A barrage of proposed or finalized regulation hammered the nation's retirement system in 2010. Over the last year, The U.S. Department of Labor and the Securities and Exchange Commission have proposed or finalized a handful of laws and enforcement initiatives while Congress passed major legislation that, taken together, already are changing the world of investments and retirement planning.
In a phrase, they're all screaming, "Transparency!" Significant rules, regulations and legislation issued include:
401(k) Fee Regs
On Oct. 14, the DOL issued final regulations that require enhanced fee disclosures to participants in401(k) plans and other defined contribution plans subject to the Employee Retirement Income Security Act with participant-directed investments. The new regulations require disclosure of two major categories of information: "plan-related information" and "investment-related information."
This means is what previously has been largely hidden will now be revealed, and that's in clear and straight-forward terms. Recordkeeping, administration, distribution, investment management, brokerage, advisory, consulting and other indirect fees all impact plan participants. The new regulations now require plan providers to disclose and plan sponsors to evaluate for reasonableness all of those previously hidden fees.
On Oct. 21, the DOL released a proposed rule that would rewrite the definition of a fiduciary under federal retirement law to include anyone who provides investment advice for a fee to a retirement plan or its participants. That includes broker-dealers.
Under the rule, advisors must meet a five-part test to determine whether they are fiduciaries. That assessment includes determining whether advice is provided on a regular basis and whether it is the primary basis for a plan's investment decisions. Both of those tests would be eliminated under the newly proposed regulation, making it easier for the agency to enforce fiduciary requirements.
Target Date Fund Regs
In early December 2010, the DOL issued proposed regulations surrounding target date funds, which are often the default invests for 401(k) plans. The new proposals regarding disclosure will mandate that a clear explanation be given as to the target date fund's glide path or fund composition over time, its landing point, or when the fund becomes the most conservative and its composition at that time as well as a pictorial or graphical depiction to explain these concepts to the plan sponsors and clarification that these types of investments can lose principal.
On July 21 the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, forcing U.S. public companies to communicate how they are paying their executives, ultimately benefiting investors in the long term and helping public companies establish a healthy dialogue with their shareholders. Companies now will be responsible for disclosing the ratio of CEO pay to median employee pay and correlation between actual performance and compensation.
Clearly, transparency is the mandate and disclosure is the watchword this year. Employers and investors will have more information on what they are paying for, to whom, for what, etc.
Although there is no question that the more information available to the public, the better, it is at the same time daunting because having more information doesn't necessarily mean the public will, as a result, make good decisions with it. The biggest risk is participants will not know what to do with all of the information without preparation. Participants will not only need to understand there's a cost for the 401(k) and/or 403(b) benefit - many of whom do not - but they also need to understand they've been paying it all along.
That said, change creates opportunity: Now is the time to educate the public about the details of what saving for retirement really means and requires. It's important for professionals, the media, financial groups and everyone else involved in the industry to provide decision makers, which include employers and investors, enough information and time to understand what all of the components of the costs as related to some of the recent regulatory changes as well as why they are or are not legitimate and reasonable, how they can get information to help them determine that, and what they can do if they feel or think the fees are not. This is a true education process that will take time and should have started yesterday, well ahead of when that information starts showing up on participant statements and website information.
As mentioned, the regulations will force providers to become more transparent by providing clearer and more detailed, even nuanced, disclosures. Through these regulatory changes, plan sponsors are being made more accountable in explicit ways.
With the 2008 economic downturn a few years behind us now, investors still should not forget what happened during that time. They should look for a proven, time-tested strategy that has shown its ability to protect funds in down markets and participate in rising ones. Single bullet approaches are not going to work, nor have they ever.
These regulatory and legislative changes to investments and retirement planning will enable Americans to begin to think differently about retirement. They'll need to start thinking of retirement as a lifestyle, rather than a destination. Meaning, they'll have to constantly be aware of their investments and retirement finances, they'll have to amend them as they move forward in their life, and they'll have to either do that themselves or find assistance to help them with the process.
Last year, we began to witness a move to force greater awareness, accountability and responsibility of individuals for handling their retirement investing. This year should begin a stronger push in educating Americans about the details of what saving for retirement really means and requires as well as what it really costs.
Investing is not a simple business. It requires a skill the a vast majority of workers don't have and cannot or will not acquire. To that point, it may be time to advocate less choice, not more, in regards to retirement plan investments absent personalized and specific investment advice delivered by an independent fiduciary advisor.
For the majority, the ideal system would automatically enroll workers in plans, automatically set their savings rate at a realistic, but also sufficiently high number that, using sophisticated modeling would increase the likelihood of accumulating a significant sum for one's later year and would default everyone into a well-diversified managed account option that would the responsibility of an independent, experienced fiduciary to oversee and competitively evaluate.
Most of the elements to achieve this are in place, and 2011 should be one more step in that direction. Bottom line: Change is for the good, transparency without preparation can be confusing, and investors need to become well-informed and find an advisor they can trust.