This week I've blogged about the Australian superannuation (pension) system and the regulation of investments and investment advice. In sum, Australia is in the midst of reconfiguring its system, which ranked significantly higher than the U.S. patchwork of 401(k)s, DBs, etc. in terms of adequacy, sustainability and integrity (e.g. regulation, governance, etc.).
The reforms include the development of a robust set of low cost default investment products for workers who are not interested in making their own investment decisions. Although Australian employers are required to make contributions to an account (similar to U.S. 401(k)s) for their employees, the employers will have virtually no legal liability for choosing the default investment product for employees who do not make a choice. Employees who want advice on their investments, whether in a superannuation account or otherwise, will receive that advice from an investment adviser who must provide advice in the best interest of the client, and who will be prohibited from receiving commissions, rewards for scale and soft dollars.
The Australian pension system holds less than ten percent of the pension assets of the U.S. employer-based system (A$1.28 trillion v. $17.5 trillion). Perhaps the smaller size enables the Australian system to be more nimble. Or maybe it means there is less available money for lobbying to retain the status quo of a system that is very lucrative for the financial services industry. My question for the week harks back to my question of last Friday. It surprises me that employers and employees do not join together to demand a better system in the U.S. It appears to me that in a 401(k) system employer and employee interests align for a low cost, high performance system that does not require employers to be experts in financial products. Australia is ahead of us. Why can't the U.S. at least make progress?
Friday, December 16, 2011
Thursday, December 15, 2011
A "Best Interests" Standard for Financial Advice to be Effective on July 1, 2012
Yes, you read that correctly. It is likely that a standard requiring providers of individual advice to retail clients to act in the best interests of their clients will be effective on July 1, 2012. Advice providers will be banned from receiving a variety of payments that raise concerns of conflicts of interest including: many commissions; payments based on volume; and significant soft dollar payments Legislation and regulation are in process after multiple years of study and consultations. There are no exceptions for broker-dealers who happen to provide advice or for those who provide advice on money employees are saving for retirement through their work-based retirement account.
Not aware that this is so close to implementation? That is because it is happening in Australia, not in the U.S. The project is known as the Future of Financial Advice (FoFA). In general, the new FoFA standards and requirements will be imposed across the board on the provision of individual advice to retail clients.
This week the Australian Securities & Investments Commission (ASIC) announced, http://www.asic.gov.au/asic/asic.nsf/byHeadline/11-294AD%20ASIC%E2%80%99s%20plans%20for%20FoFA%20reforms?opendocument its plans to issue guidance on the reform. AS part of the FoFA reforms, ASIC's powers will be expanded.
Australia's approach should be interesting to everyone in the U.S. watching the DOL and SEC efforts to enhance the quality of financial advice to individual, retail investors, including those investing through their 401(k) accounts and IRAs.
Not aware that this is so close to implementation? That is because it is happening in Australia, not in the U.S. The project is known as the Future of Financial Advice (FoFA). In general, the new FoFA standards and requirements will be imposed across the board on the provision of individual advice to retail clients.
This week the Australian Securities & Investments Commission (ASIC) announced, http://www.asic.gov.au/asic/asic.nsf/byHeadline/11-294AD%20ASIC%E2%80%99s%20plans%20for%20FoFA%20reforms?opendocument its plans to issue guidance on the reform. AS part of the FoFA reforms, ASIC's powers will be expanded.
Australia's approach should be interesting to everyone in the U.S. watching the DOL and SEC efforts to enhance the quality of financial advice to individual, retail investors, including those investing through their 401(k) accounts and IRAs.
Wednesday, December 14, 2011
Investment Advice and Complaints about Advice in Australia
Another interesting report out of Australia this week is the annual report of the Financial Ombudsman Service (FOS). http://fos.org.au/centric/home_page/publications/annual_review.jsp
Instead of having a dispute resolution system for securities customers (like our FINRA arbitration and mediation system), another for 401(k) investments (in the U.S. an internal plan complaint system followed by lawsuits in the federal courts), another for insurance (in the U.S. complaints to state regulators), etc., FOS covers all of those areas.
