Government Cracks Down on Brokers and 401k Plans

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Market Digest – Week Ending 2/27

Domestic stocks ended the week slightly lower, but remained near record highs. Fed Chairwoman Janet Yellen commented Monday that economic growth continues to increase at a “solid” pace, laying the foundation for future rate increases. International stocks rallied following news of Greece’s bailout extension, and held onto modest gains for the week. Domestic bonds, gold and commodities all increased.

Weekly Returns:

S&P 500: 2,105 (-0.3%)
FTSE All-World ex-US: (+0.1%)
US 10 Year Treasury Yield: 2.00% (-0.11%)
Gold: $1,212 (+1.0%)
USD/EUR: $1.112 (-2.3%)

Major Events:

  • Monday – President Obama endorsed stricter “fiduciary” rules for brokers.
  • Tuesday – Eurozone leaders approved a four-month extension to Greece’s bailout program, although doubts remain over Greece’s ability to meet its obligations.
  • Tuesday – The US Supreme Court held hearings for the Tibble v. Edison International case regarding high cost 401k investment options.
  • Wednesday – Three men in Brooklyn, New York were arrested and accused of plotting to join Islamic State (ISIS) in Syria.
  • Thursday – The FCC approved net neutrality rules that essentially classified the Internet as a utility thereby granting the FCC more regulatory authority over Internet service providers.
  • Friday – Revised fourth quarter US GDP growth came in at 2.2%, beating consensus expectations.

Our take:

Despite a relatively quiet week for markets, the US government was anything but. Out of all the noise, there were a couple notable developments specific to investors. On Monday, President Barack Obama spoke at an AARP event, where he endorsed stricter standards for brokers who make investment recommendations within retirement accounts. More detail can be found in our post: New Push by President Obama Will Help Protect Your Retirement Savings.

On Tuesday, the US Supreme Court heard arguments for Tibble v. Edison International. The case involves a group of investors suing Edison International over its 401k plan. They claim Edison failed to act in the best interest of investors by offering high-cost retail mutual funds. Tuesday’s hearing was not to settle the case, but to determine whether the case can even be taken to court (due to the statute of limitations). The justices appear likely to side with investors, which would make it legal for Edison employees to sue. And if such a ruling is made, it could open the floodgates for other lawsuits around the country.

While it’s too early to determine the direct impact, both of these developments shed light on important issues within the investment industry. We’re not saying brokers are “bad people”, but even well intentioned brokers aren’t aligned with your best interests if they’re paid based on their recommendations. And although the potential, new standards won’t eliminate commissions, they’ll hopefully allow investors to make more informed decisions.

Finally, 401k plans are a dark corner of the investment industry in desperate need of change. They are often rife with layers of hidden investment fees which have only recently been disclosed to investors. To see how your plan stacks up, take a look at our 401(k) Fee Calculator. Many are also full of high-cost, actively managed mutual funds which tend to underperform over time. All of this means one thing: less retirement savings for investors. So hopefully these lawsuits bring much needed attention to the issue. One thing is clear, there needs to be a higher standard of due diligence when selecting a 401k plan and the associated investment options.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

2 comments

  1. Keith Daniels

    Few investors can afford the fees charged by fee for service advisors. The average widow or small scale investor
    Is more than adequately served by the suitability standard for those advisors who are paid by commission or a percentage of AUM. Does a client with $50,000, for example, best be served by paying a $5,000 per year fee for investment advice? No, only those investors with much,much larger AUMs can afford to pay such fees for a fiduciary.

    Further, it is a misnomer to contend that commissions make a huge difference. If you have a good client and present two almost identical investment options, the only difference being one option pays 3 % and the other 4.5% commission, which option will the buyer take? With either, it will not cost the client anything. Thus, if that client wants his advisor to stay in business, the buyer will choose the higher commission option. The client is not harmed or ill served by buying the higher commission product. Other rules in place already protect against churning, front loading and other wrongful actions as enforced by the States and/or FINRA.

    Reply
    • John Rice

      Keith, if an investor is presented with two near identical options why would he choose the more expensive option to “keep the advisor in business”? Also, how can you say that it doesn’t cost the client anything? It cost him 1.5% more each year which can make a big difference once you hit retirement. Well, since 1.5% is no big deal for you then how about giving me that 1.5% each year. I’ll even treat you to a nice dinner each year when I collect the check.

      Reply

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