New 401(k) Regulation

I don't usually comment on laws and regulations, nor on retirement account issues, but I saw an article today that touches on a subject that keeps coming up like Whack-A-Mole.

Bloomberg has the article about proposed Department of Labor regulation that would "apply a fiduciary standard to those firms who advise plan sponsors about which investments to offer."  The rationale:

Improved regulation of retirement plans is needed because employers and participants may not understand that the person educating them about their 401(k) investments may have a financial stake in the choices they make, the U.S. Government Accountability Office said in a report released yesterday.

“If left unchecked, conflicts of interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker’s career,” the GAO said.

 I other words, an advisor to the plan would be responsible for ensuring that the plan is administered solely in the interest of participants.  The article states that the regulation is designed to prevent conflicts of interest.

There are so many things wrong with the proposal.  First, ERISA already assigns fiduciary responsibility to the plan sponsor, and the participant is presumably looking out for his own interest.  If advisors to the plan  are to be held to a fiduciary standard, can other vendors be far behind?  And when everyone has responsibility, no one does.

Second, fiduciary responsibility is a very vague standard.  What is in the best interest of participants is the subject of judgment.  What bis a good investment?  What is a reasonable cost?  How many funds are to be offered?

Finally, advisors will  not be willing to take on these liabilities without additional compensation.  If the concern is that the plan is incurring excessive costs, the solution is not to add another cost factor onto the plan.

The answer to conflicts of interest is disclosure.  The DoL went a long way some years ago when it introduced a worksheet that allowed a plan sponsor to calculate the total cost of administering a plan and managing its investments.  While that tool was somewhat unwieldy, it got the conversation moving in the right direction.  Such a tool could be adapted to show the specific compensation information so that the plan sponsor can make informed decisions.

On the other hand, there are a n umber of firms that are voluntarily offering to accept a fiduciary role as a partner with plan sponsors.  By contract, the advisor accepts fiduciary liability with regard to the plan on behalf of the plan sponsor.  Now there is no questions as to who is the fiduciary, and the authorities are aligned with the responsibilities.  These firms are receiving a premium fee for these services, and these fees are fully disclosed.