The Department of Labor has finally issued an "interim final regulation" governing fee disclosure and conflicts of interest in 401(k) plans. Unfortunately, it's too little, too late.
The goal of the new regulation (effective July 16, 2011) is to allow employers and plan participants to finally figure out what they're paying for their 401(k) plan. Currently, there's no obligation to disclose "revenue-sharing" payments extracted from mutual fund families that want to be included as 401(k) investment options. These payments create an obvious conflict of interest between the adviser (who wants to maximize them) and employees (who want to minimize them). Under the new regulation, full disclosure is required.
Only in the perverse world of the securities industry would candid disclosure of fees paid to vendors be considered a victory. In all other areas of commerce, it's not an issue. How would you feel if your car dealer refused to give you the price he's charging for your car?
Advisers Should Be Fiduciaries
The new regulations don't deal with the core problems of this broken system. Disclosing revenue-sharing payments isn't nearly enough. They should be prohibited altogether. Brokers and insurance companies justify them by claiming the fees offset record-keeping costs. However, participants would be far better off paying a fully disclosed, transparent fee for these services, and getting the benefit of objective, nonconflicted advice from advisers to their 401(k) plans.
Advisers should be required to be what's known as "3(38) ERISA fiduciaries," which means they can have no conflicts of interest. But the new regulations focus on disclosure of conflicts of interest. Real reform requires their elimination
If advisers were held to this standard, you would not see retail shares of mutual funds placed in plans where lower-cost, institutional shares of the same funds were available. You would see plans with pre-allocated portfolios of low-cost, globally diversified stock and bond index funds, exchange-traded funds and passively managed funds. Currently, most 401(k) plans have a confusing mish-mash of high-cost, actively managed funds (where the fund manager attempts to beat a benchmark, usually without success). This is great for advisers and mutual fund families (high costs mean big profits), but bad for employees.
The Best Recommendation Possible
Labor Department employees don't have to look further than their own plan to find the poster child for a properly run 401(k). Their plan is part of the U.S. government's mega $240 billion Thrift Savings Plan (tsp.gov), which has extremely low fees, no actively managed funds and pre-allocated portfolios that make it easy for government employees to purchase one fund that's best suited for their investment goals and tolerance for risk. Walter Updegrave, the respected financial journalist for Money magazine described this plan as "one of the best retirement plans around."
But here's the most compelling reason for the Labor Department to look to this plan when issuing regulations intended to improve the lot of employees: The securities industry is opposed to it. As reported by Allan Roth, in an excellent column on this subject, the Investment Company Institute, a trade group that seeks to keep profits of mutual funds as high as possible, published a paper taking shots at the Thrift Savings Plan. If the ICI is against it, it has to be good for employees!
Labor Department employees already have a dream plan. They should give everyone the same opportunity for retirement with dignity.
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