Sociologist Robert K. Merton popularized the term “unintended consequences.” Unintended consequences are outcomes that are not the outcomes intended by a purposeful action. Unintended consequences can be roughly grouped into three types:
- A positive, unexpected benefit.
- A negative, unexpected detriment occurring in addition to the desired effect of the policy.
- A perverse effect contrary to what was originally intended (when an intended solution makes a problem worse).
For me, the law of unintended consequences is usually how positive changes can cause unexpected detriment. For example, Prohibition (debatable whether that banning alcohol consumption is positive) had the effect of being a boon for organized crime.
When it comes to the changes in the retirement plan industry, I believe many of the positive changes such as fee disclosure and the new 401(k) advice regulations will have some positive effect, but may have some detriments because it may leade to some unintended consequences.
For example, the fee disclosure regulations will certainly lower plan expenses and that is certainly going to hurt the margins of many plan providers, which will include a group of excellent third party administration firms and financial advisors.
The same can be said of the 401(k) advice rules. I think advisors who can offer advice (at least afford the auditing requirements of the regulations) will be at a competitive advantage. So advisors who can’t afford to comply or can’t because they are brokers (and won’t be allowed to become fiduciary advisors as required by the regulations) may have their book of business depleted.
I certainly look forward to these positive changes, but I am wary about the negative impact that these changes will certainly create. Your guess is as good as mine.