The retirement services industry must educate politicians, and their staffs and advisers, to consider the possible effects of financial laws and regulations on the retirement plans of millions of U.S. workers when drafting them.
Too often politicians and advisers do not think past the immediate goal of the legislation or regulation and do not realize that retirement assets of 75 million workers and millions of retirees could be hurt or at least put at risk.
One example of attempted interference by politicians in investment policy — an area where most have no expertise — is the letter sent by two senators urging the Federal Retirement Thrift Investment Board to reverse a move in the international equity fund to the MSCI ACWI ex-U.S. Investible Market index from the MSCI EAFE index because the former includes Chinese firms "involved in the Chinese government's military, espionage, human rights abuses."
Such a move would have no effect on the Chinese government or Chinese companies, but could harm the long-term return of the board's investments.
A more prominent example is the apparent trial balloon floated by the Trump administration that it was considering investment curbs on China to reduce the flow of U.S. capital to Beijing, including requiring the delisting of Chinese-related stocks from U.S. stock exchanges.
According to U.S. government data, 156 companies worth $1.2 trillion were listed on U.S. exchanges in February though American depository receipts. Many are included in index funds and exchange-traded funds in which pension funds and mutual funds seeking foreign diversification are invested.
Though the report was quickly denied by White House officials, the prices of Chinese company-related stocks and ETFs focusing on Chinese stocks dived before slowly recovering.
Many commentators reacted quickly. Some argued that the president has little power to order the delisting of Chinese stocks because the New York Stock Exchange and Nasdaq are independent business entities not beholden to the White House.
Even if Congress went along with delisting Chinese ADRs, analysts suggested the law could be challenged in court.
If the move survived court tests, it would hurt U.S. investors more than Chinese companies and the Chinese economy because investors from other countries likely would quickly pick up the investments the U.S. investors sold, meaning the action would not have its intended effect.
Further, such a divestiture order would lock U.S. investors out of some of the most dynamic Chinese companies and reduce investors' diversification opportunities, likely hurting long-term investment returns.
Even the threat of such action might cause U.S. pension funds and 401(k) investors to cut or eliminate their allocations to the Chinese ADRs, again possibly hurting long-term performance.
Perhaps the biggest damage this trial balloon has done is to the idea that U.S. financial markets are free and fair, unencumbered by political meddling. No action has been taken, but the idea that the political system, through the White House or Congress, could interfere with the markets for political purposes has been raised as a possibility.
Even if the issue receives no further consideration, the memory that it once was raised as a possibility will take time to fade. It has created uncertainty.
Politicians and their advisers should be reminded again and again to dig more deeply into the possible side effects of finance-related actions they may be considering. Any long-term gain may be offset by long-term damage to the assets millions of workers and retirees invested in the financial markets.
