February 16, 2017
While the headlines are dominated by White House leaks and personnel scandals, the Trump administration and Republicans in Congress have been quietly helping the financial industry siphon off your retirement savings.
<p><a href="https://www.nytimes.com/2017/02/03/your-money/estate-planning/fiduciary-rule-is-now-in-question-whats-next-for-investors.html">First, the administration announced that it was reviewing a rule scheduled to take effect in April requiring financial advisers to work in their clients’ best interests</a>. Yes, you read that correctly. Some people presenting themselves as financial advisers can now <em>legally</em> steer you to rip-off investments, a glaring problem the Obama administration addressed in a commonsense rule <a href="http://www.epi.org/blog/commonsense-rule-to-protect-investors-from-conflicted-advice-survives-industry-onslaught/">six long years in the making</a>.</p><p>The rule, backed by <a href="http://consumerfed.org/wp-content/uploads/2016/04/6-Ways-the-DOL-Fiduciary-Rule-Protects-Retirement-Savers.pdf">the Consumer Federation of America</a>, <a href="http://www.pionline.com/article/20170207/ONLINE/170209888/financial-firms-ready-for-fiduciary-rule-sen-elizabeth-warren-says">Senator Elizabeth Warren</a>, <a href="https://www.nytimes.com/2017/02/09/opinion/putting-clients-second.html?partner=rssnyt&emc=rss&_r=1">Vanguard founder John Bogle</a>, and <a href="http://saveourretirement.com/">others</a>, applies to brokers, plan consultants, and others advising participants in 401(k)-style plans and IRAs who don’t already adhere to a fiduciary standard. Among other things, it prohibits financial professionals from pretending to offer disinterested retirement advice while working on commission and from steering retirement savers to higher-cost investments when similar but lower-cost options are available. Importantly, the rule protects job-leavers from being lured into rolling over their pensions and 401(k)s into higher-cost IRAs, at a time in their life when many people are vulnerable to bad advice.</p><p>How can anyone argue against the fiduciary rule with a straight face? The financial services industry counters that if some clients don’t get bad advice, they may not be able to afford advice at all. This is like dietitians arguing that clients may not be able to afford nutritional advice if it’s not paid for by Coca Cola. The industry also says the rule could put some people out of business, which isn’t reason to oppose it—it goes without saying that we shouldn’t prop up a business model where survival is dependent on fleecing savers.</p><p>So far, three federal courts have turned back challenges to the rule—<a href="https://www.wsj.com/articles/texas-judge-upholds-retirement-savings-rule-but-its-fate-remains-in-doubt-1486601486">most recently in Texas</a>. But the effort the financial industry has expended to fight the rule tells you how much some players have to lose when it goes into effect—an estimated <a href="https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_coi_report_final.pdf#page=3">$17</a>–<a href="https://www.atkearney.com/financial-institutions/dol-fiduciary-rule">20 billion</a> a year. This suggests that roughly a quarter of <a href="https://obamawhitehouse.archives.gov/sites/default/files/omb/budget/fy2017/assets/ap_14_expenditures.pdf#page=23">taxpayer subsidies intended to promote saving in 401(k)s and IRAs</a> are pocketed by firms engaging in sleazy practices.</p><p>The fiduciary rule stops short of requiring plans to offer the lowest-cost investments, such as index funds or no-load annuities, though <a href="http://www.forbes.com/sites/johnwasik/2016/04/08/four-biggest-winners-under-new-dol-rule/#2ae9a9f72605">companies offering low-cost funds and annuities are expected to benefit from the rule. The rule is also expected to favor certified financial planners and other advisers who already adhere to a fiduciary standard</a> but have been undercut by salesmen masquerading as advisers.</p><p>The rule doesn’t prevent plan sponsors and others from providing educational materials with generic advice about how much to save and the importance of diversifying across asset classes, which is all most people really need. There’s a remarkable consensus in the academic literature that individual investors would be better off adopting passive investment strategies, such as investing in index funds, rather than trying to beat the market. The idea has finally caught on, and <a href="http://www.wsj.com/graphics/passive-investing-five-charts/">over the past decade money has poured out of actively-managed funds and into passively-managed funds</a>.</p><p>Despite this, many 401(k) plans are still loaded with high-cost investment options. This is because plan sponsors have little incentive to focus on fees passed on to participants—and may even benefit if financial providers sweeten the deal by discounting other services. This explains why <a href="https://www.nytimes.com/2017/02/14/opinion/whod-want-to-limit-retirement-plans-house-republicans.html?_r=0">Republicans in Congress are trying to repeal another Obama administration rule that helps state and local governments establish IRAs that workers can contribute to through automatic payroll deduction</a>. These initiatives specifically target workers whose employers don’t offer retirement plans and so would actually expand the pool of savings managed by the financial services industry. But they pose a threat to the mutual fund industry insofar as they demonstrate the cost advantages of passive investing and pooled savings.</p><p>Congress may vote as early as today on federal legislation that creates potential roadblocks for five states poised to implement retirement plans and other states considering similar initiatives. The legislation, backed by the Securities Industry and Financial Markets Association, takes aim at an Obama administration rule clarifying that <a href="http://www.latimes.com/opinion/editorials/la-ed-gop-retirement-savings-attack-20170210-story.html">state- or city-administered IRAs don’t fall under the federal Employee Retirement Income Security Act governing employer plans</a>. Overturning the rule wouldn’t mean state and local governments couldn’t move forward with the plans—<a href="http://www.npr.org/2017/02/13/515043686/congress-poised-to-stop-state-run-retirement-programs">California plans to enroll workers next year regardless</a>—but could cloud their legal status.</p><p>The legislation, which will be voted on without a public hearing, belies Republicans’ claim to respect states’ rights. The <a href="http://edworkforce.house.gov/news/documentsingle.aspx?DocumentID=401286">sponsors falsely claim</a> that the initiatives “force” workers into government-run plans without consumer protections, even though participation is 100 percent voluntary and the plans will have much less expensive investment options than most 401(k)s. David John, who coauthored an <a href="https://www.brookings.edu/wp-content/uploads/2016/06/07_automatic_ira_iwry.pdf">influential paper in favor of auto-enrolling workers in IRAs</a> when he was at the conservative Heritage Foundation, has done a good job <a href="http://action.aarp.org/site/DocServer/AARP1119_THF_Response_SpotlightFeb8v3.pdf?docID=3301">debunking</a> other false claims with his AARP colleague Angela Antonelli. But with billions of dollars of fees at stake, it’s probably safe to assume that the financial industry—and the members of Congress who support them—will keep finding reasons to oppose <a href="http://www.heritage.org/social-security/report/how-the-obama-administrations-new-rule-create-state-based-retirement-savings">state initiatives</a> and <a href="http://www.heritage.org/government-regulation/commentary/feds-just-cant-allow-people-save-and-invest">commonsense consumer protections</a>.</p>
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