The discussion itself was quite interesting. In fact, the readers might be interested in knowing that two presenters went even further by suggesting that IRAs be eliminated altogether (e.g., one gentleman basically said the American public is not savvy enough to manage their retirement account, and that, therefore, IRAs should be abolished by moving IRAs into 401(k)s and permitting only a few investment choices!). Needless to say, I was quite outspoken about how I and the American public would view such a move! I believe I stated that eliminating IRAs would be about as popular to the American public as changing the name of the Statue of Liberty, and that A DOL recommendation to do so would be like asking Congressmen to commit political suicide! Another said that it was unrealistic to assume that a financial adviser would follow an objective computer model designed (in the best interests of the investor) to recommend strategies and asset classes that they didn’t get paid to sell. While this may be true, it is exactly why, in my opinion, such advisers shouldn’t be granted an exemption. That is, financial advisers should be motivated not by how their advice benefits them, but how it benefits their customers.
IRA and retirement planning controversy at the Department of Labor
August 15th, 2007 · No Comments
On July 31st, I was asked to testify on behalf of the self-directed IRA industry on an issue left to the Department of Labor (DOL) to decide. The matter was defined when Congress approved the Pension Protection Act of 2006. The issue is this: Congress mandated that either 1) a computer model be designed that would be used by financial advisers thereafter, that would take an investor’s risk tolerance, age, and financial objectives into consideration, as well as all permitted investment options under the law; or 2) that the DOL grant a class exemption to financial advisers from the otherwise self-dealing rules as defined by IRC 4975. What this means is that unless the DOL could find or develop and bless such a computer model, they were essentially being asked to allow financial advisers working for firms that sell proprietary products to only recommend the products their firms sell to their investment advisory clients. They, of course, would charge their clients a fee for doing so, generally over and above any commissions and other costs associated with the assets purchased. In the past, this would be an obvious conflict and breach of the self-dealing rules defined in IRC 4975. Unfortunately, following the testimony of the 13 organizations that presented, a computer model meeting Congress’ requirements does not appear to exist or to be feasible. Thus, it appears that the DOL will have no choice but to grant financial advisers the right to self-deal (e.g., to be paid for advising clients to invest only in the products their employers sell). This is an obvious step backward for IRA holders, which is what this writer told them. I believe Congress’s intention, as reflected throughout the Pension Protection Act, was to ensure more (not less) diversification in IRA portfolios to avoid the type of retirement account crisis created by the ENRON scenario, for example. Again, it appears Congress’ intention will not be effected, due to the apparent absence of an acceptable computer model. Diversification into other non-correlated asset classes (like real estate and private equity), I argued, and supported by a computer model, would help prevent the kind of retirement plan losses ($1.7 trillion) in the stock market downturn from 2000-2005.
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