Skip navigation
tug of war retrorocket/iStock/Thinkstock

Conflict in the Financial Services Industry Is Inevitable

Especially in 401(k) plans.

Years ago, when company stock in 401(k) plans was a major issue, I visited a publicly traded bank in western Pennsylvania that was facing a dilemma. The senior managers, also members of their 401(k) retirement committee, knew there was a major announcement that would adversely affect the bank’s share price. As ERISA fiduciaries, they asked me if they should sell the stock in the plan before the announcement and, if they did, whether it be considered insider trading.

Though I have a law degree, I am not an expert in these areas, so I demurred, but it highlighted the inherent conflict within defined contribution plans. ERISA fiduciaries must put the interests of the participants first regarding the plan but that does not mean they should ignore what’s best for the company as well as the people in charge of administering the plan.

Conflict in our country and the world seems to be reaching a boiling point as we near what could be the most consequential election in our nation’s history. We are divided more than ever since the Civil War while conflicts in the Ukraine and the Middle East rage on with no end in sight. Similarly, as the convergence of wealth, retirement and benefits gains momentum, so will the potential for conflict increase with providers, advisors, plan sponsors and broker/dealers on different sides of some issues.

The fundamental driver of conflict within DC plans is the fact the buyers are not the principal users. It’s obvious plan sponsors should not give the record-keeping mandate to their bank in exchange for better interest rates on their line of credit but there are more subtle issues like using that provider’s target date funds to lower record-keeping costs.

There is a potential conflict between agencies that oversee advisors and DC plans with the DOL taking a more proactive role in prescribing behavior as it has done in their latest iteration of the fiduciary rule, attempting to protect unsophisticated investors especially when they decide whether to roll over their DC accounts, while the SEC leans more toward disclosure.

As convergence heats up driven in part by declining record keeping and advisory fees that could reach zero, all eyes turn to participant services potentially pitting record keepers against the advisor who brought them the plan. And plan sponsors might need to arbitrate weighing who is most qualified to help their employees while at the same time protecting data privacy.

Retirement plan advisors are looking for ways to increase their revenue and stand out from Triple F advisors. To achieve this, they are either creating their own products and services or representing those that pay additional fees. As a result, they find themselves in the dual role of being a salesperson and a co-fiduciary to plan sponsor clients who expect them to be objective third-party overseers of other non-fiduciary vendors. And their broker/dealers might want their advisors to sell certain products and services from which they benefit.

Many record keepers, most of which are not fiduciaries but must disclose all fees charged to the plan, are receiving as much as seven-figure platform-level payments from asset managers, much of which is hard to calculate by the plan and is likely not listed in the 408(b)(2) forms.

And while we wring our hands about how to improve the DC system, increase access and help more workers with their financial issues while integrating all benefits and providing retirement income solutions, with some pundits suggesting we script the entire system, the U.S. retirement schema with over $24 trillion in participant-directed assets and $38.4 trillion overall is the envy of the world.

The attempt to eliminate all conflict is futile and likely not worth the effort with all good intentions aside. So the issue then is not how to eliminate conflict but how to better manage it while being transparent squashing the most egregious instances acting as responsible stewards. It is possible to put others’ interests first, which is what clients expect, while prospering.

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.