Biden's Retirement Savings Proposal

The Vice-President announced new regulations to try to protect employees' investments in qualified retirement plans, such as 401(k) plans.  I made some comments on KREX (link to story) after they called us for an interview.  (They really called Barbara, but she was unavailable!)

The proposal addresses conflicts of interest which occur when plan advisors also give individual participants advice by making it illegal for one advisor to sit in both roles.

As is typical in the investment field, there are complex issues that arise for which a regulatory fix may not provide the intended outcome.

First, regulators have already been trying to move toward full disclosure on fees for several years, yet still many plan administrators lack a full understanding of the fees they incur, which can be substantial in a big plan, yet may remain hidden in various insurance expenses (check the fine print) and when the products use expensive share classes for the funds.  For example, when the index fund option has an expense ratio of over 1 percent, the provider is hiding fees by using more expensive share classes.

This latest "fix" thinks that you can regulate away a conflict of interest issue.  In fact, all advisors have built in conflicts.  Fee-only providers which charge an asset-based fee (e.g. 1% per year on assets under management), like we do, are not conflict-free, as many "fee-only" providers might claim.  When helping clients consider paying down debt, using money that would otherwise be available for investment, there is an obvious conflict of interest.  What makes an advisor trustworthy isn't necessarily the fee regime they have adopted, but rather whether or not they really place clients' needs first.

The unintended consequence of the current proposal that I was trying to discuss during the KREX interview is the possibility that fewer advisors will step in to serve the retirement plan vendors if they are prohibited from taking on former employees as clients.  That would leave employees out in the cold, with less help than they have now (and that's hard to imagine!) if advisors are afraid that wearing the hat of employee education consultant would prevent them from serving individuals from the company in a more traditional client capacity.

Washington always wants to fix things for us, and nearly always makes things worse, and more expensive, through their efforts.  Employers have the incentive to protect their employees from untrustworthy advisors.  I hope that Washington doesn't make things more difficult for everybody in an effort to appear like they are going to bat for workers.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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