OTEers know I’ve long been concerned about economic security in retirement among aging Americans whose limited earnings and savings threaten to generate inadequate income replacement rates once they’ve aged out of the workforce.
That’s one reason for my frequent scribblings on behalf of the new “fiduciary rule,” limiting conflicts of interest among financial advisors providing investment advice for retirement savers. Jeff Sommer has a useful piece in the NYT on this and other matters, making many good points but glossing over one very important one.
First, the gloss. Thanks to some seriously stiff spines by Democrats in the White House and Congress, conservatives’ efforts to block the rule have thus far been thwarted. The rule—which basically requires retirement savings advisors to put their clients’ interests first—starts phasing in about a year from now, i.e., early in the next president’s first term.
But you notice how I keep calling this a “rule,” not legislation? Congress didn’t pass this into law, of course (that would be way too functional), so the next president can change the rule on day one. It would actually take some time to unwind it—there’s a process that would take months—but it could be stopped before it started.
The fact that this and the many other rule changes and executive actions (the overtime rule, higher minimum wage for workers on federal contracts, and much more) enacted by this White House could be wiped out by the next administration is, IMHO, underappreciated.
It’s also the case that rule changes have limited purview—without Congress, the White House could raise the minimum wage for workers on federal contracts, but not for the national workforce. In the case of the fiduciary rule, the administration’s purview is only in regards to advice for retirement savings.
Thus, other advisers can over-manage funds and, as Sommer emphasizes, charge the commissions and fees most commonly associated with active fund management; research consistently shows how costly that can be to savers. Sommer presents new research comparing returns on S&P indices to those from active management. The finding is once again that “index funds outperformed the average actively managed fund in every single category” out of 29 asset categories.
However, when the researcher eliminated the impact of fees, the funds “managed to beat their benchmarks. For example, in the real world, more than 80 percent of large-cap funds trailed their benchmarks. But when Ms. Soe’s calculations removed the negative effect of fees from fund returns, only 69 percent underperformed. That’s still a poor record — and still argues for cheap index funds — but it’s much better.”
A common complaint among investment advisors is that the new fiduciary rule will push them toward passive vehicles, like low-fee index funds. I gotta say: that increasingly sounds more like a feature than a bug.