Investment Insight

The Department of Labor (DOL) recently issued proposed regulations concerning acceptable professional investment advice for retirement plan participants. The DOL is concerned that,

[P]articipants in participant-directed defined contribution plans … make poor investment decisions due to flawed information or reasoning. These participants may pay higher fees and expenses than necessary for investment products and services, engage in excessive or poorly timed trading, or fail to adequately diversify their portfolios and thereby assume uncompensated risk, take more or less than optimal levels of compensated risk, and/or pay unnecessarily high taxes.

To protect them, the proposed regs require their “fiduciary advisors” to “Apply generally accepted investment theories that take into account the historic risks and returns of different asset classes over defined periods of time,” while making sure they don’t, “inappropriately distinguish among investment options within a single class on the basis of a factor that cannot confidently be expected to persist in the future,” (emphasis added). Sounds like Bogleheads pushing the case for low-cost index funds.

But maybe they’re not. The regs do emphasize that they aren’t trying to preclude, “applying generally accepted investment theories that take into account additional considerations,” but then again, they do have to meet that “confidently be expected to persist” requirement. What would meet this test?

Let’s see, fees could reasonably be expected to persist although they can be waived or modified to some extent by the mere whim of the fund’s board of directors. Manager tenure and fund track record will persist as long as the manager stays and the fund remains in business. The fund’s objective is pretty sticky, too, and the DOL already expressed its love for asset class evaluations. On the other hand, funds’ risk, return, fundamentals, and MPT can change daily, so presumably they can’t be considered.

If you plan to offer advice to retirement plan participants, you’d better start building some fund evaluation models based on expenses, manager tenure, and track record. Let’s hope the final regs get some significant revisions before you actually have to use them.