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Mar 02

401(k) plans: Teeming with conflicts of interest

Posted by annearf in fiduciaryEmployees Beneftis Security AdministrationEmployee Retirement Income Security Actcompliance


This just in: 401(k) plan providers might not be all that impartial about the investment choices they recommend. In fact, these plans are teeming with conflicts of interest.

That's according to a new report from the Government Accountability Office. Called Improved Regulation Could Better Protect Participants from Conflicts of Interest, it looks at what conflicts exist and what the Labor and Treasury Departments should do about it.

Basically to judge from the report, the situation is ridiculously corrupt.

Some examples: Providers that work with sponsors to establish and maintain their plans have been known to receive third-party payments from investment fund companies. These arrangements, known as "revenue sharing", create a conflict of interest when providers get "greater compensation from certain funds," says the report.

Or there's the matter of investment education. Some providers push their own funds during these sessions without revealing that they have a financial interest in promoting them. And participants, assuming they're getting good old investment advice, don't understand that the provider doesn't have a fiduciary responsibility to look out for their interests.

One problem with policing these abuses is that the Employee Benefits Security Administration (EBSA) is only able by law to address fiduciary providers. Also although EBSA has tried to revise the definition of a fiduciary under the Employee Retirement Income Security Act (ERISA) and require better disclosure, the regulations don't require that disclosures be made in consistent formats.

With all that in mind, the report offers some recommendations, including: changing the definition of a fiduciary for purposes of investment advice, requiring written disclosures that not only specify sponsors aren't trying to offer impartial advice, but do so in a consistent manner employees can understand; requiring disclosure of any compensation from plan investments; and requiring disclosure that investment products outside a plan typically have higher fees within a plan.

In light of how many employees are in 401 (k)s--63 percent of private sector employees in a retirement plan participated only in a 401(k) plan in 2008, according to the Employee Benefit Research Institute-and how badly those people were hit when the market collapsed, making sure these plans are run ethically seems like a no-brainer.

Of course it seemed like a no-brainer after 2008 that the financial services industry required tougher regulations, but banks and other lobbyists managed to dilute that effort pretty successfully. Let's see if anything constructive happens this time with 401(k)s.


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