Disputes involving superannuation (the Australian term for pensions) increased in the past year. The largest category of disputes (32% of the total) was disputes involving "self-managed superannuation funds" (SMSFs) (the closest equivalent in Australia to U.S.IRAs). That shouldn't be surprising, in part because in terms of both assets and numbers of funds, SMSFs constitute the largest category of funds. In terms of the issue in dispute, advice constituted the largest category (at 26%) followed closely by service complaints (at 22%).
So, as in the U.S., advice on pension-related savings can be problematic in Australia. Unlike the U.S., Australia has a project in place to review and make revisions to the its regulation of financial advice. Check in here for more on that soon.
Instead of having a dispute resolution system for securities customers (like our FINRA arbitration and mediation system), another for 401(k) investments (in the U.S. an internal plan complaint system followed by lawsuits in the federal courts), another for insurance (in the U.S. complaints to state regulators), etc., FOS covers all of those areas.
Disputes involving superannuation (the Australian term for pensions) increased in the past year. The largest category of disputes (32% of the total) was disputes involving "self-managed superannuation funds" (SMSFs) (the closest equivalent in Australia to U.S.IRAs). That shouldn't be surprising, in part because in terms of both assets and numbers of funds, SMSFs constitute the largest category of funds. In terms of the issue in dispute, advice constituted the largest category (at 26%) followed closely by service complaints (at 22%).
So, as in the U.S., advice on pension-related savings can be problematic in Australia. Unlike the U.S., Australia has a project in place to review and make revisions to the its regulation of financial advice. Check in here for more on that soon.
Monday, December 12, 2011
Australia Releases Draft Legislation on Pension Fiduciary Obligations
As part of its effort to reform its private-sector, employer-based pension (known there as superannuation) system, Australia just issued proposed legislation and an accompanying explanation on revised fiduciary obligations. http://strongersuper.treasury.gov.au/content/Content.aspx?doc=exposure_drafts/trustee/default.htm
Australia has been engaged in a methodical review of its mandatory superannuation system, which currently requires a 9% contribution to DC accounts on behalf of nearly all workers, since mid-2009. One of the major changes being implemented is a new set of default investment products, known as "MySuper" products.
The new fiduciary standards and general requirements enhance the duties of the trustees (typically entities) that are legally responsible for superannuation funds (each 'fund' is a collection of investment products). Australia's reform also addresses the duties of the trustee-directors (the individuals who are directors of the trustees). And, additional duties will be imposed on trustees and trustee-directors with respect to MySuper products.
The Australian superannuation guarantee system is quite different from the U.S. system (for more detail, see my article: Building Value in the Australian Defined Contribution System: A Values Perspective at 33 Comparative Labor Law & Policy Journal 93-135 (2011) or email me an I'll be happy to send you a copy). Australia's system is mandatory, employees have very broad choices on which fund and which product within the fund holds contributions made on their behalf, and their government-administered system (the closest parallel to U.S. the Social Security system) is means tested through both asset and income tests. It also is far smaller in terms of numbers of employers and employees and overall asset levels.
A few things standout though about the Australian approach to private-sector employer-based savings for retirement. Its system was recently rated second in the world (true, a limited number of countries were studied but they included the leading countries in pension provision) whereas the U.S. came in below the median. Over the past two and a half years Australia has performed a thorough review of its system, accepted most of the recommendations in that review, and is in process of implementing them. It has imposed fiduciary obligations on the financial services entities that provide investment funds and products. And, it is in the process of enhancing the obligations of those entities and the individuals responsible for governing the entities.
In short, Australia is moving ahead with reform of its employer-based system while the U.S. remains stuck with a legal framework enacted back before 401(k) plans even existed.
Australia has been engaged in a methodical review of its mandatory superannuation system, which currently requires a 9% contribution to DC accounts on behalf of nearly all workers, since mid-2009. One of the major changes being implemented is a new set of default investment products, known as "MySuper" products.
The new fiduciary standards and general requirements enhance the duties of the trustees (typically entities) that are legally responsible for superannuation funds (each 'fund' is a collection of investment products). Australia's reform also addresses the duties of the trustee-directors (the individuals who are directors of the trustees). And, additional duties will be imposed on trustees and trustee-directors with respect to MySuper products.
