The U.S. Government opens the door for the financial industry in 401k

July 17, 2020

To us, it seemed like an attempt to find middle ground between confusion and chicanery as current U.S. Department of Labor Secretary Eugene Scalia described his proposed changes for Americans' retirement plans: "[They] would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers."

I like the "arrangements" word. I have a choice pile of documents sitting here on my desk from the industry that comprise those "arrangements." They include, as this article points out, commissions, 12b-1 mutual fund fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties.

And the Department of Labor just allowed annuities into retirement plans via the Secure Act of 2019.

"Protecting retirement savings?" Sorry. Annuities and whole life insurance may sound compelling (particularly if you're a highly paid salesperson who likes to spread fear of uncertainty instead of disclosing your commissions or comparing your products to low-fee index funds), but more obscure fees do not protect anyone's retirement.

It gets worse. The government is also proposing to allow leveraged private-equity funds into Americans' retirement plans. The average investor on the street has little time or inclination to examine the leverage ratios inside those private equity investments. Looking at return numbers without understanding leverage is meaningless.

What do they propose should be difficult to include? Environmental, Social, and Governance (ESG) investments, because they don't focus solely on profits.

In a normal environment, choices are good, even if you don't agree with the choices - the "free" in "free market" is, after all, important. However, information clarity and lack of friction are also critical ingredients for a free market to operate. Today, Americans' retirement plans, care of the financial industry, have neither. This will have the practical effect of defaulting many workers into products they don't understand, for which they pay too much, which they'll discover are difficult to exit.

Dan Cunningham

Think Advisor: Dept of Labor Floats Revised Fiduciary Rule 6/29/20
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Bloomberg: Matt Levine: The Government Wants ESG Out of Pensions 6/25/20