Retirement Test

DOL's Nod to Passive - A Step Forward For Plan Participants

Retirement Test
“History shows that where ethics and economics come in conflict, victory is always with economics. Vested interests have never been known to have willingly divested themselves unless there was sufficient force to compel them.”
– B.R. Ambedkar

The Department of Labor (DOL) recently published a proposal that would create more stringent standards of fiduciary care for retirement plans. Specifically, the DOL would require “brokers to act in the clients’ best interest and disclose any conflicts when offering guidance for retirement investment accounts.”

The fact that a proposal needs to be made in the first place seems outlandish. Who is going to question this proposal or simply say “no”? In essence, saying “no” to this proposal would insinuate the disbelief in honesty and transparency as itemized priorities when it comes to guiding hard-working citizens towards retirement readiness. Or, getting to the real crux of the matter, getting paid too much money to sell products that clients may not need, but are not necessarily harming them.

The biggest step in the right direction that the DOL has made in this new proposal is to offer an automatic “safe harbor,” or legal exemption, for those brokers or advisors who offer plan participants low cost index funds. According to the DOL, “facilitating investments in such high-quality, low-fee products would be consistent with the prevailing (though by no mean universal) view in academic literature that posits that the optimal investment strategy is often to buy and hold a diversified portfolio of assets calibrated to track the overall performance of financial markets,” i.e. index funds, or even better, index-tracking target-date funds, “consistent with the investor’s future risk appetite trajectory.”

Not everyone is completely on board with the DOL’s push for passive investment products. Mike McNamee, spokesman for the Investment Company Institute, stated, “investors must be able to have the choices they need to make sound investment decisions; that includes the choice between active and passive.” The unfortunate dichotomy of this statement is that the increasing of choices is exactly what has led investors down the wrong path in the first place. If I were to walk into my doctor’s office and he gave me a menu of procedures to choose from asking me which one I would like performed, I would have no idea where to start. They are the professional, I would want them to tell me. I don’t know enough about it to understand what’s in my best interest. Too many choices with too little information leads to either making no decision (inertia effect), or choosing a little bit of everything (1/N effect).

Most retirees do not have full information about the consequences of the investment decisions they make. Mark Hebner, President of Index Fund Advisors, always likes to say, “odds are you do not know what the odds are.” I always like to add, “and the stakes are too high.” What if I told you that choosing an active investment that will outperform the market over an investor’s lifetime is similar to that of gambling in a casino? Losing a couple hundred dollars in Las Vegas is not going to break the bank for most people. But, capturing less and less of what the market delivers over time and paying more and more to the “experts” who attempt to beat it can, in fact, cut your retirement savings significantly.

Index Fund Advisors is a prime example of where the rubber meets the road with the DOL’s aim to bring a higher standard to the retirement plan industry. Since 1999, IFA has been trumpeting the merits of following a passive indexing investment approach. And with the development of technology within recordkeeping platforms, we have created customized target date index portfolios that allow plan participants to really “invest and relax.” The chart below explains how the IFA Target Date Index Portfolios work over time. If you have any questions about the chart or the target retirement date glide path methodology, please give us a call at 888-643-3133. 

You are welcome Department of Labor.