45 Credit to Nonfinancial
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Meanwhile, core inflation (excludin
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kept rates low across a wide range
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Investments in surface transportati
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Table 2-2 Supply-Side Components of
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Conclusion The economy continued to
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not increased from 1973 to 2013, in
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developments; individual behavior;
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action affecting income inequality
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have occurred. In doing so, these p
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Percent 24 21 18 15 12 9 6 African
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without the policy response.5 These
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Box 3-2: Income Inequality and the
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unable to obtain insurance at any p
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Figure 3-7B Percent 50 Uninsured Ra
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and have not expanded Medicaid foun
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Box 3-3: Safety Net Policies as Ins
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Millions of People 18 Figure 3-8 Im
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Figure 3-9 Effective Tax Rates for
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Box 3-4: Additional Actions to Make
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$294 million in newly appropriated
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15 10 5 0 -5 -10 -15 Figure 3-12 Pe
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Administration with those of previo
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as a share of potential GDP by Pres
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Figure 3-17 Changes in the Distribu
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30 25 20 15 10 5 0 Single Source: C
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ate on capital gains and dividends
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C H A P T E R 4 REFORMING THE HEALT
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eneficiaries have received cumulati
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form of lower premium costs and ind
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Percent 25 20 Creation of Medicare
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Figure 4-3 Health Insurance Coverag
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90 80 70 60 50 40 30 20 10 0 25 55
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Percent Uninsured 25 CHIP Created 2
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Legislative actions subsequent to C
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Percent Uninsured 40 35 Figure 4-7
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ecause of the ACA’s provision all
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Box 4-2: Dynamics in the Individual
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projected during the debate over th
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whelming majority of Marketplace en
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Figure 4-v Change in Benchmark Prem
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20 Figure 4-10 Share of Workers in
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percent during the decade preceding
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Panel A: Share with a Personal Doct
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Box 4-3: Interpreting Results from
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Fortunately, the OHIE is not the on
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Figure 4-14 Uncompensated Care as a
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Figure 4-15 Uninsured Rate by Popul
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Figure 4-17 Monthly Gain in Private
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Change in Working-Age Employment to
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this cross-sectional relationship b
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ecent discussions of macroeconomic
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Figure 4-23 Life Expectancy at Birt
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Figure 4-24 Mortality Rate vs. Medi
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more to cover Medicare patients tha
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example, through CMMI, the Administ
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orient payment around the entirety
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Percent of Payments 60 Figure 4-26
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covered under ACO contracts at the
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Additional Steps to Reform the Heal
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legislation that overrides the reco
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Figure 4-28 Health Care Price Infla
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Figure 4-30 Trends in Real Prices f
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average growth rate of real per enr
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Figure 4-34 Growth in Real Costs fo
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made a large, readily quantifiable
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in states experiencing weaker and s
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distribution, holding fixed both sp
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individuals among individuals 65 an
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Figure 4-40 Average Real Deductible
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Figure 4-41 Real Per-Enrollee Presc
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educe the growth rate of Medicare s
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improvements will strengthen ACOs
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-5 0 -2 Figure 4-42 Cumulative Perc
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Woolhandler 2015). These analysts a
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productivity on the job. These bene
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Figure 4-46 Premiums and Cost Shari
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(KFF 2016). Another fifth of tradit
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2030 2028 2026 2024 2022 2020 2018
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C H A P T E R 5 INVESTING IN HIGHER
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Gainful Employment regulations. To
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Thousands of 2015 Dollars 900 800 7
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externalities, credit constraints,
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Figure 5-4 Earnings by Age and Educ
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Figure 5-5 Variation in Earnings by
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Box 5-1: Anti-Poverty Efforts and E
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careers. Some of the effects of the
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eligibility cutoff likewise finds s
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Box 5-2: Federal Investments in K-1
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Evaluations of early local Promise
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America’s College Promise Playboo
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Dollars 45,000 40,000 35,000 30,000
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pre-payment penalty. Second, by tyi
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equirements, pushed efforts associa
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Figure 5-16 Size of Outstanding Loa
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Figure 5-17 Average Monthly Payment
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Figure 5-18 Distribution of Key Out
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Figure 5-20 Earnings by Family Inco
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to student needs and improve test s
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Box 5-5: Making Sure Students Enter
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prior, the early FAFSA reform helps
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Figure 5-ii Number of Institutions
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Figure 5-23 Gainful Employment Earn
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Additionally, Pell Grants can be be
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C H A P T E R 6 STRENGTHENING THE F
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with no easy way to get the funds f
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public has limited information, run
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value added of the sector has gradu
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managers. Thus, after fees, savers
Page 364 and 365: Too Many Resources in Finance? Beyo
Page 366 and 367: of the firm after the purchase affe
Page 368 and 369: Percent 100 Figure 6-2 Mortgage Ori
Page 370 and 371: Figure 6-4 Case-Shiller Home Price
Page 372 and 373: Figure 6-7 Global OTC Derivative Ma
Page 374 and 375: consumer and investor protections.
