For more than a generation, American society has been moving from a system of defined benefit pensions to one primarily reliant on defined contribution plans. In other words, we are shifting from the old arrangement where retired workers received a pension check every month to a new world in which they have to live off the proceeds of their investments in tax advantaged accounts. To put it another way, our society will help you save for retirement but, beyond that, you are on your own.
In such a brave new world, a relatively sophisticated knowledge of investments, financial markets, and basic economics is essential to avoid spending the golden years eating dog food. There are really only two paths available for the retirement saver: either master these skills oneself or hire someone who possesses them to serve as a knowledgeable guide. The former is quite difficult, particularly for a person with a work life, family life, and other things to think about. The latter, on the other hand, brings us to the problem we face.
If one chooses to pay for guidance, it is self-evident that the guide must put the client’s interests first. Otherwise, there is a distinct danger that the individual saver will be robbed of the money needed for a comfortable retirement. On a societal basis, the failure to enforce this discipline makes the entire defined contribution retirement structure little more than a scheme for looting. While such a flawed system would leave devastated families in its wake, the wider social consequences are even more disastrous.
Although it was a long time in coming, in 2010 the U.S. Department of Labor proposed a rule that would require any person providing investment advice to a retirement plan to be a fiduciary. In a lobbyist-led skirmish typical of present day Washington, that proposal was withdrawn to allow for more input. Now the DOL is on the verge of issuing a revised rule.
In a remarkable show of bipartisan cooperation, legislative leaders from both parties have sought to have the Acting Secretary of Labor delay or kill the rule. The argument, it seems, is that such a requirement, “could severely limit access to low-cost investment advice.”
In a fine piece in Time Magazine, Christopher Matthews argues that such advice, as currently available, is not worth preserving. He writes that “workers … are taken advantage of by a financial-services industry that steers them into expensive products that do more to pad the industry’s bottom line than to build up retirement savings.” The rule proposed by DOL is an attempt to change that situation. Our political leadership, it seems, will have none of that. We can only assume that they are too busy protecting the industry to lend a hand to workers struggling to save for a decent retirement.
We leave for another day the question of whether the proposed rule is even adequate to do the job. There is a separate fight in Washington over whether “fiduciary duty” should be understood to mean what it has since Hammurabi’s Code or if it should be redefined to the lower level necessary to meet the demands of the same industry that opposes its imposition.
Dan Solin drew a connection between Matthews’ article in Time and Professor Ian Ayres’ letter to 401(K) plan sponsors and concluded his piece by thanking both of them for standing up for hard-working Americans. Professor Ron Rhoades has written extensively about the proposal to extend fiduciary responsibility to investment advisors. Many other commentators have weighed in on a matter that, at first glance, seems entirely self-evident. No one deserves anything less than professionalism and fiduciary duty from those who would advise on complex financial decisions. In the case of qualified retirement plans, however, there would seem to be even less room for debate.
If American society wishes to maintain any semblance of fairness to its working people, it must make a simple choice. It can decide to turn back and reinstitute a program of adequate defined benefit pensions so that workers receive monthly checks sufficient to live out their lives in comfort and dignity. Or, it can continue on the present course of defined contribution plans that effectively require professional expertise for proper management. If it chooses the latter, though, it must ensure an extraordinarily high level of professionalism in those who would guide retirement savers through the financial maze. Imposing a traditional (not watered down) version of fiduciary duty is a first step toward that obligation. The failure to take even that first step would be an abdication of governmental responsibility that could only be described as shameful.