Costly Regulations Will Reduce Your Retirement Options

The Department of Labor is pushing a new regulation that will limit consumer choice when it comes to retirement savings, and like everything the government does, it’s going to wind up costing you a lot of money.

The rule would impose greater regulations on brokers of retirement accounts such as 401ks and IRAs, to whom people turn for investment advice. Why are stricter rules needed? The proposed rule claims it’s because people generally cannot “prudently manage retirement assets on their own” and therefore the government has to come in and do it for them.

This profoundly condescending attitude is typical of big government regulators. The common man is too dim-witted to function on his own, so he must be controlled. It’s the same sort of reasoning that led to the increased regulations on what kinds of plans insurance companies could offer under the Affordable Care Act, a fact which led John Berlau of the Competitive Enterprise Institute to dub the rule, “Obamacare for your IRA.”

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Many managers of retirement accounts receive what are essentially advertising payments from mutual funds, some of which they then recommend to their customers. Current law already requires that they disclose these payments as conflicts of interest, but the proposal concludes that, “Disclosure alone has proven ineffective” and calls for stricter regulations. The assumption here is that brokers are deliberately sacrificing their clients’ interests by recommending inferior funds. But such a practice would be professional suicide in a competitive market, when customers who are shortchanged can easily flee to the competition.

In fact, these payments allow brokers to charge their customers lower fees, making a service available to Americans who might not otherwise be able to pay for them. Stopping these payments through regulation would drive up prices significantly, not to mention the economic harm that would come from fewer people being able to afford investment advice.

What’s more, a new report from the Financial Services Institute found that the proposed rule will cost taxpayers $3.9 billion - nearly 20 times the estimate used by the Department of Labor. This cost is only for initial implementation of the rule, and doesn’t take into account ongoing compliance costs, or the costs associated with less access to investment advice.

The most frightening thing about the proposed rule, beyond its effect on retirement brokers and their clients, is that it has the potential to lead to direct regulation of retirement plans, preventing certain types of less conventional investments through 401ks or IRAs. The customer who wants to put retirement funds into precious metals or real estate may soon find such investments “unapproved” by the government. This would make the fund custodians liable for losses resulting from the choices of their clients. It’s hard to imagine any custodian being eager to offer such an option, with the knowledge that he will be on the hook if it goes south.

The kind of paternalism that holds that Americans are too stupid to make their own investment choices without government approval ultimately leads to higher costs and fewer options for investors, and a total loss of wealth across the economy. The administration knows this, which is why the Department of Labor dramatically understated the cost of the rule. Having failed to legislate effectively, the Obama administration is now trying to use regulations to advance its agenda. But you can’t regulate your way to prosperity. What you can do is get government out of the way and let people choose how to manage their investments without interference from paternalists who think they know better.

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