Changing an Industry through Regulation: The Department of Labor’s Conflict of Interest Rule

We all know that our government and its agencies are very good at reacting to a real or perceived crisis with new laws and regulations designed to reduce the chances of another similar event occurring. The most recent example of this concerns the cost and availability of health care. The solution designed and implemented into law, affectionately known as Obamacare, was well intended. However, we all know that it has major problems that will need correcting.

The financial services industry has had many crises over the years. And just as with Obamacare, our elected leaders and their bureaucrats took steps to try to fix the problems. When new laws and regulations are enacted, affected organizations are forced to make major changes in operations. These changes can make ongoing business stressful while compliance and marketing departments scramble to catch up. The Great Depression brought us the Securities and Exchange Commission, the Investment Advisors Act, Glass Steagall, and the FDIC. In most cases the laws and regulations were modified over the years, or as in Glass Steagall, eliminated, to meet the reality of societal changes.

We are currently in the middle of a modification to a four decade old law, the Employee Retirement Income Security Act of 1974 (ERISA). This act was the result of a crisis taking place in the funding, administration, and investing of pension plan assets. It forced public corporations and unions who offered pensions to their employees to meet the fiduciary standard of care in all aspects of handling and investing funds for the beneficiaries of their plans. It required a minimum funding level, a minimum level of insurance coverage based on the value of the plan assets, and, like the FDIC, a member funded insurance program, the Pension Benefit Guarantee Corporation (PBGC). While the Act also established Individual Retirement Accounts (IRAs), unlike corporate and union plans, there was little oversight specified regarding the management and care of IRA assets. In 1978, the Internal Revenue Service made 401(k) plans possible, and as defined contribution plans, they were also subject to ERISA regulations, which gives a level of comfort for plan participants.

Laws created decades ago can often either lose effectiveness or, as in the case of ERISA, change the very nature of what they were established to correct. At the time of the ERISA enactment, the average person’s plan for retirement was based on a pension check and social security. The individual worker did not have to rely upon personal savings to supplement social security. Corporations realized they could eliminate the cost and liability of meeting the defined benefit plan rules of ERISA, as well as the cash flow needed to fund these plans, if they switched their participants to 401(k)s. In essence this passes all of the retirement risk from the corporation onto the individual worker. As we know, when individuals are given a choice to spend today or to defer spending for thirty years, many if not most individuals will just not save. The result has been a great crisis in retirement readiness for the majority of American citizens.

Here are a few facts as stated by the Economic Policy Institute:

  • Nearly half of families have no retirement account savings.
  • The mean retirement savings of all families is $95,776.
  • The median savings, or those at the 50th percentile, for all families in the U.S. is just $5,000.
  • The median for all families with some savings is $60,000.

The EPI has stated, “The large gap between mean retirement savings ($95,776) and median retirement savings ($5,000) indicates inequality – that the large account balances of families with the most savings are driving up the average for all families.”

The National Institute on Retirement Security estimates that the short-fall in current dollars needed to ensure all citizens are retirement ready is between $6.8 and $14.0 Trillion.