|Don't heed this 401(k) advice|
House bill: Fox guards the hen house
The House bill changes the rules and allows investment advice to
be provided by the financial institution and its agents, even if
there's a financial conflict of interest. Only once would advisers
be required, in the context of an advisory session, to announce
the fact that they would stand to gain from the advice they are
dispensing. After that, each adviser can advise to his heart's content
and not mention it again. Oh, and they're obligated to say that
employees are free to seek independent advice on their own.
Well, we are always free to do that, aren't we? The problem is,
few of us actually run out and get this advice.
On top of that, the bill gives free rein to financial institutions
to advise businesses about what investment options should be offered
to their workers. In other words, they would exert a lot of influence
at both the plan level and at the participant level.
As a matter of fact, if the employer were offering funds from multiple
fund families, but the adviser worked for only one of the families
represented, it would be permissible, in fact downright hunky-dory,
for the adviser to discuss only the funds from his own fund firm
to plan participants under the provisions of this bill.
So, is it a good idea to get biased investment information from
an adviser that stands to profit from the advice given? I don't
think so. Financial institutions, which are making a big push for
this legislation, argue that they can offer this service at a reasonable
cost because it will be wrapped up in the management fees that they're
already charging. These advisers don't have to be licensed experts,
by the way; they can just work for the financial services firm that
sells the products.
From an employer's standpoint, this would be the cheapest way to
go. Employers wouldn't have to monitor the advice given to their
employees, but they would be responsible for selecting and monitoring
the adviser periodically.
But how cheap is this from the employees' standpoint? If they are
being directed into investments that can legally pay an adviser
bigger fees, why, it wouldn't be cheap at all now, would it? In
fact, it could be extremely expensive.
Reish predicts that a turf battle will ensue between
investment managers and broker-dealers, neither of whom would have
to worry about conflict-of-interest provisions currently in place
with regard to investment management fees and 12b-1
"I think it's hard to predict exactly what the
outcome will be, but I see a fight over the participants' money,"
Who loses here? Employees, because of the likelihood
that they'll be steered into higher-cost funds. They'll end up feathering
their advisers' nests to the detriment of their own. But proponents
say the regulatory agency that oversees financial services firms
-- the Securities and Exchange Commission -- will protect plan participants.
As if it doesn't already have enough on its plate policing crooks
in the industry!