Page 376 and 377: Figure 6-iv Top 5 Banks as Share of
Page 378 and 379: cult to replace with services from
Page 380 and 381: Are U.S. Banks Too Big? The questio
Page 382 and 383: The three federal banking agencies
Page 384 and 385: Risk Taking The Dodd-Frank Act took
Page 386 and 387: Box 6-3: The Performance of Communi
Page 388 and 389: Figure 6-ix Return on Assets of Ban
Page 390 and 391: egulators can take a more holistic
Page 392 and 393: Figure 6-13 Repo and Reverse Repo,
Page 394 and 395: Figure 6-15 Private Funds Reporting
Page 396 and 397: Days 60 Figure 6-16 Weighted-Averag
Page 398 and 399: Figure 6-18 Systemic Risk (SRISK),
Page 400 and 401: In the absence of another financial
Page 402 and 403: lower funding costs in 2007-09, “
Page 404 and 405: through the Dodd-Frank Act and othe
Page 406 and 407: Prior to the financial crisis, one
Page 408 and 409: asis.24 One of the advantages of ce
Page 410 and 411: findings from the NRSRO examination
Page 412 and 413: Prior to the crisis, enforcement of
Page 416 and 417: Table 6-i Sources of Investment Adv
Page 418 and 419: financial system and the systems of
Page 420 and 421: Box 6-6: The JOBS Act While it was
Page 422 and 423: Figure 6-23 S&P 500, 2003-2016 Inde
Page 424 and 425: Figure 6-27 Mortgage Delinquency an
Page 426: It created the FSOC to consider ris
Page 429 and 430: energy efficient and lower greenhou
Page 431 and 432: of domestic actions to reduce green
Page 433 and 434: people and vegetation (U.S. Global
Page 435 and 436: investment are much higher than the
Page 437 and 438: Delaying Action on Climate Change I
Page 439 and 440: uses and land management activities
Page 441 and 442: Carbon Pollution Standards for Powe
Page 443 and 444: a projected range of $16 billion to
Page 445 and 446: these resulted in insignificant cha
Page 447 and 448: Figure 7-4 Corporate Average Fuel E
Page 449 and 450: diesel fuel and jet fuel. The Vehic
Page 451 and 452: Box 7-3: Building Resilience to Cur
Page 453 and 454: sources in the oil and gas sector,
Page 455 and 456: emissions and total greenhouse gas
Page 457 and 458: Figure 7-7 Energy Intensity of Real
Page 459 and 460: Figure 7-10 U.S. Petroleum Consumpt
Page 461 and 462: Figure 7-12 Energy Intensity Transp
Page 463 and 464: Figure 7-14c Energy Intensity Comme
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Figure 7-16 U.S. Energy Consumption
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2008 to 7 percent in 2015. Figure 7
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Index, 2008 =0 0.1 0.0 -0.1 Figure
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Figure 7-23 Decomposition of Emissi
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three determinants of emissions? If
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Percent 100 80 Figure 7-26 Sectoral
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characteristics, and management tre
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oil and gas sector) were subsequent
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while creating new jobs and raising
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such as using similar methodologies
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Box 7-4: Supporting Increased Penet
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sector, the fee would incentivize p
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to be used to decompose emissions i
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Reinvestment Act.” NBER Working P
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D’Amico, Stefania, et al. 2012.
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______. 2016. “Chapter 3: Develop
Page 497 and 498:
Chetty, Raj, et al. 2014. “Where
Page 499 and 500:
NBER Working Paper 22170. Cambridge
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American Hospital Association and H
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Cantor, Joel C., et al. 2012. “Ea
Page 505 and 506:
______. 2012a. “Direct Spending a
Page 507 and 508:
Dranove, David, Craig Garthwaite, a
Page 509 and 510:
Wars: Global Solutions for Developi
Page 511 and 512:
Huang, Jidong, and Frank J. Chaloup
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McWilliams, J. Michael. 2016. “Ch
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Pinkovskiy, Maxim. 2014. “The Imp
Page 517 and 518:
______. 2016. “Certification of M
Page 519 and 520:
Arcidiacono, Peter, V. Joseph Hotz,
Page 521 and 522:
Bulman, George, and Caroline Hoxby.
Page 523 and 524:
______. 2015a. “Economic Costs of
Page 525 and 526:
Dobbie, Will, and Roland G. Fryer J
Page 527 and 528:
Committee on Health, Education, Lab
Page 529 and 530:
Jepsen, Christopher, Kenneth Troske
Page 531 and 532:
Marcotte, Dave E., et al. 2005. “
Page 533 and 534:
Reynolds, Arthur J., et al. 2011.
Page 535 and 536:
Chapter 6 Acharya, Viral. V., Deniz
Page 537 and 538:
Fama, Eugene F., and Kenneth R. Fre
Page 539 and 540:
Wheelock, David C., and Paul W. Wil
Page 541 and 542:
______. 2016a. “The Economics of
Page 543 and 544:
______. 2016c. Short Term Energy Ou
Page 545 and 546:
Interagency Working Group on the So
Page 547 and 548:
Office of Management and Budget (OM
Page 550:
A P P E N D I X A REPORT TO THE PRE
Page 553 and 554:
Council Members and Their Dates of
Page 556 and 557:
Report to the President on the Acti
Page 558 and 559:
consulting with a wide variety of o
Page 560 and 561:
In October, the Council released a
Page 562 and 563:
Research Economists David Boddy . .
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A P P E N D I X B STATISTICAL TABLE
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GOVERNMENT FINANCE, INTEREST RATES,
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Year or quarter Table B-1. Percent
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Table B-2. Gross domestic product,
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Table B-3. Quantity and price index
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Table B-5. Real exports and imports
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Year Total Table B-7. Real farm inc
Page 579 and 580:
Table B-9. Median money income (in
Page 581 and 582:
Labor Market Indicators Table B-11.
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Year or month Table B-12. Civilian
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Table B-14. Employees on nonagricul
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Year or month Table B-15. Hours and
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Government Finance, Interest Rates,
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Table B-19. Federal receipts and ou
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Table B-21. Federal and State and l
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Table B-23. U.S. Treasury securitie
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Year and month Bills (at auction) 1
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Year and month Table B-26. Money st
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