« AFM Featured on AboutTheBlog.com | Main | A Review of “Achieving Prosperity” by Todd Lipscomb »
Bill to Aid 401(k) Participants - I DON’T LIKE IT!
By JLP | August 3, 2006
According (NOW FREE!) to the Wall Street Journal:
The Pension Protection Act, which is under consideration in the U.S. Senate this week after passage in the House late Friday, would let 401(k) providers like mutual funds, brokerage firms and insurance companies help workers choose specific funds for their retirement accounts.
Here’s the concern:
Some independent financial advisers see a conflict of interest for firms that could recommend their own funds.
I’ll second that! I think offering advice is fine and probably much-needed. However, there’s a huge conflict of interest if that advice is coming from the very people who are administering the plan. Do you think a representative of Merrill Lynch is going to recommend anything other than a Merrill product? I also see lots of potential for retirees to be directed into high-fee annuities, which will be a boon to the advisor but most likely not in the best interest of the retiree.
Here’s one last quote from the article that stresses my concern:
“Everything that has happened in the securities industry the last five years, all these scandals, at the heart of it was a conflict of interest,” says David Kudla, chief executive of Mainstay Capital Management, a Grand Blanc, Mich., firm that manages about $500 million in retirement assets for individuals. “Given the regulatory track record, how can anyone think this is a good idea?”
I think companies should beef up their education efforts and make it an annual requirement FOR ALL EMPLOYEES to go to. I also think that EVERY employee should receive a statement telling them how much they have, how much they should have, and how much they will need at retirement, which would make it more difficult for them to bury their heads in the sand. Kinda like that seatbelt light in your car that keeps flashing until you buckle your seatbelt.
Topics: 401(k), Investing, Retirement Planning, Roth 401(k) |
August 3rd, 2006 at 12:50 pm
Whew! I must say I am relieved. When I first read your tagline, I thought the govt came up with some taxpayer-financed scheme of providing protection for 401(k) participants!
But I can clearly see the conflict of interest. Perhaps the bill can provide for safeguards against conflict of interest … maybe a third party could play a role in the “advising”.
August 3rd, 2006 at 1:04 pm
I like the idea of having a third party, not the fund provider, giving investing advice. Too much potential for a conflict of interest otherwise.
I have attended “pre-retirement” seminars at work (US Govt.) that were provided by third party, and they did a great job of providing investing advice and info. The Feds have recently stepped up efforts in this area, requiring agencies to provide this kind of training to employees. That is because most employees now are covered under the new Fed. retirement system with a 401k component and Soc. Sec., rather than the old all-inclusive defined benefit retirement system.
August 3rd, 2006 at 2:13 pm
I agree with JLP. But what else would you expect from me since I’m an independent financial adviser? I’m biased!
This kind of legislation is based on the “known fact” that most of us are just too stupid to know what we are doing so the government MUST make “experts” available to help us. Yes, some people do make dumb decisions with their retirement accounts. But that’s their business and it’s their money. Is it the governement’s job to rescue everyone from their poor decisions? I don’t think so. Besides, it’s not like people don’t have options to get help if they want it.
Anyway, it doesn’t matter whether the advice in these retirement plans is third party or not. Everyone is after a piece of the action.
This is reality. Consumers earn and save the money; Wall Street takes as big a chunk as it can get.
The real bonanza for these firms is having access to ALL of the assets of each plan participant. These firms will be trolling for other retirement accounts (old employer plans, traditional IRAs, Roth IRAs), education savings, brokerage accounts, and so on. They will be looking to expand their horizons by getting all of these assets under their management, whether that be through a broker or advisor relationship beyond the 401(k) account. Then they will go after related services such as insurance, etc.
Who is going to be able to resist “that nice young man on the phone” when he suggests getting together with an advisor from the firm’s retail division — especically after just “helping” someone sort out the confusing options in the 401(k) plan?
This will be a gold mine for Wall Street.
August 3rd, 2006 at 2:46 pm
What I would really like to see is the ability to invest in a much wider variety of investments: exchange traded funds, bonds, equities, etc instead of the standard pick one of these handful of mutual funds for your 401k situations.
I spent the better part of 3 years working for a company that had FOUR, yet just FOUR mutual funds to choose from. I stayed in cash the whole time. The funds were terrible.
August 3rd, 2006 at 7:50 pm
Frankly, I like the “good default” arrangements being done by some companies: since most people are lazy, auto-enroll them into the 401K when they’re hired at the maximum match rate, auto-subscribe them to a broad-market index fund or “lifecycle fund” appropriate to their age, and let them opt out of either if they choose to do so. These are far more successful at enrolling people into 401K plans than the “send home a massive packet and a ton of forms” method most companies use.
The problem with education is that this will only be yet another reason for small companies to not have 401K plans. I have enough trouble convincing startup CEOs to caugh up the cash for good plans over the cheaper junk plans as it is.
August 4th, 2006 at 9:31 am
I agree with Foobarista. automatic enrollment is the only way to get some people to even think about retirement savings. It is a bit paternalistic and not a perfect solution, but at least a start.
August 4th, 2006 at 12:32 pm
[...] AllFinancialMatters doesn’t like a new bill to “aid” 401(k) participants. Free Money Finance thinks we can take some lessons on how to earn money from star professional athletes. Five Cent Nickel talks about Vanguard’s new website login. [...]
February 24th, 2007 at 3:21 am
I agree with auto subscription. If you give people the choice they will not save for their retirement.