Retirement Savers Really Do Need Government Help
I have some good news and some bad news.
The good news is that the Department of Labor’s fiduciary rule, which states that any broker or manager offering advice on retirement-savings accounts must put the clients’ interests first, looks like it will survive. It goes into effect officially on June 9.
The bad news? There is no evidence that Secretary of Labor Alexander Acosta either understands the reasons for the rule, or believes it is important. He makes that much clear in an op-ed in the Wall Street Journal:
Another example of a controversial regulation is the Fiduciary Rule. Although courts have upheld this rule as consistent with Congress’s delegated authority, the Fiduciary Rule as written may not align with President Trump’s deregulatory goals. This administration presumes that Americans can be trusted to decide for themselves what is best for them.
Certainly, it is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions.
Today, I would like to suggest that instead of killing the rule, Acosta should improve it.
Why? Ultimately, the fiduciary rule will save investors -- and by extension, the federal government -- hundreds of billions of dollars in the future. This also explains who opposes the rule -- specifically, those who stand to benefit most if it’s abandoned. It was noteworthy that shares of large publicly traded brokers dropped when Acosta’s op-ed was published, suggesting that dollars, not principles, were the real issue.
The arguments against the fiduciary rule are thin, particularly the claim that it limits choices. There is a universe of options available, from brokers to registered investment advisers. Charles Schwab Corp. offers retirement advice. So does Vanguard Group Inc. There are lots of automated algorithmic software services that do the same. And then there are all the large brokerage firms. 1 And for those who choose to keep their own counsel, there is nothing in the new rules to stop that. Even after the fiduciary rule is implemented, there will be an enormous range of options available for investors in tax-deferred retirement accounts.
But something else Acosta said deserves scrutiny: “This administration presumes that Americans can be trusted to decide for themselves what is best for them.”
Since this seems to be the sturdiest objection that Acosta has.
Philosophically, he is referring to the idea of the nanny state. We don’t want the government intervening in every little aspect of our daily lives. Who can disagree with that? Most of us understand that freedom requires adults to assume personal responsibility. So Acosta does raise a valid point.
However, it is reasonable for government to be involved in our lives where it is either more efficient or otherwise impossible for us to do certain things ourselves. For example, it doesn’t make sense for individuals to inspect the cleanliness, safety and sanitary conditions of every restaurant kitchen each time we go out to eat. Nor do we measure every gallon of gas we purchase to verify it is precisely 231 cubic inches. Instead, we demand our local and state governments do that on our behalf.
The same is true at the federal level, where we have the Food and Drug Administration and Department of Agriculture to do that for us. Since the FDA and USDA came into existence, the number of deaths due to tainted meat and unsafe medicine has plummeted. These agencies are far from perfect, but the alternative -- allowing market forces to punish companies that mistreat or cheat customers -- is the sort of remedy that only exists in crude libertarian fantasies.
It is the exceptions noted above where we want the government to intervene on our behalf. Exactly where that line should is and should be is a matter of legitimate debate.
Which brings us back to the standard of care required for offering advice on retirement accounts. Note that this isn’t an “all or nothing” debate; rather, it is about which of the two existing regulatory options work best -- the fiduciary rule or the so-called suitability standard, which requires a broker only to recommend appropriate investments. I have discussed the differences between these previously here and here.
Thus, it isn’t about whether investors should be trusted to manage their own affairs. We already have rules governing that. Instead, the fiduciary rule only raises the standard for one specific group of investment vehicles, retirement accounts.
Are individuals capable of managing their own retirement investments, without any assistance from Big Brother? Based on the academic data and studies of investor behavior, the answer is a resounding no.
Why? They simply lack the knowledge, skills and discipline to properly handle their own financial affairs. They make terrible decisions. They trade too much. They chase the hot hand, following whatever manager is the flavor of the month. They focus on performance at the expense of having a sustainable process. They are not well diversified and suffer from home-country bias. Perhaps most damning of all, they pay excessive fees.
This last point is important, because the costs are hardly transparent in many types of employer-sponsored retirement-savings plans. 2
So this isn’t about trusting the American people to handle their financial affairs; it is about recognizing the harmful information asymmetry, and compensating for it with rules promulgated by government. Caveat emptor isn’t an acceptable standard.
So rather than thinking about getting rid of the fiduciary rule, the goal should be to make it work better. Some more transparency would go a long way.
Many large brokers stopped paying their employees for managing accounts valued at less than $250,000 dollars -- retirement or otherwise. Merrill Lynch, Morgan Stanley and Wells Fargo & Co. are among the big firms that decided it was too much work for too little revenue.
In 401(k) accounts, fees are disclosed in Form 408b2, which goes to participants; Form 5500 is the publicly filed retirement plan document. Most investors (and to some extent even plan sponsors) are not as familiar with these as they should be. If they were, they would have a better chance of understanding the fees they pay in their tax-deferred retirement accounts.
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