Just when you think that our government is full of incompetent career politicians who can't get anything right, a real hero rides in.
You've probably never heard of Phyllis Borzi. She is an assistant secretary at the Department of Labor and she's helping you and our country in ways few will ever appreciate.
We've written extensively about the inherent conflicts of interest when you trust someone with your money. In finance circles, it is called "agency risk." Yes, your broker, or mutual fund manager may not fully put your interests ahead of their own. These conflicts almost define how the investment management business operates and is regulated.
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Borzi runs the Employee Benefits Security Administration (EBSA), which "pursues policies that encourage retirement savings and that promote retirement security for all working Americans." Our retirement security depends in large measure on the sound investment of more than $11.2 trillion in pensions, 401(k) accounts, and IRAs. To guide our decisions, we get advice from trusted experts.
But a flawed 35-year-old rule gives brokers a loophole that allows them to skirt these fiduciary standards. Under her stewardship, the Department of Labor has been pushing through regulations that would force service providers to disclose fees and limit conflicts of interest.
"The law on its face is simple enough: advisers should put their clients' interests first. But as always the devil is in the details – in this case, in the question of what constitutes paid investment advice," Borzi said last week before a House committee. "(We) will amend a flawed 35- year-old rule under which advice about investments is not considered to be "investment advice" merely because, for example, the advice was only given once, or because the adviser disavows any understanding that the advice would serve as a primary basis for the investment decision."
When it comes to your retirement savings, fiduciaries who advise you have a duty of "undivided loyalty" to your interests, to act prudently when giving advice. You can sue a fiduciary personally for any losses arising from breaches of such duties.
But the 1975 laws were made before 401(k)s and at the inception of IRAs. The loopholes and technicalities let brokers easily dodge fiduciary status. Borzi has reams of evidence showing that because of this, IRAs are dramatically underperforming 401(k)s.
"For additional evidence, consider the underperformance of IRAs relative to plans, the size of the gap is troubling," Borzi said. "IRA holders do not have the benefit of an employer to represent their interests in dealing with advisers. From 1998 to 2007, the average annual returns for IRAs were 4.5 percent, compared with 5.4 percent for 401(k)s. IRA holders often pay fees that can be two to three times higher than the fees paid by employee benefit plan participants."
Borzi believes that Americans with 401(k)s and IRAs are entitled to receive impartial investment advice and wants to ensure that you can see the fees you are paying. Her new proposals would protect us and our IRAs from conflicts of interest and self-dealing by correcting outdated 1975 rules.
The brokerage investment community is having a fit because many IRAs today are held by brokers, not advisers. Brokers do not have to live up to a fiduciary standard and can get paid for advice by commissions for trades and by getting a piece of the fees you pay to mutual funds. Brokers claim they are not fiduciaries because they "disclaim any understanding that their advice might constitute a primary basis for the IRA holders' investment decisions."
If brokers become fiduciaries, they could not accept commissions or revenue sharing payments. To do so would constitute "fiduciary self-dealing," which is prohibited. They would have to be transparent and show you what you are paying.
They have submitted hundreds of comments, even going so far as to claim that Borzi's proposals would increase costs to the investor.
Borzi is on a mission to change the system so anyone getting advice on IRAs could receive an extra 1 to 2 percent return by eliminating the conflicts. Fees would go down and investors would retire with more. There are 75 million IRA accounts with $4.7 Trillion invested. If she impacts half of that and help investors keep another 1 percent, that's almost $24 billion each year that will stay in our pockets.
Mitch Tuchman is CEO and founder of MarketRiders, an online investment advisory and management service helping Americans invest for retirement. MarketRiders gives investors greater peace of mind knowing that they are leveraging the best thinking of Nobel Laureates and the investing methods used by the world's most elite institutions and wealthiest families. MarketRiders is on the investor's side, helping reduce investment costs and risks, and increasing retirement savings.