Raiders of the Lost Retirement Account

Worried about your ability to set money aside for retirement? You should also worry about what happens to the money you do manage to put away. According to a report from Demos, the typical two-earner family with an employer-sponsored account will end up paying some 30 percent of its retirement nest egg – a total of $155,000 – to Wall Street money managers in 401(k) fees and charges.
How can this be? The financial services industry, in addition to its talent for developing different kinds of fees, has been adept at coming up with ways of concealing them. To start with, many of the fees and costs that Wall Street collects for trading securities are typically omitted from the top-line “expense ratio” reported to savers. That’s a pretty huge omission, since trading fees account for half the fees charged to an average investor, according to Demos.

The industry also makes its fees look small by typically reporting them as a percentage of total savings, avoiding any mention of the far higher proportion they make up of your total investment return. For example, a total fee that adds up to 2 percent of managed assets may seem small – but if your typical return is 7 percent, the fee represents almost 30 percent of total returns.

One of the biggest advantages enjoyed by industry lies in the nature of the professional advice available to investors seeking to understand such questions. Astoundingly, the broker who sells you a retirement product often has no obligation to serve your best interests, or even to provide you with reliable counsel. Instead, the law often gives brokers a green light to promote products that generate higher fees for them, regardless of the impact on you.

The non-partisan Government Accountability Office has documented numerous instances of such conflicts of interest. The GAO not only found investment managers cross-selling products to 401(k) clients that enriched the manager at the investor’s expense, but also brokers being rewarded for steering investors into high-fee products. One report found that almost a quarter of telephone representatives and half of web sites incorrectly informed investors that no fees would be levied for managing their retirement money if they transferred it into an individual retirement account. In fact, fees are charged on these products, but are usually buried deep in the fine print of the IRA documents.

The good news is that these problems have found a place on the agenda of Washington regulators. The bad news is that the necessary remedies face tremendous opposition. In fact, the way things are going, it will take a mighty effort to keep industry lobbyists from winning the fight to keep investors in the dark.

The Department of Labor has taken up the task of updating the legal protections covering 401(k)s and other employment-based retirement accounts. Certain forms of retirement savings (especially those managed directly by your employer) are already protected by a strong fiduciary duty – that is, a legal requirement for the investment manager to put your best interests first. But the fiduciary-duty rules are outmoded, and exclude much of the current retirement-fund market.

These fiduciary rules were last updated in 1975 – a time when over 90 percent of retirement plans were controlled directly by employers. That’s very different from today’s individualized accounts like 401(k)s and IRAs. As a result, employees have no legal protection when engaged in many transactions, including the critical one of “rolling over” a 401-K into an IRA.  In order for the new rules to be effective, the Department of Labor will have to impose a clear ban on inappropriate steering of clients, including strict limitations on broker-payment arrangements that create conflicts of interest, along with much better disclosure.

And it will have to do so in the face of fierce resistance from the financial industry. The Department of Labor recently had to retreat on one proposal to improve fiduciary rules in a debate dominated by insider interests such as brokers and investment managers who benefit from the current high fees and lack of obligations to clients. Now the department is preparing to propose reforms again, and the same interests will try to defeat them again. The public needs regulators and legislators to stand up for better protections for our savings, and prevent the process from being dominated by financial insiders.

The Dodd-Frank financial reform law also handed an important responsibility to the Securities and Exchange Commission – the task of developing new rules to increase fiduciary protections for advice given by securities brokers. Right now, while investment advisors have a duty to put your best interests first, securities brokers don’t. In practice, the distinction between the two types of investment professionals is blurred and unclear to most investors. The Dodd-Frank law called for securities-broker fiduciary duties to be made stronger, clearer and more like those of true investment advisors.

Unfortunately, this is another area where heavy industry lobbying has greatly delayed and weakened action. Preliminary indications suggest that the SEC’s approach could end up being far weaker than is needed to protect investors.

The issues in retirement savings are broad, and new fiduciary rules won’t take care of all of them. But a strong legal obligation for all investment advisors to avoid deceptive and abusive practices would be a common-sense start. And that can only happen if investors and employees stand up for the principle that when financial professionals give advice, they must put the best interests of their clients first.

— Marcus Stanley
(Originally published on