Defined contribution plans like 401(k)s and 403(b)s are, by nature, run and regulated by the government, which makes lobbyists and associations more important than any other industry. While nearly every part of the DC food chain is represented, perhaps the most important group—the attendees—are not.
DC plans exist to help people save for retirement at work, and they have proven to be very powerful. Over $11 trillion is in DC plans and another $14.5 trillion is in IRAs, most of which came from rollovers. Although service providers and advisors should be able to make money, their reason to be is to serve the participants.
The government has attempted to protect participants by making plan sponsors fiduciaries under ERISA, which a 1982 court case called the highest liability recognized by law in the world. Many, but not all, advisers and providers are considered fiduciaries, meaning they must act in the best interest of their clients, sometimes to their disadvantage. However, savvy attorneys enable fiduciary clients to abide by the law by serving their best interests first.
Some counselors and providers do the right thing, not because they have to, 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 their participants and beneficiaries, which may force them to do what's in their best interest.
Filers, advisors, asset managers, TPAs, brokers/dealers and plan sponsors deploy powerful lobbyists to shape laws and regulations either on their own if they are large 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're not at the table, you're on the menu.
Laws and regulations shape the D.C. industry and appear to be coming fast and furious as retirement, particularly the $25 trillion-plus and growing defined-payroll and participant-driven plans, continue to receive more attention and is one of the issues the least bipartisan in Washington. Think about the impact of the Pension Protection Act of 2006, 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.
Every ingredient in the DC food chain is on the table except for the participants, which, of course, means they're on the menu. It would be nice to think that lobbyists would sacrifice the best interests of their clients for the sake of the participants, but seriously, who believes that?
It's the same issue with the DC plans. Although some plan sponsors allow the rank and file to serve on their retirement committees, ultimately, management prevails. Granted, some are sympathetic, but if they really were, they wouldn't have killed the DB plans and adopted retirement income.
So who represents the participants with legislators, regulators and in the courts? Although it may be blasphemy to say that the plaintiffs' lawyers are the only ones. Yes, some make a lot of money, as providers and advisors do, and some may present false claims, but at the end of the day, they don't get paid if they don't win over the participants.
Is there a real solution to the lack of representation of participants in Washington or in the states because, after all, it's their money we're playing with? You could argue that clients will be attracted to advisers and providers who do the right thing and have their best interests at heart, but participants are not making the choice about which registrars, asset managers or advisers to work with. .
Before the alarms go off and the “401(k) police” round me up, I'm not suggesting a federal or government solution where the cure may be worse than the disease. All I'm saying is that it's pretty clear to me why all parts of the DC food chain spend huge amounts of money shaping retirement policy, except for the participants, who are probably the most important. Is it fair or even fair? What can be done?
Fred Barstein is the founder and CEO of TRAU, TPSU and 401kTV.