IMHO November 10, 2007

IMHO: The On Your Own-ership Society

Last week, as I was surfing the Web, I stumbled across an article titled “Time for Employers to Cut Cord to 401(k) Plans.″
Reported by
These days, I wouldn’t be surprised to see that kind of premise from a pro-business periodical (see “IMHO: Why Knots’)—but the premise here was quite different. The article’s author—Bloomberg’s John Wasik—wasn’t suggesting that employers should get out of the 401(k) plan business because it made good business sense for them, but rather that “employees can benefit from having 401(k)-style plans cleft from their employers because the programs would cease to be a black box of excessive middlemen and management expenses.’
The articlepoints to the recent round of hearings on the issue in Congress, “several government reports,’ and a recent survey by AARP as proof that employers are not fully disclosing and reducing fees in these retirement programs. And thus, Wasik argues, “[G]iving you more control over your 401(k) will also give you the chance to find the best providers of the most diversified funds.’ Wasik maintains that, by allowing individuals to do their own shopping for the best deals, a “competitive national market’ would emerge. “Middlemen would get the boot and employees could improve their total returns,’ he says.
Now, I’m a free-market libertarian from way back—and I’m leery of current trends that, IMHO, seem to disengage participants from the business of paying attention to these investment accounts. But as I told Wasik in a follow-up e-mail, “No offense, John—but are you nuts?’
I’ll concede that there are almost certainly situations out there where participants are being ill-served by the fees they are paying for their retirement plans, though I personally happen to think those situations are not as pervasive—or as egregious—as some would have us believe (it wouldn’t hurt to have more disclosure to be sure of that, however). I will also concede that many (most?) participants don’t know what they are paying for their retirement programs—though I think that most could get to a good approximation of that number with a modest amount of help.
However, it seems to me that getting the employer “out’ of the 401(k) would have several immediate—and hugely detrimental—impacts to participants. First and foremost, our purported ability to find a better deal on our own notwithstanding (setting aside for a moment the reality that some significant number of participants don’t even want to take the time to fill out an enrollment form; see “IMHO: For the People, By the People’), how am I going to be able to find a better deal with my individual 401(k) balance than my employer can with the aggregated balances of me and all my co-workers? Even if some highly compensated workers managed to negotiate a special arrangement, do we really think that that the average participant could—or would?
Second, once employers become mere conduits for payroll deductions, workplace education on such matters as the importance of saving and investment will become a thing of the past—after all, participants will now get that from the provider they found on their own. Enrollment meetings? No need for that, since your 401(k) is a do-it-yourself option. And, IMHO, once we’re “on our own,’ it won’t be long before that employer match will fade away (in Wasik’s defense, he doesn’t see the loss of the match as a consequence of his proposal—but I do). The model for all the above, IMHO, can be found in much of the current non-ERISA 403(b) space: the match, the lack of employer involvement, the low participation rate(s), the fees….
But the thing we would lose most with an employer-lite 401(k), IMHO, is the oversight of a trusted fiduciary. Granted, many employers don’t fully understand that role or the responsibility—too many don’t have the expertise, and far too many are willing to place those decisions in the hands of providers and advisers undeserving of that trust.
But many more are working hard every day to see that these programs are well-administered, reasonable in price and service, funded and supported in the workplace—and in the process, making a difference in helping ensure a more satisfying retirement for us all.
IMHO, it’s a contribution we can’t afford to be without.
Compliance November 10, 2007

SEC: Stay Tuned for 12b-1 Changes

While the Securities and Exchange Commission (SEC) is actively considering changes to Rule 12b-1, most of the comments on the subject appear to be opposed to change.
Reported by
In a speech given at the Investment Company Directors Conference this week, Andrew Donahue, Director, Division of Investment Management at the SEC, told attendees that there were concerns that Rule 12b-1 no longer serves the purpose for which it was intended and that the factors that a board considers are not relevant in today’s market. But he also admitted that most of the comments received to date were opposed to any significant changes.
He noted that when the SEC adopted Rule 12b-1 in 1980, the fund industry was in a far different state than exists today; recession, inflation in double digits, and depressed stock values. In fact, Donahue noted that during the worst period — January 11, 1973 to December 6, 1974 — the (non-inflation adjusted) S&P 500 declined almost 46%.
Funds had experienced a period of net redemptions and, according to Donahue, there was serious concern for the viability of the mutual funds market for a variety of reasons. “The Commission adopted Rule 12b-1 which generally makes it unlawful for a fund to act as a distributor of its own securities — which the fund will be deemed to be if it engages directly or indirectly in financing any activity primarily intended to result in the sale of its fund shares — unless the fund adopts a plan of distribution,’ Donahue noted. The adoption and continuation of a 12b-1 plan requires board approval and, in keeping with the release adopting the rules, boards typically consider nine factors when determining whether to approve or continue the plan, he said. However, he noted, many of those urging a repeal or refinement of Rule 12b-1 argue that the rule no longer serves the purpose for which it was intended and that the factors that a board considers are not relevant in today’s market.
The SEC hosted a roundtable discussion on the topic in June, and also solicited public comment on Rule 12b-1. Donahue said that the SEC received more than 1450 comment letters on the topic – but also noted that approximately 1000 of these letters were “…form letters that were sent by financial planners and registered representatives who oppose substantive reform of Rule 12b-1.’ Donahue also noted that an additional 400 or so individualized letters were sent in by financial planners – most of whom also oppose substantive rule reform – and the SEC also received approximately 25 letters from mutual funds, large broker-dealers, insurance companies, industry associations and counsels – and most of these also opposed significant rule reform, according to Donahue.
However, he noted that there were “riddled throughout’ the letters from the mutual fund companies various levels of support for:
  • changing the name of the fee,
  • requiring additional disclosure and
  • revising the role of the fund board in approving the distribution plan.
Donahue did note that the SEC received approximately 10 letters from investors – most of whom supported substantive reform or repeal of the rule. “My staff is currently evaluating the many comments we received,’ Donahue said. “Once that process is complete, we will formulate a recommendation to the Commission. Stay tuned for further developments.’
Stay tuned indeed.
A transcript of the speech is online at http://www.sec.gov/news/speech/2007/spch110607ajd.htm

«