Bad News for 401(k) Participants

On Monday the U.S. Department of Labor released a very disappointing ruling for 401(k) investors that withdrew a proposal to subject financial professionals who give investment advice to 401(k) plan participants to a fiduciary standard of conduct. This means that brokers and insurance agents who service investors in what has become our nation’s most important retirement savings vehicle would have had to put the investor’s interests ahead of their own. This would have meant no more selling outrageously priced investment products to plan participants, no more selling whatever fund pays them the highest commissions and no more placing poor performing funds in 401(k) plans whose only attraction was their willingness to pay the plan vendor to be in the plan. Needless to say the brokerage and insurance industries mounted an intense and heavily funded effort to defeat or delay this regulation.


Predictably, the political attack on DOL was lead by members of Congress hailing from states in the Northeast where the insurance and securities industry is concentrated. The main argument from these companies is that, if they have to place the plan participant’s interest above their own, then the small investor would actually suffer because they could no longer afford to give them advice. You can restate this more accurately as “if we are fiduciaries we can no longer get away with charging outrageous fees for selling products that mostly benefit our respective companies”. I find their (the brokerage and insurance industries) argument baseless as, my own firm, Pilot Capital Management, and many other fee-only, independent Registered Investment Advisors (RIA’s) have been successfully counseling small investors while being held to a fiduciary standard for a very long time. The stance taken by brokerage firms and insurers reflects their need to build and maintain large companies (and impressive buildings) that, in general, have not succeeded in producing better advice for investors. Fee-only RIA’s have found it very difficult to compete in the 401(k) arena because of the ease with which brokerage firms, insurance companies and banks have been able to hide the very high fees charged to plan participants, particularly in small to mid-sized plans. This regulation would have helped level the playing field. DOL did say that it plans to reissue the proposed regulation in early 2012.

Thankfully there is some good news for 401(k) plan participants. Beginning in 2012, 401(k) plan vendors will have to show every plan participant exactly how much they are paying in fees (in dollars) on each statement. Our guess is that this will be a very eye-opening experience for many plan participants. Examine your first statement in 2012 carefully for the fee disclosure. If your total fees are greater than 1% of your plan balance (for small company plans) or greater than 0.5% (for larger company plans), then you have a right to be concerned. Go to your employer and ask if the plan fees have been compared to similar plans to determine if the fees are reasonable and ask to see the data. Your employer is a fiduciary and is legally bound to place the interests of the plan participants above all others involved with the plan. Also, you are being charged these fees for “investment advice”. If you’ve never actually received any advice (this occurs more often than the industry cares to admit) then you have a right to question exactly what it is you are paying for.

Finally if you’re in the habit of writing to your elected representatives, write and tell them that you are outraged at Congress’s surrender to the lobbying efforts of the brokerage and insurance industries on this matter.