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Financial Companies Lobby to Keep 401(k)s Broken
Part 1 of this series was on the recent Frontline 401(k) expose'. It includes the financial industry's belief employees don't need advisors who uphold their best interest and its confession it is unaware many 401(k) products under-perform the market. Watch this if you haven't. The link is below.
[1]In this segment I'm highlighting a specific example of the power the financial industry has in controlling the 401(k) market.
The Department of Labor (DOL) has tried to level the playing field for people contributing to 401(k) accounts. This is because a stage is being set on which tens of millions will run out of money. The DOL has also noted companies providing retirement plans have been allowed to create their own rules for decades, and correctly concluded the two are linked.
Its effort to improve the system to better benefit the consumer, however, has been thwarted by the financial industry.
Shocking, I know.
Last year the DOL was able to make fee disclosure a requirement. After 20+ years…now the plan provider has to tell you what you are paying…kind of.
[2] This year the DOL attempted to expand the definition of fiduciary, making plan vendors and representatives responsible for the plans they are selling.
Fiduciary: An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another's benefit.[3]This sounds like a relationship you'd want…right? If you have a 401(k) account though, you are more likely familiar with this scenario:
1) You get a list of funds with recent returns next to them.
2) You pick which funds to invest in.
3) You hope the funds do well.
To the investment company the scenario looks like this:
1) It provides a list of funds to a company, but the company is responsible for the funds offered.
2) The employees invest in the funds the company agreed to include.
3) The investment company hopes the funds do well, but gets paid either way.
For the investment company it's big returns with no risk...which is the dream of the employees investing in the plan. Ironic. Plan vendors, however, are often making their returns from fee sharing arrangements inside the funds, not from the success of participants using their products.
Participating in an effort to halt the DOL from expanding responsibility to plan manufacturers, Ronald O'Hanley, President of Asset Management and Corporate Services for Fidelity Investments addressed Congress.
Mr. O'Hanley started well: "Significant reforms need to be made to the retirement system now because an increasing number of Americans are marching towards retirement with little hope of maintaining their standard of living."
But then he insisted including plan vendors and brokers as responsible parties to a retirement plan would "blur the line between education and advice and eliminate valuable education and guidance (401K) investors receive today."
In my experience the biggest complaint of plan participants is the lack of advice. You can decide for yourself how much education and guidance your 401(k) plan offers you.
He went on, "Advisors and brokerage firms could face legal liabilities that would
compel them to abandon a commission based model and potentially exit the retirement market altogether…and this will hurt average and low income Americans."
[4]Mr. O'Hanley agrees the system is broken and requires immediate change to curtail a retirement crisis. His recommendation was that Congress consider forcing higher contributions and more education. If I understand, that means keep doing the same thing, just more of it.
I've yet to encounter a situation in which Will Rogers advice, "if you find yourself in a hole, first, stop digging," was more important.
Fidelity makes no bones about wanting the commission based model to be left intact.
The reason is because if the manufacturer and advisor receive commission revenue it creates a conflict of interest in the client relationship. If this sounds like a bad thing its because it is, unless you are selling retirement plans.
Because of this conflict, the firm is not allowed to act as a fiduciary. Just like a divorce attorney can't represent both spouses, a plan provider can't represent both the manufacturer and the consumer. The industry could not be more clear on whose interest it prefers to uphold.
With that in mind Mr. O'Hanley's argument is:
"You can't make us fiduciaries because then we can't make commissions. If we can't make commissions then we have to charge fees. If we charge fees then the "valuable education" we provide would be considered "advice." If we are giving advice we have a responsibility to uphold our client's best interest. So we have to make commissions, otherwise Americans will lose their valuable education."
Circular Reasoning: "The reasoner begins with what he or she is trying to end up with. Circular logic cannot prove a conclusion because, if the conclusion is doubted, the premise which leads to it will also be doubted."[5]Frankly, I doubt Fidelity's conclusion.
Unfortunately, Congress does not and halted the DOL from making plan providers more responsible for the plans they sell.
Most employers and employees don't have time to be educated on investing and retirement planning, let alone want it. What they need is someone to advise them on how much they need to save and what funds to put it in, preferably from someone who will stand behind that advice.
I promised in Part one if you stick with me through this series I will provide reasonable solutions to the retirement crisis. Here's solution #1: If you act as an advisor or supply funds in a plan, you are required to act as a fiduciary.
I welcome your questions and comments.
Marc Becker, Accredited Investment Fiduciary
Managing Partner, Wiser Financial Coaching, LLC
Wiser Financial Coaching, LLC, is a Registered Investment Advisor Firm
P.S. – If you Google "employees sue Fidelity" that's kind of interesting too.
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