Retirement Plan Regulation and Airline Deregulation

With changes in fee disclosure and the change in the definition of fiduciary, many advisors have been asking me for my opinion on what effect these changes will have. While I don’t have a crystal ball, I can certainly answer that question rather simply. The companies that have already adapted to a full fee disclosure model will thrive and those who hid fees all along will have a tough time. The same can be said for some brokers who are affiliated with broker-dealers who don’t believe that being a fiduciary was part of the bargain. Some retirement plan third party administration (TPA) firms and advisors will thrive, while others will die. Of course, there may be some unintended consequences.

Since I am a big fan of business history, this reminds me of the Airline Deregulation Act of 1978, which deregulated the U.S. airline industry. Until 1978, the Civil Aeronautics Board (CAB), regulated many areas of commercial aviation such as routes, fares and schedules. The CAB had three main functions: to award routes to airlines, to limit the entry of air carriers into new markets, and to regulate fares for passengers. The CAB essentially handed the international flight market to Pan Am and Pan Am heavily rewarded their employees for their good fortune. Other airlines that were protected by governmental regulation like Eastern also had some sweetheart deals for their labor unions.  In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) was $1,442. With that kind of fare, these legacy airlines could be generous with their staff.

There were some against deregulation. Some complained that smaller markets would lose airline service and that the airline industry didn’t need to change the status quo (sound familiar).

The changes after airline deregulation were breathtaking. Fares decreased and carriers that could not adapt to deregulation and had huge labor costs because of their “monopoly” like Pan Am, TWA, and Eastern died. The unintended consequence was probably the fact that airline travel has increased so dramatically, that we have constant delays because of huge capacities of flights.

With the advent of change, everyone take a guess on what may happen and everyone could be wrong. Change will certainly occur, some companies will thrive and some will die. Those who have adapted to the changes before they took place will be at an advantage.

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3 Responses to Retirement Plan Regulation and Airline Deregulation

  1. Dennis says:

    Much of investment fee disclosure rules seem redundant to me. That fact is no matter how many times or ways you present the same investment fee information, some people just won’t take the time to read or listen to the information. It’s kind of like putting up a stop light and then make it flash, whistle, and then for good measure putting a billboard behind the stop light with BIG STOP sign on it, there’s always going to be one goofball who runs the stop light. Sometimes you can’t protect the clueless no matter how much you try.

  2. Kevin Spaeth says:

    Dennis,
    I don’t think fee disclosure is necessarily about protecting the clueless. I think it’s more about leveling the playing field and educating the people making the decisions. I’ve seen providers that hide the wrap fee on the 17th page of an 18 page. I’ve heard wholesalers talk about the “average expense ratio” of the funds without mentioning the 60 BPs that’s tacked on for recordkeeping expenses. I’ve talked to clients of producing TPAs who don’t realize their TPAs are getting billable fees, trails off the assets as an investment advisor and revenue sharing from the provider. To continue your analogy, right now there’s no light, BIG STOP sign, no whistle and no flash. There’s just a sign, covered by overgrown vegetation, that says “Prepare to Stop in One Mile”

    • Dennis says:

      Kevin, if that’s the case I am curious how participants selecting their investments? I don’t think I have ever seen an enrollment kit that didn’t expenses disclosed in the fund profile and referenced in BOLDED footnotes on historical investment returns. Perhaps I have been fortunate in that I have always worked with reputable advisers/brokers/vendors. I know I would never select an investment based on returns alone. In my experiences I have noticed it is disclosed in numerous places even outside of the enrollement kits. Participant online access, etc. The industry as is has too many redundant notices and disclosures, “notice of notices”, if you will. If you overwhelm participants with paperwork, Enrollment forms, beneficiary forms, Safe Harbor notices, QDIA notices, EACA/ACA/QACA notices, SPD, SAR, etc. I think in some ways what the government/industry/consumers thinks is the solution to the problem may be making the problem worse because people are being so overwhelmed with forms and notices that they don’t even bother reading them anymore. Selecting investments and an amount or % percentage to withhold is the most important part of an employees’ enrollment and it should be done knowing all the facts. I am all for full disclosure, just hate seeing redundancy and perpetulating (sp) the participant tuning out. Just my $0.02

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