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View Points January 12, 2024
A System to Protect Workers’ Retirement Assets Already Exists
The co-founder and head of advisory Francis LLC responds to pushback on the DOL’s fiduciary rule proposals by calling for plan advisers and sponsors to seek conflict-free, flat-fee advice for participants.
Reported by Michael Francis, Contributor
For more than a decade, the U.S. Department of Labor has tried to modernize the Employee Retirement Income Security Act of 1974, a federal law designed to protect American workers’ retirement assets. The release of the new retirement security rule on October 31, 2022, is the DOL’s latest attempt to improve the protections of this almost 50-year-old regulation. Unfortunately, these efforts are aspirational at best and consistently thwarted by an industry determined to protect its extremely profitable business model.
Michael Francis
According to the Employee Benefit Research Institute, 40% of Americans are currently projected to run short of money in retirement, indicating this issue clearly needs more attention.
Having spent the first 20 years of my career in wealth management and the subsequent 20 years in institutional investment consulting, I believe the best answer to safeguarding workers’ retirement assets is hiding in plain sight.
Improving the odds for American workers achieving their retirement income goals will require a combination of better education and alternatives to the predatory business models that currently dominate the retirement plan investment adviser industry.
Conflicts of Interest
The new retirement security rule is designed as a protection against conflicted investment advice. Conflicted advice occurs when an adviser can increase their own compensation with the advice they render to clients.
The cost of conflicted investment advice to retirement plan participants is enormous. In fact, several recent studies performed by independent researchers, including the U.S. government, have estimated that conflicted investment advice costs American workers tens of billions of dollars in unnecessarily high investment management fees each year.
ERISA was originally intended to protect American workers’ retirement assets from people in a position of control who would use these large pools of money to enrich themselves. What ERISA failed to anticipate was the evolution of employer-directed pension plans to employee-directed 401(k) plans and that the rules designed to protect retirement plan sponsors from those with conflicts would need to be enhanced to include protections for participants.
Financial Services Industry: Friend or Foe?
The role that the financial services industry plays in this story is complicated. On the one hand, the industry’s ingenuity and creativity are partially responsible for the explosive growth of 401(k) and individual retirement account assets. On the other hand, the strong desire to maximize profits too often causes industry actors to place their own interests before the interests of the American workers they purport to serve.
From the perspective of those in the wealth management industry, conflicts of interest are so deeply embedded in the phenomenally profitable customer service model, it cannot imagine another way to deliver investment advice. The industry’s primary rebuttal to the new retirement security rule makes this point: It claims if it is not allowed to provide conflicted investment advice, then no advice will be provided, especially to low- and moderate-income retirement plan participants. This week, a group of policymakers added to their arguments, signalling a similar concerted pushback to that which happened in 2016.
However, a law degree and 20 years of watching institutionally hired advisers provide investment advice to tens of thousands of 401(k) participants for an hourly fee make clear how warped by greed this position clearly is. Looking objectively at the situation, it is shocking how the high margin and conflicted compensation arrangements deployed by most investment advisers—schemes that would cause other professional advice givers like accountants or attorneys to lose their professional license—have become universally accepted practice.
Conflicted Advice, No Advice Aren’t the Only Options
Given the hundreds of millions spent each year marketing the benefits of conflicted advice, those in the financial services industry would prefer that consumers spend no time investigating alternative investment advisory solutions.
The Garrett Financial Network of registered advisors, dating back to the 1990s, is one of the first good examples of an alternative investment advisory model in which investors pay advisers a flat hourly rate, similar to how an accountant or attorney is paid for professional advice. There are also a handful of firms focused on delivering a similar model institutionally to groups of employees.
More recently, the advent of robotic advisers, with an assist from AI, has seen enormous growth. While all robo-advice is not conflict-free, German data company Statista reported that the robo-adviser market is still rapidly growing. with the number of users expected to amount to 34 million by 2024.
A Way Forward
Despite there being options to deliver conflict-free advice to investors, to date, the only group that has made progress improving the odds for the American worker has been the plaintiff’s bar. Hundreds of successful lawsuits against plan sponsors who unwittingly allowed conflicted financial service providers to take advantage of their employees’ retirement assets by charging excessive fees have begun to convince employers they need to pay closer attention to conflicted advice.
Importantly, as seen during the public comment period for the proposed retirement security rule, regulators face significant challenges to their efforts to combat conflicted investment advice. This is evident as the financial services industry once again lobbies to protect its 40% profit margins derived from excessive compensation associated with conflicted advice.
Considering this inevitable pressure, the ultimate solution to the problem is likely going to have to come from the free market. The only way forward is for more retirement plan sponsors to understand the detrimental effects of conflicted investment advice on their employees and change their investment adviser hiring decisions accordingly. Then, and only then, will more American workers be in the position to retire.
Michael Francis is president and co-founder of Francis LLC.
