How one campaign is pushing workers to save for retirement
Barbara Roper is director of investor protection for the Consumer Federation of America, an alliance of about 300 pro-consumer groups. A regular witness at Congressional hearings, she is CFA’s top spokesperson on and analyst of the abuse of Americans at the hands of unethical financial advisers and institutions. Since joining the CFA 30 years ago, Roper has been a forceful advocate of legislation and regulation of investment advisers, and a promoter of consumer investment education. She recently shared her perspectives on investor protection in the context of retirement savings with EBN; highlights of that conversation follow.
EBN: Are most Americans somehow at a disadvantage in their prospects for a sound retirement due to too much being expected of them in their understanding of investing?
Roper: I think our financial system is premised on what I think is an unrealistic assumption, which is that most people are capable of making sound, informed decisions about their investments, and that if you just give them adequate information, they can protect their own interests.
We have transformed our retirement system to one that relies on people’s ability to make sound decisions about their retirement investments without any real evidence that that’s an accurate assumption for the majority of the population. So we’re forcing people to make important financial decisions they’re ill-equipped to make, decisions that will determine their financial well-being in the future. By doing that, we almost force them to turn to financial professionals for help without providing the protections necessary to insure that they will get reliable help.
EBN: So you must be pretty excited about the Department of Labor’s fiduciary rule for advisers in dealing with their clients’ retirement investments?
Roper: Yes, I’ve been working on that in one form or another since I started at CFA in the fall of 1986.
EBN: Why did it take so long?
Roper: Initially the focus was on regulation of the financial planners in their dealings with their clients with respect to all of their financial affairs, not just retirement. We were pushing the idea that financial planners should have an obligation to act in the best interests of their customers throughout the financial planning process, including while they were implementing their recommendations with investment products based on that advice, not just while they were providing advice.
EBN: Don’t you believe even without the fiduciary rule, that retirement plans have come long way in helping people avoid investment disasters, with employers now frequently defaulting participants into target-date funds, and using auto-enrollment to get the retirement savings ball rolling?
Roper: Yes, those can be helpful, although I believe there’s some evidence that with low auto-enroll default deferral rates some people enroll at lower levels than they would have otherwise. Also there are many participants who invest in target date funds and lots of other funds, without understanding that the target date funds are designed to give them appropriate diversification.
EBN: I understand that CFA has been involved in efforts to encourage saving. Tell me about that.
Roper: We have a very large, high-priority program called America Saves, the purpose of which is to encourage people of modest incomes to save and build wealth. It was based on some research we did with a Ford Foundation grant a long time ago. We were looking at why people weren’t saving enough, whether they understood what they needed to be doing or not, and the barriers to saving.
EBN: What did you learn?
What emerged was that across income levels, you see dramatically more saving if people have a plan. We didn’t distinguish between whether or not it was a plan they developed with a professional adviser, or on their own. As I recall, people with incomes between $20,000 and $100,000 who had a plan saved twice as much as those who didn’t. Above $100,000, it narrowed a little bit to around 60% more.
So the America Saves program was developed out of that research designed to use social marketing techniques, like the “friends don’t let friends drive drunk” campaign, to encourage people to save. The premise was that you enrolled in the program, you identified a goal, you developed a strategy to reach that goal, and you set about saving.
There were also basic messages about how to do that effectively, and it had wealth coaches and an intensive support network to help promote savings.
EBN: Has it changed?
Roper: It has evolved over the years. It started out largely as community-based programs in Cleveland and Kansas City, and has expanded beyond that. The biggest aspect of it now is something called Military Saves, to encourage savings among service members.
EBN: How does this tie in to CFA’s advocacy role?
Roper: If someone is locked in a cycle of debt with a high-cost lender, they’re not going to be saving for retirement. If someone is paying more than they should be for auto insurance because they happen to live in the wrong zip code, that’s money that can’t go towards other priorities like retirement. If someone is paying more than they should for investments, that’s money that doesn’t end up contributing to their retirement income. So our advocacy to protect consumers in the financial services arena all have a common effect on people’s ability to save and build wealth for retirement, or any other purpose.
EBN: Did you try to get employers engaged in the savings education campaign?
Roper: Yes, some employers did sponsor the America Saves program for their employees.
EBN: Does the Labor Department strike the right balance with the fiduciary regulations for retirement savings advisers? Is the fact that advisers can still be commission-based a problem as far as the CFA is concerned?
Roper: No, we were actually very strong supporters of that approach for a couple of reasons. First, a rule that didn’t include some ability for brokers and insurance agents and others to get differential compensation would never have been finalized. So creating the “best interest contract exemption,” taking a step away from ERISA’s strict no-conflicts approach and creating a mechanism that allows for the existence of these kinds of conflicts subject to appropriate limitations, was one that we strongly supported. So I think that the DOL, for the most part, got the details right.
And one important provision that often gets overlooked that we think is crucial to the effectiveness of the rule is the requirement that the financial services firms mitigate conflicts of interest. So whether it’s in compensation or personnel practices, or setting quotas for the sale of products, they have to eliminate those practices that create incentives for advisors to act in ways that are not in the best interest of the retirement investor.
EBN: What changes do you think will ultimately result from these rules?
Roper: One of the very important factors that will determine your retirement savings success is having good menu of investment options in your plan. One of the benefits to insuring that they get fiduciary level advice should be better investment options in small company plans that previously weren’t getting the benefit of that advice.
EBN: As you know there is litigation over these regulations. What do you think will happen?
Roper: The common argument is that the DOL has exceeded its authority. Well that’s just clearly not true, DOL has clear authority under ERISA to define investment advice. But, I’m not going to predict how the courts will rule.
EBN: So-called “robo” advisers that provide automated investment advice and asset allocation services to individuals, including for their retirement savings portfolios, are getting a lot of attention. Are you concerned about whether they are taking on the role of fiduciaries?
Roper: I don’t think the question is whether robo-advisers can be fiduciaries, but what does a fiduciary duty look like in the context of robo advice. And just as the question is not can broker-dealers be fiduciaries, the question is what does a fiduciary duty look like in the context of advice that’s associated with sales based recommendations. I think the question then is what is that appropriate regulatory regime for this new delivery mechanism for advice.
EBN: To return to where we started, do you ever question the basic assumption that our retirement system is predicated on, since the eclipse of the defined benefit pension, namely that the average person can be successful at preparing financially for retirement?
Roper: The investor protection issues that I work on are irrelevant for a significant portion of the population. We have a retirement system that’s based on the assumption that individuals can make sound decisions and adequately fund a secure and independent retirement, yet there is no evidence that that’s the case. The percentage of people who have no money saved towards retirement is large. I think the system works really well for the financial services firms, and I think it works really poorly for way too many Americans.