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.