As the Department of Labor continues moving its fiduciary rule forward, Jerry Bramlett argues that advisors will have no choice but to steer more plans toward passive index investments, with potentially damaging effects to participants.
Writing in the most recent issue of NAPA Net the Magazine, Bramlett says that in his view of the White House Council of Economic Advisers (CEA) report that accompanied the proposed fiduciary rule, in order for the regulation to have its desired effect, all DC plans to migrate to passive indexes. In Bramlett’s opinion, the Obama administration doesn’t trust active managers, and thinks their services actually reduce return.
To refute this, Bramlett notes that there have already been two major market corrections this century — in 2001-02 and 2008-09 — and that, when the next downturn hits, it will harm plans that had little choice but to enter during a bubble right before it burst. The regulation, he writes, will push investors and plan sponsors towards buying securities that could easily become disconnected from their intrinsic value, without having an active manager around to correct or mitigate exposures to risk.
Bramlett says that the fiduciary proposal may also have the unintended consequence of forcing advisors to second-guess actively managed plan decisions, which Bramlett warns could harm investors far more than any regulation could help. He says that courts may ultimately view active management on the whole as “not acting in the ‘best interest’ of participants,” pressuring advisors to quickly replace underperforming funds faster than they would otherwise.
The problem with that, Bramlett writes, is that studies have shown that quickly removing underperforming managers actually harms plan performance in the long run. He cites a 2012 Towers Watson study that says employers who retain their managers through periods of underperformance actually perform better over a three-year period than those who fire managers for performing behind benchmarks in the short term.
In addition to Bramlett’s column, the Summer issue of NAPA Net the Magazine highlights what the new generation of plan advisors are thinking — including the 2015 NAPA “Young Guns” list — along with a recap of this year’s NAPA 401(k) Summit in San Diego, and the cover story, which examines five key factors that advisors should look at when determining whether longevity-planning options are right for their clients. The Summer issue also features regular contributors Nevin Adams, Warren Cormier, David Levine, Brian Graff, Don Trone, Steff Chalk, Fred Barstein and NAPA President Joe DeNoyior — and marks the debut of a new column on financial wellness by Jania Stout.