The Australian superannuation guarantee system is quite different from the U.S. system (for more detail, see my article: Building Value in the Australian Defined Contribution System: A Values Perspective at 33 Comparative Labor Law & Policy Journal 93-135 (2011) or email me an I'll be happy to send you a copy). Australia's system is mandatory, employees have very broad choices on which fund and which product within the fund holds contributions made on their behalf, and their government-administered system (the closest parallel to U.S. the Social Security system) is means tested through both asset and income tests. It also is far smaller in terms of numbers of employers and employees and overall asset levels.
A few things standout though about the Australian approach to private-sector employer-based savings for retirement. Its system was recently rated second in the world (true, a limited number of countries were studied but they included the leading countries in pension provision) whereas the U.S. came in below the median. Over the past two and a half years Australia has performed a thorough review of its system, accepted most of the recommendations in that review, and is in process of implementing them. It has imposed fiduciary obligations on the financial services entities that provide investment funds and products. And, it is in the process of enhancing the obligations of those entities and the individuals responsible for governing the entities.
In short, Australia is moving ahead with reform of its employer-based system while the U.S. remains stuck with a legal framework enacted back before 401(k) plans even existed.
Friday, December 9, 2011
Why are Plan Sponsors ERISA Fiduciaries in 401(k) Plans?
Why are plan sponsors ERISA fiduciaries to their 401(k) plans, especially when it comes to the selection and monitoring of investment vehicles?
I know that is how ERISA and the current regulations are written. My question is why from a policy perspective this hasn't been changed?
I think employers fiduciary status in these situations is an anachronism attributable to the fact that 401(k) plans did not exist when ERISA was enacted and the fiduciary definition has not been appropriately updated to reflect the new reality.
It is not sensible to expect employers to be experts on the ever changing world of investment products, especially in a system where benefit plan sponsorship is voluntary. And, it really is not sensible to let many of the individuals and entities who provide advice to employers about investment selection and monitoring off the 'fiduciary' hook when we leave employers dangling on that hook. I'm not sure why employers and the employer organizations involved in benefits policy haven't supported the DOL's attempts to rationalize the definition of ERISA fiduciaries. It seems to me that it would be in employers' interests, both in the short and long term, to have their advisers held to fiduciary standards. Anyone have any answers?
I know that is how ERISA and the current regulations are written. My question is why from a policy perspective this hasn't been changed?
I think employers fiduciary status in these situations is an anachronism attributable to the fact that 401(k) plans did not exist when ERISA was enacted and the fiduciary definition has not been appropriately updated to reflect the new reality.
It is not sensible to expect employers to be experts on the ever changing world of investment products, especially in a system where benefit plan sponsorship is voluntary. And, it really is not sensible to let many of the individuals and entities who provide advice to employers about investment selection and monitoring off the 'fiduciary' hook when we leave employers dangling on that hook. I'm not sure why employers and the employer organizations involved in benefits policy haven't supported the DOL's attempts to rationalize the definition of ERISA fiduciaries. It seems to me that it would be in employers' interests, both in the short and long term, to have their advisers held to fiduciary standards. Anyone have any answers?
Thursday, December 8, 2011
Investor Confusion - Who is to Blame?
Yesterday I wrote agreeing with the House Republican letter stating, among other things, that fiduciary regulation should not add to investor confusion. I also wrote about the myriad of overlapping, inconsistent, technical, and detailed regulation that creates that confusion.
Ultimate responsibility for the regulatory morass, though, lies with Congress. Back in 2009 Congress, as a result of the financial crisis, could no longer ignore the need for regulatory reform. There was hope that the structure of the regulatory system could be streamlined to accomplish more, decrease the problems that fell between the 'cracks' of the agencies' boundaries, and ensure responsibility for regulatory failures could be established. I wrote at the time of the oddity that the same investment products and advisers are regulated by different agencies depending on whether the money being invested happens to be in a 401k vs a 'regular' account. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1331042 That paper is now dated because Congress failed to address that problem, as part of its failure to stand up to the self-interest of the individual agencies and engage in significant structural reform.
