A Big Bang for 401(k) Plans?

by IFA Contributors - Wednesday, 23 May, 2012

Source: NASA

On rare occasions, a change so profound and significant occurs in the financial world that it is given the “big bang” designation. Examples include the 1975 abolition of the fixed rate commission system in the U.S. and the drastic deregulation of the London Stock Market in 1986 under Margaret Thatcher.

In the past few months, a great deal of coverage in the financial media has been given to the 8/30/2012 Department of Labor deadline for 401(k) plan administrators to disclose all fees to plan participants. At Index Funds Advisors, Inc. we have always maintained that transparency is essential to successful investing, especially regarding fees and other expenses, so we strongly support these new requirements, as can be plainly seen in this video.

IFA.tv Show 10

Fee Transparency
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When an advisor agrees to accept fiduciary responsibility for a retirement plan, she is required to fulfill the traditional duties of a fiduciary which include diversification of the investments and controlling costs to justifiable level. The one type of investment that inarguably meets these requirements is a low-cost index fund. Retirement expert Mary Beth Franklin (no relation) observes that many providers who previously focused on actively-managed funds are now adding new product offerings with lower-cost index funds. The Department of Labor has indicated its agreement with this approach, much to the chagrin of brokers and active managers. An especially bizarre complaint was voiced by Paul R. D’Aiutolo, vice president of investments, advisory, and brokerage services at UBS Institutional Consulting.

“The purpose is to keep people engaged in their plans. While index funds may perform well over the long term, it’s often the ups and downs of actively managed funds that keep plan participants paying attention.”

Memo to Mr. D’Aiutolo: Investing for retirement is not intended to be a source of entertainment.  As one of our favorite Nobel Laureate economists Paul Samuelson said, “I tell people [investing] should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

IFA will continue to closely monitor the situation regarding fee disclosure requirements, and we will make every attempt to keep investors informed. For further informative video discussions on this and many other important subjects, please visit www.ifa.tv.