ON THE HILL OCTOBER 1, 2013
Just because the government has shut down doesn’t mean Congress will cease its central function of making Americans’ lives miserable. While everyone watches the legislative back-and-forth on the budget, the House may vote this week to thwart a key new Labor Department protection affecting $10.5 trillion in retirement funds. Basically, House Republicans want to allow the financial services industry to continue to steal from your 401(k) and IRA plans. And far too many Democrats want to help them.
The Labor Department proposal, known as the “fiduciary rule,” would change the ethical standards by which employer-based retirement products like 401(k)’s and IRAs are marketed and sold. The rule has not been updated since 1975, before 401(k)’s and IRAs even existed. The Labor Department wants to broaden the definition of a “fiduciary” to cover all financial advisers who offer individual investment advice for a fee. Under the rule, they would be legally required to work in the best interest of their clients. For example, a fiduciary would not be able to push investment products on customers in which they have a financial stake. The agency defines the goal of the proposal as “to ensure that potential conflicts of interest among advisers are not allowed to compromise the quality of investment advice that millions of American workers rely on, so they can retire with the dignity that they have worked hard to achieve.”
The short version here is that when the country turned away from guaranteed pensions in the 1980s and started encouraging individual employees to gamble with their retirement nest eggs on the stock market, it also threw them into the arms of a predatory financial services industry. And it’s a big business; IRAs and 401(k) plans hold roughly $10.5 trillion in total assets.
Currently, it is depressingly common for financial advisers, more than 80 percent of whom are not fiduciaries, to self-deal when offering advice. First off, they obtain large fees from the retirement products they sell. According to the think tank Demos, a median-income, two-earner household will pay $155,000 during their lifetime to financial advisers on average. (The lifetime gains for two-earner households from retirement accounts are around $230,000, meaning that nearly two-thirds of the profits go to the industry.) Second, non-fiduciary financial advisers can enjoy kickbacks; right now there is no rule against an adviser from a mutual fund company encouraging clients to put their money in specific funds sold by that company. In fact, that’s the norm, and the adviser typically receives a commission for the sale.
Conflicts of interest like this cost retirement investors at least $1 billion a month, because the funds they get channeled into underperform the alternatives. Financial advisers also encourage rollovers into high-cost IRAs when an individual changes jobs. None of these schemes have to be disclosed to the customer, under the current standard. The National Bureau for Economic Research found in a recent study that “adviser self‐interest plays an important role in generating advice that is not in the best interest of the clients.”
So in the middle of a retirement crisis, when the majority of Americans already aren’t accumulating the savings they need to maintain their standard of living, sellers of retirement products are skimming close to $60 billion a year off the top through deceptive practices, making a bad situation even worse.
The Labor Department, which has jurisdiction under the Employee Retirement Income Security Act (ERISA), sought to put a stop to this in 2010, when it proposed a new fiduciary rule. Since ERISA rules hadn’t been updated since 1975, it seems reasonable to broaden the definition of investment adviser to fit the modern, 401(k)-led retirement marketplace, protecting a new class of investors. But the financial services industry bared its teeth, sending enough comment letters and imposing enough pressure to get the agency to withdraw the rule. Now that the Labor Department plans to re-submit the proposal, the industry has shifted to attack it in Congress.
H.R. 2374, the dubiously named “Retail Investor Protection Act,” passed the House Financial Services Committee in June. It would delay the Labor Department’s rule until 60 days after the Securities and Exchange Commission completes its own rule (both Labor and the SEC have jurisdiction over different parts of the investment adviser industry). Though the SEC released a study in 2011 recommending stronger protections for investors, it has said publicly that their fiduciary rule would not be ready this year, so this is merely a stall tactic. (In addition, Wall Street probably thinks it has more pull with the SEC than the Labor Department to bend the rule to their will.) Moreover, H.R. 2374 would force agency rule-writers to prove that retail investors are “systematically disadvantaged” under the current rules. The goal there is to make it impossible to write a new rule at all, and to protect the financial services industry from losing tens of billions of dollars.
In public and in meetings with Congressional staffers, lobbyists claim that a new fiduciary rule would force investment advisers and brokers to drop millions of small accounts, depriving investors of all the great financial advice they offer. The industry is basically saying that it can’t afford to help small investors if it’s not allowed to rip them off. “Think about this for a minute,” author Helaine Olen, whose book Pound Foolish savaged the personal finance industry, told the New Republic. “That means the industry is saying they don’t have a viable business model if they need to do what is best for their customers.”
At the same time, the industry claims to be a charitable organization that likes to give financial advice out of the goodness of their heart. These companies claim they don't make any money from small investors, and that their accounts with larger investors subsidize the free advice they offer. But if that were true, why would they abandon this charitable advice if it were no longer profitable? “It’s completely nonsensical, circular logic,” said one Hill staffer. Moreover, considering that low-cost index funds routinely outperform those offered by advisers in 401(k) plans, there’s no reason to believe that this allegedly valuable financial advice is even valuable at all.
Sadly, the industry’s logic has captured the hearts of Congress. The vote in the Financial Services Committee for H.R. 2374 was 44-13, with lots of House Democrats in favor. Ten Senate Democrats have urged a delay in the Labor Department’s fiduciary rule as well. The Wall Street wing of the Democratic Party is perfectly comfortable with allowing the financial services industry to prey on trillions of dollars in 401(k) plans and IRAs.
Like the defense industry, financial advisers are sprinkled throughout the country; every member of Congress has several in their district. So it’s difficult to shut down the retirement swindle: That would mean challenging a powerful industry that can deliver campaign contributions and lay claim to local jobs.
More importantly, members of Congress are falsely swayed by the plea from the industry that 401(k) and IRA plans are the only recourse for Americans to have a decent retirement. First of all, stock-based retirement plans have failed; Americans are much better off with a defined-benefit pension than a product whose value shifts with the vicissitudes of the market. Ask anyone who retired during the stock crash of 2008 if they felt lucky to have a 401(k) to fall back on. Second, the retirement problem doesn’t automatically require a Wall Street solution. The idea that people have to tolerate conflicted advice in order to save for retirement is ludicrous. The retirement crisis is a function of 30 years of stagnant wages and an erosion of what was a secure “three-legged” retirement stool, consisting of pensions, private savings, and Social Security. With pensions being ravaged if not eliminated, and saving rates approaching zero, the only recourse to allow seniors to retire with dignity is to significantly expand Social Security, a fact that has finally attracted major support among liberals. Tax benefits on 401(k) and retirement plans cost the government hundreds of billions of dollars every year: People would benefit more from simply getting a bigger universal payout in retirement.
The very least we can do, if we keep the current flawed system, is create a standard so that the advice millions of Americans get on their retirement money does not come from anyone looking to bilk them.
David Dayen is a contributing writer at Salon.