“Raiders Of The Lost Retirement Account”: Wall Street’s Deceptive Retirement Account Fees Hurt Savers
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.
By: Marcus Stanley, U. S. News and World Report, June 4, 2013
“The GOP’s Favorite Government Jobs”: Republicans Didn’t Realize Government Budget Cuts Result In Layoffs
Politico’s Austin Wright has a crazy little story about a spat between congressional Republicans and the Labor Department that hinges on the possibility of mass defense contractor layoffs.
The fight is over whether defense contractors are required to send out notices warning their workers of layoffs that would kick in as a result of the large defense spending cuts due Jan. 1 — aka”sequestration.”
Republicans say yes, citing the WARN Act, which requires large employers to give 60 days’ notice of possible layoffs. The GOP has been chortling in glee at the prospect of such notices going out to every single employee of the largest defense contractors, because the 60-day countdown just happens to arrive four days before Election Day. Because, you know, layoffs are bad, even if they mean Big Government is shrinking.
But the Labor Department says no! Labor’s main argument is based on the reasoning that sequestration is not inevitable — Democrats and Republicans still have time to come to a budget deal that would avoid sharp defense cuts. (Indeed the whole point of sequestration was that the prospect of such cuts was supposedly so drastic that it would force a compromise.)
According to Politico’s Wright, congressional Republicans consider the Labor Department’s decision a “political stunt.” That accusation has a high likelihood of being true, but it seems just a little bit hypocritical coming from Republicans who are hoping that layoff notices timed to be delivered just before Election Day will help their own electoral chances.
And that’s hardly the tip of the hypocrisy iceberg. Buried beneath the surface of this latest example of Washington dysfunction is a basic truth: Government budget cuts result in layoffs. That’s not good during a period of very slow economic growth. And yet, Republicans seem to have little problem when the newly unemployed are teachers or firefighters. But when defense’s ox is getting gored, then it becomes a big deal, and then the layoffs are presumed to be Obama’s fault and thus embarrassing to the White House.
By: Andrew Leonard, Salon, August 6, 2012
GOP Sen Chuck Grassley: We Need “Child Labor” To Fight Obesity Epidemic
At a recent town hall in Osage, Iowa, Sen. Chuck Grassley (R) responded to a question about the Labor Department’s stricter limits on child labor by claiming that they could exacerbate the child obesity epidemicby making kids less “active”:
Concern was raised about the proposed Department of Labor’s intent to greatly limit child labor on family farms.
“This farm bill will greatly affect our FFA and 4-H programs,” said Grassley. “Kids won’t be able to help on farms not owned by their parents.
“It’s interesting that this child labor bill goes against Michelle Obama’s anti-obesity initiative,” said Grassley. “How can kids be active if they are limited by this law?“
Grassley represents a farm state that both relies on child labor and contributes to the national obesity epidemic through its production of corn products like high-fructose corn syrup. Iowa farmers benefit from billions of dollars in corn subsidies that allow them to put a glut of cheap, unhealthy foods on the market.
As for his Dickensian defense of child labor, that’s sadly par for the course for Republicans these days. Several GOP-led states have rolled back child labor laws. In December, seventy rural state lawmakers led by Rep. Danny Rehberg (R-MT) denounced the Labor Department’s new protections for the country’s most vulnerable workers. They argued that hard manual labor teaches children important “life lessons.”
Under current law, 400,000 children working on farms are not protected from exploitation and dangerous labor. The proposed rules would forbid children younger than 16 from working with pesticides, timber operations, handling “power-driven equipment, or contributing to the “cultivation, harvesting and curing of tobacco.”
Contrary to Grassley’s suggestion, the physical activity children endure during farm labor is no picnic. The fatality rate for child farm workers is four times higher than that of nonagricultural child workers.
Many Republicans have mocked First Lady Michelle Obama’s anti-childhood obesity initiative, but Grassley in particular has powerful financial motivations for supporting some of epidemic’s worst culprits. As a member of the Agriculture, Nutrition, and Forestry committee, he’s raked in hundreds of thousands of dollars in campaign contributions from the Food & Beverage, Food Processing & Sales, and Agricultural Services and Products industries.
By: Marie Diamond, Think Progress, January 17, 2012
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