Last month, the Department of Labor announced some good news for the millions of Americans who will — or already do — rely on defined contribution plans to help fund their retirement. Starting next spring, financial professionals handling tax-advantaged retirement accounts (including 401(k)s and other plans) will have to act as fiduciaries and put their clients' financial best interests before their own.
This development is also good news for the sponsors of those plans. Conflicts of interest between plan sponsors and financial advisers — for example, advising a client to invest in a mutual fund that gives a heftier commission than a different option — can be costly. The Obama administration has estimated that they cost Americans about $17 billion a year.
That is money that plan participants cannot afford to lose. And since many sponsors — often not investment professionals themselves — hire third parties for the fiduciary management of the assets in the plan, it is essential that their advisers be obliged to provide as unbiased counsel as possible.
Today, the notion of retirement borders on sacred. In the U.S., retirement assets totaled more than $24 trillion as of 2014, and people hope that their golden years will pass in relative ease and comfort. And 401(k)s, individual retirement accounts and other self-directed plans play a growing role in supporting American retirement: 401(k) assets alone grew to an estimated $4.4 trillion in 2014 from $2.2 trillion in 10 years earlier.
But there's still a substantial gap. The growth in DC plans means that people are increasingly asked to build the assets for their own futures, as traditional pension plans become less common and as Social Security seems less certain.
The uncertainty is to be expected. Funded retirement, in the grand scheme of history, is still new and, as it turns out, quite fragile. For thousands of years, people worked until they died or until their family provided support.
Even 200 years ago, retirement as we know it today simply did not exist. It did not emerge until urbanization and industrialization provided people with sufficient surplus or income to support a period of dignified retirement after decades of toil. And the development of sound savings structures, both public and private, made the prospect of a recreational retirement a genuine possibility.
With all this progress, we certainly don't want to take a step backward now. Since many Americans' livelihoods after retiring will depend a great deal on robust and well-invested DC plans, the decision from the Department of Labor will help make a comfortable retirement a bit more of a possibility for more Americans.
Because self-driven retirement accounts are susceptible to the shocks of market conditions, we must recognize there's still work for financial professionals, regulators, plan sponsors and individual investors to do. We must keep up the pressure to ensure that those whom people rely on to help them invest for retirement operate as free from conflicts of interest as possible. In the process, we should seek out policies that can help make investing more effective for plan participants and sponsors alike.
We applaud the recent decision from the Department of Labor as a victory for retirement, and a step toward a more level playing field that provides strong opportunities for individuals to invest their assets and generate returns. But it's just a step, and there's work to do yet.
Norton Reamer is the former CEO of Putnam Investments and founder of United Asset Management. Jesse Downing is an investment professional in Boston. They are the authors of "Investment: A History."