Upton Sinclair, an ardent anti-capitalist, wrote The Jungle to expose what he thought were the dangers of a free market economy.

He intended to do this through his plot about a heartless meatpacking company that took advantage of the poor working class it employed.

When Teddy Roosevelt read it, he saw only one thing--the awful truth of how the sausage is made (literally).

He immediately had the federal government inspect the meat packing industry and confirmed what Sinclair had written about. In no short time, Congress passed and Roosevelt signed into law the Pure Food and Drug Act of 1906 and the Meat Inspection Act.

In a low or slow information environment, it’s easy for a business to hide problems. In those cases, it’s nearly impossible for consumers to find those problems and react accordingly (i.e., by not buying that product or service).

In matters involving food or money, information flows more quickly (mainly because there’s an incentive). Buyers move at the speed of sound, unlike regulation, which tends to ooze ever so slowly like molasses.

We may be witnessing this first hand in our industry (see “Will Increased 401k Fee Scrutiny Trump DOL’s New Fiduciary Rule?” FiduciaryNews.com, February 23, 2016).

It’s very possible all the media focus on 401k fee litigation has obviated the need for the DOL’s proposed Conflict of Interest (aka “Fiduciary”) Rule--at least as that new rule pertains to 401k plans.

Why? Because, through their own purchasing choices, plan sponsors may already be enforcing what the rule was meant to enforce.

Scott J. Stitt, Counsel at Tucker Ellis LLP in Columbus, Ohio, says “the Tibble v. Edison case from the US Supreme Court in May 2015 added a lot of uncertainty over the application of the statute of limitations in ERISA fee cases, and how far back a plaintiff can look when asserting a breach of fiduciary duty claim. That uncertain liability window--plus the fiduciary rule and its news commentary, plus some big recent fee case settlements (like in the Nationwide case, and the Boeing case, to name just two)--have led to increased discussions regarding fees. I think of all of these things as creating a ‘critical mass’ of fee news and commentary that has caught everyone’s attention.”

The free market, enhanced by the instant communications environment we currently live in, may be the most effective SRO around.

It’s not 100 percent foolproof, but it can move at the speed of light. We see this every day in the stock markets.

Once word--even an unconfirmed whisper--gets out that a company is tainted (either through poor earnings, a failed product, or a scandalous investigation), the price of that company’s stock falls precipitously.

What applies to the stock market holds for all markets.

Twenty years ago, most 401k plans held funds with 12b-1 fees.

Once plan sponsors, primarily through class action suits, discovered 12b-1 fees increase fiduciary liability, that product became tainted.

Today, very few 401k plans offer mutual funds with 12b-1 fees. Indeed, so dirtied are 12b-1 fees, it’s remarkable any plans still hold funds that contain 12b-1 fees.

It wasn’t regulators that caused this.

Not only are 12b-1 fees still legal, there are specific provisions in the DOL’s regulatory framework that continue to permit their use.

Furthermore, no one expects the new Conflict of Interest Rule to change this exemption in any meaningful way. So, once again, the marketplace is acting in advance of the regulators.

There are only two kinds of products and services that compel an almost immediate response from consumers--those of the stomach and those of the wallet.

Lessons derived from these markets show us the true value--and the ultimate sustainability--of capitalism. The free market is self-regulating. In the most prominent examples of this, regulations are always a step behind, often coming in a little too late to help and with unintended consequences that can stifle true progress.

This is bad news for the forces intent on defeating capitalism.

As Upton Sinclair once lamented about the reaction to his book, he said, “I aimed at the public’s heart and by accident hit its stomach.”

Instant Insights /

The free market is always one step ahead of regulators

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