Posts filed under “401(k)”
Over the years, I have written and spoken positively about the fiduciary standard (see e.g., this or this or this). Simply stated, a fiduciary is obligated to put the client’s interest first. Period. It is higher duty of care owed to clients than the traditional broker “suitability standard.” I’ll say more another time about why the new Department of Labor standards are the correct approach.
However, a recent development is so rich with irony that I could not wait to comment.
It is no surprise that the financial services industry not presently governed by the higher standard is against the new rules that the Department of Labor has proposed for making 401(k) and 403(b) advisers. It requires that all compensation-related retirement plan advisers must act as fiduciaries.
The reason for the opposition is simple: It potentially costs the industry a boatload of money. The change in standard requires the adviser to put the client’s interest ahead of even the adviser’s own pecuniary interests. That is a huge change.
The thinking behind the Labor rules is that retirement investment costs have slowly inched up, to the point where now they take a meaningful chunk out of people’s nest eggs. The SEC, despite aresearch report and staff recommendation that all advisers and brokers move to the fiduciary standard, has been politically unable to accomplish that goal.
Former SEC Chairman Arthur Levitt has called the lack of congressional support for the rule is a “national disgrace.” The White House Council of Economic Advisers estimates retirement savings with the fiduciary rule could be more than $200 billion over 10 years.
The Department of Labor gets to regulate 401(k)s because they are part of employees’ total compensation package. They do not have the same political process as the SEC, and perhaps most important to this aspect of regulation, they don’t have five political appointees of which a majority are required for any rule change. Hence, the Labor Department was able to do by fiat for 401(k)s what the SEC could not do for the entire industry.
There is a lot of money involved. How much? As an example, let’s consider the lowly 12b-1 fee. It is a marketing fee paid to various agents to use their mutual funds. To grossly oversimplify this, think of it as a similar fee that food companies pay supermarkets for prime shelf space. Mutual fund companies pay brokers to carry these funds on their platforms.
To show you just how warped this corner of the industry is, 12b-1 fees can be as much as 0.25 percent of assets, and somehow “still call itself a no-load, or no-commission, fund” according to a Wall Street Journaldiscussion of fees; they are allowed to be as high as 1 percent.
That adds up. Morningstar crunched the numbers, and determined that for “the industry overall, the figure is from $12 billion to $15 billion.” To give that some context, the total annual U.S. box-office receipts for domestic film sales are less than that at $10 billion; the National Basketball Associations total revenues – ticket sales, television broadcast rights, clothing, licensing deals, merchandise, etc., are only $7 billion. This little fee that you probably did not know about is bigger than the NBA, bigger than Hollywood.
And that’s just one small fee. The total of all fees involved likely exceeds $100 billion. With all that money at stake, the industry threw a lot of firepower to protect its fees and fight the changes. It hired lobbyists, paid think tanks for position papers, wrote op-eds and hired a bunch of flunkies to promote its views on social media.
Here is where it starts to get interesting.
Many of the people working against the implementation of the fiduciary standard are hired guns. You might think that in fighting against an implementation of the fiduciary standards, the players involved would, well, take care to not violate whatever duties of care they owe to their various employers.
You know, like a fiduciary would.
We learned via the Washington Post blog Daily 202 that a non-resident Brookings scholar, Robert Litan, failed to comply with a rule the think tank has “prohibiting those who are generally not paid by the institution from associating their congressional testimony with the think tank.”
In other words, from acting in their own self-interest instead of in the interest of the firm they are ostensibly performing research for.
Senator Elizabeth Warren, the former Harvard Law School professor, is in favor of the fiduciary standard. She noted the violation of Brookings rules, calling its report “highly compensated and editorially compromised work on behalf of an industry player seeking a specific conclusion.” The researcher was fired by Brookings.
The study had a single sponsor, the Capital Group, which also manages $1.4 trillion through its subsidiary American Funds. They also oppose the Department of Labor’s rules.
It just goes to show what happens when you try to serve two masters.
Originally published as: A Fiduciary Critic, Representing Whose Interest?
Over the years, I have been critical of the way 401(k)s are created, administered and managed. They can be expensive and filled with underperforming actively managed funds, some of which charge way too much. Some retirement plans offer too little diversification, especially in international and emerging-market sectors. I have also noted that you, the individual investor,…Read More
It’s tax day. Perhaps like millions of your fellow Americans, you waited to the last minute to file and will be trudging off to the post office or filing electronically later today. I’m not going to lecture about your procrastination. However, I am going to ask you two somewhat tax-related questions: 1. How much have…Read More
About 9,000 U.S. taxpayers have each accumulated at least $5 million in individual retirement accounts, said the Government Accountability Office, raising questions about some investors’ tax-advantaged returns. Zimmerman Edelson Partner Robert Zimmerman and Bloomberg’s Peter Cook also discuss tax inversions on “Street Smart.”
Source: Bloomberg, Sept. 16 2014
A recent Gallup poll asked working Americans what they expected in retirement. “Half of Americans think they will have enough money to live comfortably after they retire.” This is the first time since before the financial crisis that a majority of Americans have felt this way. The poll is very revealing about both investing psychology…Read More
From Bloomberg Visual Data: The IRS collected more than $5 billion in 2011 from penalties incurred by taxpayers who withdrew money from tax-deferred retirement accounts before the age of 59 1/2. The people who pay the penalty include younger workers who switch jobs and don’t bother to roll over their accounts and older workers who…Read More
There’s nothing wrong with 401(k)s, except the players involved Barry Ritholtz Washington Post March 9, 2014 This past year has seen a firestorm of criticism casting 401(k)s as mostly terrible. Their performance is too poor, and the fees too high, with poor investment choices built into most of them. Typical plans are complicated…Read More