Watchdog hits 401k plans for conflict of interest
The GAO recommends changes to ensure that millions of savers' funds are protected.
This post comes from Neil Weinberg at partner site Forbes.com.
The nation's 401k retirement plans are riddled with conflicts of interest that are causing financial damage to tens of millions of savers, according to a Government Accountability Officereport released this week titled "Improved Regulation Could Better Protect Participants from Conflicts of Interest."
Those conflicts of interest involve undisclosed "revenue sharing," in which firms administering 401k programs receive fees from fund managers, record keepers, custodians and others, who pay to be included in the plans, the GAO says. Additionally, some program providers use generalized "investment education" sessions to promote their own funds, the government watchdog added.
"If left unchecked, conflicts of interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker’s career," the GAO said. Post continues after video.
The proportion of private industry employees participating in 401k-style defined contribution plans rose from 36% in 1999 to 43% in 2008, according to Investment Company Institute data. In large companies, such plans are often administered by big mutual fund companies like Fidelity Investments, Vanguard Group and T. Rowe Price. Among smaller firms, cost are often higher and involve products from providers like Prudential Financial, Principal Financial, Nationwide Financial Services.
Another danger the GAO pointed out: 401k providers often deliberately structure company plans to avoid accepting fiduciary, or legal, responsibility for the plans under the Employee Retirement Income Security Act. For retirement savers the costs of conflicts of interest can be huge. Studies show returns for 401k-style plans lagging 1 percentage point a year behind those of professionally managed traditional pension plans, the GAO said.
"While (the Department of) Labor has taken steps to address the potential for conflicted investment advice provided to sponsors and participants, more can be done to ensure they receive impartial advice," it added. "In fiscal year 2007, the Employee Benefits Security Administration began a national enforcement project that focuses on the receipt of improper or undisclosed compensation by certain providers, but its enforcement efforts are constrained to fiduciary providers and limited by EBSA’s approach for generating cases."
Among the GAO’s recommendations: That the Labor Department "amend pending regulations to require that service providers disclose compensation and fiduciary status in a consistent, summary format and revise current standards, which permit a service provider to highlight investment options in which it has a financial interest.
GAO also recommends that the Department of the Treasury amend proposed regulations to require disclosure that investment products outside a plan typically have higher fees than products available within a plan. Overall, Labor and Treasury generally agreed to consider our recommendations as they evaluate comments received on pending regulations."
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