So, yes, House Republicans identify an important concern when they write about investor confusion. But, Congress passes the buck down the chain when it gives multiple agencies regulatory responsibility over different bits and pieces of the financial services industry and then complains when the agencies attempt to do the impossible job they have been given.
Ultimate responsibility for the regulatory morass, though, lies with Congress. Back in 2009 Congress, as a result of the financial crisis, could no longer ignore the need for regulatory reform. There was hope that the structure of the regulatory system could be streamlined to accomplish more, decrease the problems that fell between the 'cracks' of the agencies' boundaries, and ensure responsibility for regulatory failures could be established. I wrote at the time of the oddity that the same investment products and advisers are regulated by different agencies depending on whether the money being invested happens to be in a 401k vs a 'regular' account. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1331042 That paper is now dated because Congress failed to address that problem, as part of its failure to stand up to the self-interest of the individual agencies and engage in significant structural reform.
So, yes, House Republicans identify an important concern when they write about investor confusion. But, Congress passes the buck down the chain when it gives multiple agencies regulatory responsibility over different bits and pieces of the financial services industry and then complains when the agencies attempt to do the impossible job they have been given.
Wednesday, December 7, 2011
Investor Confusion and Investment Advice
On Monday, House Republicans wrote to Secretary Solis about the Department of Labor's expected re-proposal of its regulation on the definition of an ERISA fiduciary. One of the points of contention has been the extension of fiduciary obligations to those who provide advice on the investment of pension, 401(k) and IRA assets.
The letter makes a good point - any regulation by the Department should not the increase investor confusion identified by the SEC (and, in a separate report, the GAO). The confusion being referred to is the confusion by investors on whether they can count on their advisers to act in their best interests.
The reason for the current confusion is that sometimes investment advisers are fiduciaries, in which case they do have an obligation to act in the best interest of their clients. At other times the providers of investment advice are not fiduciaries. In those cases, they may only have an obligation to provide 'suitable' advice. In non-legalese, an obligation to provide 'suitable' advice means that it is legal for the adviser to provide advice that is in the adviser's best interest (e.g. pays the highest commission to the adviser or has the highest fees) so long as the advice is appropriate to the client's circumstances. In more direct terms, a non-fiduciary may advise a client to make an investment that pays higher fees to the adviser even though the adviser knows there are equivalent, lower fee investments available.
So, when is an adviser a fiduciary? That answer is extraordinarily complex and the source of the investor confusion that worries the House Republicans, the SEC, and GAO. If the advice is about pension, 401(k), or IRA assets, it currently depends on a 5-part test written in 1975 by the Department of Labor. If the advice is about other assets, the answer probably depends on laws and regulations overseen by the SEC. Confused yet?
The letter makes a good point - any regulation by the Department should not the increase investor confusion identified by the SEC (and, in a separate report, the GAO). The confusion being referred to is the confusion by investors on whether they can count on their advisers to act in their best interests.
The reason for the current confusion is that sometimes investment advisers are fiduciaries, in which case they do have an obligation to act in the best interest of their clients. At other times the providers of investment advice are not fiduciaries. In those cases, they may only have an obligation to provide 'suitable' advice. In non-legalese, an obligation to provide 'suitable' advice means that it is legal for the adviser to provide advice that is in the adviser's best interest (e.g. pays the highest commission to the adviser or has the highest fees) so long as the advice is appropriate to the client's circumstances. In more direct terms, a non-fiduciary may advise a client to make an investment that pays higher fees to the adviser even though the adviser knows there are equivalent, lower fee investments available.
So, when is an adviser a fiduciary? That answer is extraordinarily complex and the source of the investor confusion that worries the House Republicans, the SEC, and GAO. If the advice is about pension, 401(k), or IRA assets, it currently depends on a 5-part test written in 1975 by the Department of Labor. If the advice is about other assets, the answer probably depends on laws and regulations overseen by the SEC. Confused yet?
Subscribe to:
Posts (Atom)