Finally, some regulations in the financial services world that actually benefit Americans. The Department of Labor (DOL) recently released proposed regulations that would limit the ability of financial advisers of providing advice to 401(k) participants if the adviser receives compensation from the product provider. What does this mean to you? Imagine you go to a lunch meeting with a financial adviser who runs your 401(k) plan. He or she stands up there and shows you some pretty graphs and uses technical jargon about investing and retirement. This adviser then sits down with you personally and recommends you invest in Fund A, B, and C. Well, the adviser can no longer do this if they get compensated by Fund A, B, or C. In other words, DOL wants you to get objective advice, not advice where you are pushed to funds that pay the adviser the most moolah.
This may seem like common sense to many Americans. An adviser shouldn’t be telling people how to invest their money if they can steer them into products that pay them more. It’s a no-duh, don’t you think? Except, this is exactly how Wall Street works. Wall Street or commission brokers and advisers attempt to build rapport with clients through likability or tossing around “sophisticated” financial terms and charts then drive them into a product that pays them the highest commission. There was talk of limiting this behavior in the non-401(k) market, but Senator Chris Dodd railroaded that one. The 401(k) market is a bit different though because it is guided by the Employee Retirement Income Security Act (ERISA), which is stricter on behavior since it was created to protect employees. The government wanted to be sure that an employer couldn’t touch employees retirement savings for their benefit or skew the plan in the employer’s favor at the expense of employees. ERISA protects employees by defining “prohibited transactions”. An example of a prohibited transaction is the employer or plan provider cannot borrow funds from the plan unless it is the employer’s personal account. This keeps the employer from taking employee money and possibly losing it due to bad business decisions, poor investment choices, or a crazy weekend in Vegas.
This new regulation will be seen as a prohibited transaction. Of course, the Security Industry and Financial Markets Association is disappointed with the proposed regulation.
“We are disappointed the Department of Labor decided to move in this direction after having withdrawn the previous final regulations and class exemption,” Elizabeth Varley, managing director of government affairs of the Securities Industry and Financial Markets Association, said in a statement. “The proposed regulation, if approved, will do little to expand American’s access to investment advice.”
What surprises me is this is the same organization that backed a fiduciary standard for all advisors and brokers . As mentioned previously, Chris Dodd railroaded that. So, this group believed it was good for all people giving financial advice to individuals to put their interests first, but when it comes to giving advice to retirement plans and the employees in those plans, the fiduciary standard shouldn’t apply. Hmmm, makes me think that they publicly promoted the fiduciary standard for individuals because they knew they could derail the legislation. I am sure they will do their best to hijack these regulations. But, I guess I am just a crusty old cynic.
Many believe that this move will open up 401(k) plans to index funds. To that, I say bravo. I have seen so many 401(k), 403(b), SEPs, Simple IRAs, and Money Purchase Plans that are loaded with expensive, under-performing funds. I have even seen these plans invested in annuities. The retirement plan market is a boon to the commission world and insurance industry. Most companies, and especially small companies, are inundated with fees that are hidden from the employers. With pensions a thing of the past and Social Security facing some sort of cut or alteration within the next 20 years, employees need to have solid retirement plans. It will be the core of their retirement. I applaud the DOL for taking this step. I just hope the lobbyists for the financial service industry doesn’t derail this regulation, but I am sure they will give it their best college try.