wall st

Kudos to Time Magazine

wall st

The major Wall Street firms provide a large source of revenue for the few companies that dominate the news media. This is why we found it so refreshing to read this article (“America Can’t Afford Wall Street’s Terrible Investment Advice”) by Christopher Matthews. As the title implies, Matthews pulls no punches, but we would have been happier if he had named more names besides Robert Lewis, a lobbyist for the Financial Services Institute. Mr. Lewis sent a letter to the Secretary of Labor urging him to reconsider the department’s plans to issue a new rule that would impose a fiduciary standard on investment professionals who service company-sponsored retirement plans such as 401(k)s as well as individual retirement accounts (IRAs). Rather than signing the letter himself and calling it a day, Mr. Lewis gathered the signatures of 32 members of our esteemed Congress, all of them liberal Democrats. The letter repeated the tired argument that requiring adherence to a fiduciary standard would impose such a high cost that sound investment advice would become unaffordable to the average Joe. Without the fiduciary standard, however, our average Joe is left with the “suitability” standard which allows a broker to sell him investments that have higher costs, and higher costs lead to lower returns. As this publication on 401(k) fees from the Department of Labor explains:

“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.”

As Matthews implies in the title of his article, the suitability standard is truly the unaffordable standard for investors, and as we have discussed in several past articles such as this one, the American retirement system is a train wreck. It is our opinion that imposing a fiduciary standard across the board would be a good first step towards fixing this enormous problem. If it means that the stocks of the major Wall Street firms take a hit, then so be it.

Even if the Department of Labor does not impose the fiduciary standard, 401(k) plan sponsors have been placed on notice by Professor Ian Ayres of Yale University that if they rely on non-fiduciary "consultants" to set up their plan with high-expense funds, they could be held liable for the missed gains by plan participants. Over a long period of time, this could be a huge number.

Since there are approximately $19.5 trillion in retirement assets in 401(k) accounts, IRAs, and other retirement-investment vehicles (according to the Investment Company Institute), Americans stand to make about $2 billion for every basis point improvement in returns. Our only question is, “What are we waiting for?” For more information about a low-cost 401(k) plan provided by an investment fiduciary, please contact IFA’s Retirement Plan Services at 888-643-3133 or obtain a retirement plan scorecard from ifa401k.com.