WASHINGTON, D.C. – A last minute Bush administration regulation could reduce Americans’ retirement security by allowing firms to give conflicted financial advice to workers who participate in their 401(k) plans, witnesses told the Health, Employment, Labor and Pensions Subcommittee of the House Education and Labor Committee today.
The proposal, finalized on Jan. 20, 2009, would largely remove the prohibition of pension plan investment advisors in giving self-interested financial advice to their plan participants. Consumer advocates and lawmakers are concerned that the regulation would allow financial advisors to charge higher fees and allow them to give conflicted investment advice on products they have a financial interest.
“If workers receive investment advice, it should be independent and free of conflicts of interest,” said U.S. Rep. Rob Andrews (D-NJ), chairman of the subcommittee. “During a time where American workers have already lost $2 trillion in assets due to last year’s market downturn, exposing their hard-earned retirement savings to greater risk by allowing advisers to offer them conflicted advice is irresponsible and imprudent.”
Several members of Congress objected to the proposal last summer because they said it was contrary to provisions in the Pension Protection Act of 2006 that allows limited investment advice by pension providers based on independent computer models. The regulation has been put on hold by the Obama administration.
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“The effect of legal protections for conflicted advice is quite predictable,” said Mercer Bullard, president and founder of Fund Democracy and associate professor at the University of Mississippi School of Law. “Rather than promote the providing of independent financial advice to participants, the [new regulation] will promote conflicted advice, higher fees and lower investment returns.”
Ken Baker, the corporate director of human resources for Applied Extrusion Technologies in Terre Haute, Ind., said that after his company hired an independent pension consultant to examine the company’s program, they grew uncomfortable with their 401(k) plan because of hidden fees and the close relationship between their advisor and the service provider.
After the company switched service providers, in addition to providing workers access to an independent investment advice firm, participation and contributions by employees to the new 401(k) plan jumped. Baker testified that employees better understood the fees they paid and were able to choose from straightforward, low-cost investment options.
“The employees know what the investment advisor fees are and they know they do not change when the plan assets grow,” said Baker. “In fact, even though employees could now see that they would be paying the fees for our new independent advisor, they did not object because they could see that it was worth it.”
The U.S. Government Accountability Office examined Security and Exchange Commission data on pension plans and found that undisclosed conflicts of interest could lead to low returns than those plans that properly documented any financial interests.
More problems may arise because of the prevalence of 401(k)-type plans. Instead of traditional pension plans that are operated by professional managers, 401(k) account holders pick investment options provided by their employer on their own and therefore assume greater risk. In addition, any seemingly small fees, many that are not required to be disclosed to participants, could significantly reduce long-term retirement security of the account holders.
“The threat posed to participants in account based retirement plans like 401(k)s, now the primary plan design in the United States, is quite direct,” said Charles Jeszeck, acting director of education, workforce, and income security of the GAO. “Since workers largely bear the risk of investment under this plan design, any factor, and decision that reduces the account’s rate of return can have potentially irreversible consequences for the participant’s retirement income.”
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“If workers receive investment advice, it should be independent and free of conflicts of interest,” said U.S. Rep. Rob Andrews (D-NJ), chairman of the subcommittee. “During a time where American workers have already lost $2 trillion in assets due to last year’s market downturn, exposing their hard-earned retirement savings to greater risk by allowing advisers to offer them conflicted advice is irresponsible and imprudent.”
Several members of Congress objected to the proposal last summer because they said it was contrary to provisions in the Pension Protection Act of 2006 that allows limited investment advice by pension providers based on independent computer models. The regulation has been put on hold by the Obama administration.
Created with flickrSLiDR.
“The effect of legal protections for conflicted advice is quite predictable,” said Mercer Bullard, president and founder of Fund Democracy and associate professor at the University of Mississippi School of Law. “Rather than promote the providing of independent financial advice to participants, the [new regulation] will promote conflicted advice, higher fees and lower investment returns.”
Ken Baker, the corporate director of human resources for Applied Extrusion Technologies in Terre Haute, Ind., said that after his company hired an independent pension consultant to examine the company’s program, they grew uncomfortable with their 401(k) plan because of hidden fees and the close relationship between their advisor and the service provider.
After the company switched service providers, in addition to providing workers access to an independent investment advice firm, participation and contributions by employees to the new 401(k) plan jumped. Baker testified that employees better understood the fees they paid and were able to choose from straightforward, low-cost investment options.
“The employees know what the investment advisor fees are and they know they do not change when the plan assets grow,” said Baker. “In fact, even though employees could now see that they would be paying the fees for our new independent advisor, they did not object because they could see that it was worth it.”
The U.S. Government Accountability Office examined Security and Exchange Commission data on pension plans and found that undisclosed conflicts of interest could lead to low returns than those plans that properly documented any financial interests.
More problems may arise because of the prevalence of 401(k)-type plans. Instead of traditional pension plans that are operated by professional managers, 401(k) account holders pick investment options provided by their employer on their own and therefore assume greater risk. In addition, any seemingly small fees, many that are not required to be disclosed to participants, could significantly reduce long-term retirement security of the account holders.
“The threat posed to participants in account based retirement plans like 401(k)s, now the primary plan design in the United States, is quite direct,” said Charles Jeszeck, acting director of education, workforce, and income security of the GAO. “Since workers largely bear the risk of investment under this plan design, any factor, and decision that reduces the account’s rate of return can have potentially irreversible consequences for the participant’s retirement income.”
For more information, click here.
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