Defined contribution plans like 401(k)s and 403(b)s are, by nature, ruled and regulated by the government, which makes lobbyists and associations more important than any other industry. While almost every part of the DC food chain is represented, arguably the most important group—participants—are not.
DC plans exist to help people save for retirement at work, and they have proven very powerful. Over $11 trillion is in DC plans, and another $14.5 trillion is in IRAs, most of which came from rollovers. Though service providers and advisors should be able to make money, their raison d’etre is to serve participants.
The government has tried to protect participants, making plan sponsors fiduciaries under ERISA, which a 1982 court case called the highest liability known to law in the world. Many but not all advisors and providers are deemed to be fiduciaries, which means they must act in the best interests of their clients, sometimes at their own disadvantage. Yet clever attorneys enable clients who are fiduciaries to abide by the law while serving their own interests first.
Some advisors and providers do the right thing not because they must but because they want to, even if it hurts their bottom line. Declining plan fees and the exodus to passive strategies have forced advisors and providers to find ways to serve and monetize participants and their beneficiaries, which can pressure them to do what is in their best interests.
Record keepers, advisors, asset managers, TPAs, broker/dealers and plan sponsors deploy powerful lobbyists to shape laws and regulations either on their own, if they are big enough or through associations. An immutable law in Washington is that lobbyists represent the interests of those who fund them, no matter who they say or claim to represent. Another axiom is if you are not at the table, you are on the menu.
Laws and rules shape the DC industry and seem to be coming fast and furious as retirement, especially payroll deducted and participant-directed plans with over $25 trillion and growing, continues to get more attention and is one of the few bipartisan issues in Washington. Think about the impact of the 2006 Pension Protection Act, the 2012 DOL fee disclosure rules, SECURE 1.0 & 2.0, not to mention the doomed fiduciary rule or the 2013 TDF guidance, as well as state mandates.
Each constituent in the DC food chain is at the table except participants, which, of course, means they are on the menu. It would be nice to think that lobbyists will sacrifice their clients’ best interests for the sake of participants, but seriously, who believes that?
It’s the same issue with DC plans. Though a few plan sponsors allow the rank and file to serve on their retirement committees, ultimately, management prevails. Granted, some are benevolent, but if they really were, they would not have killed DB plans and would be adopting retirement income.
So, who represents participants with lawmakers, regulators and in the courts? Though it might be blasphemous to say the only ones are plaintiffs’ attorneys. Yes, some make a lot of money, as do providers and advisors, and some might file spurious claims, but ultimately, they do not get paid unless participants prevail.
Is there a real solution to the lack of participant representation in Washington or in the states because, after all, it is their money we are playing with? You might argue that clients will be attracted to advisors and providers who do the right thing and have their best interests at heart, but participants are not making the choice of which record keepers, asset managers or advisors they can work with.
Before alarms go off and the “401(k) police” round me up, I am not suggesting a federal or government solution where the cure may be worse than the disease. All I’m saying is that it’s just painfully obvious to me why all parts of the DC food chain spend enormous amounts of money to shape retirement policy except participants, who are arguably the most important. Is that right or even fair? What can be done?
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.
