Wednesday, January 29, 2014

Concern Over EBSA Fiduciary Standard is Still Bipartisan

One of the favorite targets of some lawmakers in Washington, D.C., is federal regulations.  The typical argument is that too many regulations strangle business flexibility and opportunity, and have a depressive effect on our economy and job creation.  A contrary view is that, without federal regulations, fair trade, employee welfare, the environment, public health, and other areas of “public good” would suffer greatly.  We’re not going to get into the middle of this broad debate, there undoubtedly being merit on both sides.  But as always, we will eagerly offer our two cents worth when a regulatory issue clearly affects our industry.

One of these issues is the definition of “fiduciary” as it applies to investment advisors and other professionals who deal with employer sponsored retirement plans and IRAs.  Recently a number of congressional Democrats—who have dubbed themselves the New Democrat Coalition—sent a letter to recently appointed Secretary of Labor Thomas Perez, expressing their “concerns about the department’s proposal to redefine the term “fiduciary” for purposes of … ERISA and … Individual Retirement Accounts and similar arrangements.” 

Mr. Perez is the second Secretary of Labor to receive a such a message from Congress.  In November of 2011, 55 congressional Republicans and 30 Democrats petitioned then-Secretary Hilda Solis to request that her agency—more specifically its Employee Benefits Security Administration (EBSA) arm —narrow the scope of the fiduciary definition regulations that were pending at that time.  As we know, the anticipated fiduciary definition regulations were withdrawn and have been “pending” ever since.

Lawmaker concern then, as now, is not merely that EBSA may be poised to overstep its regulatory bounds, but that it will also damage the ability of many IRA owners to get investment advice to help them grow the assets they will need for a comfortable retirement.  It should not be lost on anyone that the concern has been bipartisan, expressed by both Democrats and Republicans.  That Democrats would break ranks and go on record with their anxiety about the direction of their own president and his appointees, speaks volumes.

IRAs are not governed by ERISA and many feel it can be legitimately argued that EBSA does not have regulatory authority over them.  One might counter-argue that assets that have been accumulated in an employer plan may deserve the same fiduciary considerations when they leave that plan and become IRA assets.  Fair enough.  But that’s not the whole story.  What is concerning is the potential of an ERISA fiduciary standard for IRA to leave many, many IRA savers with fewer investment options than they now have. 

There is risk and cost attached to expertise.  It’s as true in the IRA market as it is of the contractor who builds your home, or the mechanic that replaces the timing belt on your automobile.  Those who do it properly have more training or experience—or both—and there is a cost for this level of expertise.  Simply put, it will likely cost more to work with an advisor who can meet the ERISA fiduciary standard than one who operates on a more general level of investment suitability. 

We have heard comments from numerous advisors stating that they will not be able to serve low-balance or beginning IRA investors, because the fees they would have to charge would undoubtedly seem unreasonable; fees that, with a larger balance against which to amortize them, would seem fair and legitimate.  Some have told us that a client with smaller balances  of say less than $25,000, or $50,000, simply could not be served by them. 

The net effect for low-balance or new IRA savers could be the unavailability of some important types of investments, chiefly securities.  Such investments have historically given savers the most attractive returns in the long run, and thereby could have the greatest potential to assist in achieving retirement security. 

While we recognize the need for advisors to act in the best interest of their clients, the concerns being expressed across a landscape stretching from Wall Street to Pennsylvania Avenue seem legitimate.  Any regulations defining fiduciary for retirement saving purposes have to be practical, sensible, and should not be punishing to an important segment of those who are saving for retirement.

Friday, January 3, 2014

Why Is Our 401(k) Industry on the Defensive?

Most of us have heard the expression “Don’t shoot the messenger.”  In other words, the bearer of unwelcome news may not be the cause of it and shouldn’t be blamed or punished for delivering it.  Sadly, our retirement industry, and in particular those associated with 401(k) plans, have at times been the victim of “messenger blame,” particularly with respect to American workers’ retirement readiness.
To our credit, most of us have for a very long time been telling Americans that they should save more.  That was and still is true.  But in addition to our intended audience, among those who have been listening are members of the media, and academics in think tanks and ivory towers.  They have been listening and passing judgment, not only on the wisdom of our message, but on our performance as an industry.  Some, instead of attributing inadequate saving to workers’ personal choices, to economic forces, or to employment circumstances, have eagerly and loudly blamed us.  By “us” I mean not only the professionals working in the retirement services and investment industries, but—by association—the defined contribution retirement savings vehicles that are most readily available to American workers. 

We will not address professional performance here, knowing as we do that the honest majority of retirement professionals are not trying to fleece savers with outrageous fees or commissions, inadequate disclosure, or by swindle of any variety or flavor.  Such sins are nowhere near as common as some critics would have the public believe, and there are sound regulations which—if enforced—will bring into line those who have fewer scruples and weaker ethics than the majority of us.
We will address here some of the common themes of criticism of the retirement plans currently available to the American worker, and comment on the job that they are doing to prepare Americans for retirement. 

One criticism is that automatic-deferral 401(k) type plans have not yielded participation and saving as expected, and in some cases contributions have actually declined.  That is truly a red herring.  In some plans deferral rates HAVE seen declines, at least temporarily, when participants who were already deferring substantially did not affirmatively “reset” at their previous deferral level.  What has also happened, however, is that more participants are actually deferring in these types of plans.  What our industry has or should have learned from this is that communications between employers and plan participants needs to be better.  And proper plan design with these types of plans is critical.  Going forward, an automatic-increase feature will be a valuable tool when more employers implement it.
Another criticism is based on an ideal that could be called a pipe dream, or a pie-in-the-sky vision, if one were to be uncharitable.  It is a vision that primarily comes from academics who lead retirement research or learning centers within prestigious universities; who, incidentally, typically have access to pension plans with post-retirement benefit guarantees not dependent on the whims of the economy, or on the investing skill of the employee-participant.  Some such experts advocate a combination of mandatory employee contributions paired with government-funded payments, which together would yield assured post-retirement benefits for each of us.  One needs only look toward the use of defined benefit pension plans of late to gauge the likelihood of such a plan from an economic standpoint.  More importantly anyone who has paid any attention to the politics of our time knows that there is very little political viability in a government-run, enforced-saving program with taxpayer funding.  Ivory towers are called that for a reason.  They can be divorced from the realities that happen at ground level in our every day world.  We would all love to have a retirement plan that provided guaranteed retirement income but the economic reality and the political calculus to "mandate" such a plan is not there; certainly not now and likely not for a long time to come. 

Last to be addressed here are the numbers that tell us how we are doing as a nation of savers.  Or, as we are often told by critics, non-savers, as the case may be.  The first order of business is a confession.  The retirement industry and American employers cannot guarantee everyone a secure and well-funded retirement.  There is no free lunch, no magic bullet, no easy solution to saving enough for retirement. 
But the numbers we see tell a glass-half-full, rather than a glass-half-empty story.  According to data from a study by the American Benefits Council, the Investment Company Institute and the American Council of Life Insurers, almost 80 percent of full-time workers have access to a retirement plan.  More than 60 percent of full-time employees actually do make or receive retirement plan contributions.  Among those who are participating, those closest to retirement—age 60-64—have an average of more than $350,000 accumulated in defined contribution plans and/or IRAs. 

Does this provide a retirement solution for all, including the unemployed and all part-time workers? No.  Are accumulations equal for everyone who is saving? No, they are not.  Could there be improvements in retirement plans, and the associated investment and administration functions that go with them?  Probably.  But let’s not be so preoccupied with the pursuit of the perfect that we fail to appreciate the good in existing retirement saving options, and the great amount there is of it.