Individual Retirement Accounts (IRAs) and 401(k)s are an increasingly important source of retirement income for American families. Many young people know no other options. As IRAs and 401(k)s become more popular and more critical, people increasingly need access to the kinds of education and information that are necessary to set up and take advantage of those investment vehicles. But the U.S. Department of Labor (DOL) is pursuing a change in regulations that would restrict that access. The head of the DOL’s Employment Benefits Security Administration (EBSA) reiterated that intent in a speech earlier this week.
The DOL wants to expand what it constitutes "investment advice" under the Employee Retirement Security Income Act (ERISA) so that many more garden-variety interactions between investment service providers and their customers – 401(k) and IRA investors and aspiring account holders – would be more heavily regulated. But practically, the change would restrict those interactions and thus the amount of education and guidance available to American families.
How it would play out is IRA and 401(k) account holders who seek out workaday conversations with their investment-service providers might suddenly be greeted with awkward responses such as, “I’m sorry, but the law no longer allows me to talk with you about that.” The expanded regulation would restrict interactions so much, in fact, that many people who want basic help with their IRAs or 401(k)s would be forced to seek out far more expensive fee-for-service financial advisors. Direct costs to IRA account holders would increase anywhere from 75 percent to 195 percent, according to estimates by respected research house Oliver Wyman.
Sadly, the data seems to suggest that middle- and lower-income Americans would be hardest hit. According to Oliver Wyman, 98 percent of IRA account holders that have a balance of less than $25,000 rely on easily accessible “broker dealers” for basic guidance. It’s easy to imagine those people least able to afford the vastly increased cost of the basic investment education that they may desperately need.
It’s not only the people who already have an IRA or 401(k) who would suffer. Without paying a sizeable fee to meet with a financial advisor, an aspiring investor might find herself unable to get answers to even the most basic questions about the world of retirement planning. Oliver Wyman estimates hundreds of thousands fewer IRAs would be opened each year if DOL were to enact the regulatory change.
Also restricted would be the countless conversations that occur every day between small businesses that offer 401(k)s for their employees and the providers that help them establish and run those 401(k)s. The restrictions would result in a wave of small businesses turning away from 401(k)s, leaving their employees to fend for themselves at the very time retirement information has just become less accessible.
The consequences of what the DOL proposes would be overwhelmingly negative, yet no data or study indicates a widespread problem that needs to be addressed nor a widespread benefit that would result. The resulting outcry among retirement experts and even members of Congress from both political parties has been pronounced, yet the DOL says it is bent on proceeding. The agency has even flatly stated it is “impossible” to coordinate a single standard with other government agencies that regulate in the same area.
Retirement investment is well regulated today and is working for the American public. If the federal government wants to make changes, it should aspire to get more, not fewer, Americans planning for the future. Otherwise it should leave well enough alone.
Bartlett is president and CEO of the Financial Services Roundtable.