ARBOR OUTLOOK: Investment menus, fiduciary oversight and Hornsby

Margaret R. McDowell
Margaret R. McDowell

"That's just the way it is ... Some things will never change." — from "The Way It Is," as performed by Bruce Hornsby and The Range

Few of us are shocked that money influences public policy. That private companies are exerting significant pressure on legislation regarding retirement savings, however, is troubling.

Some background. Congress is initiating legislation that encourages Americans to save more for retirement through participation in their work-sponsored 401(k). The actual term 401(k) comes from the tax code that laid the groundwork for what has become one of the most popular retirement planning vehicles for many American workers. Plans are established by employers, who maintain fiduciary responsibility to the plan, and employee contributions are tax-deferred until money is withdrawn from the account.

While the information above is innocuous in theory, the fiduciary responsibility is extremely important. Employers are charged with providing a “menu” of investment options. These often include low-fee, stable value and target date mutual funds that generally allow employees to choose their investments from a reasonably diversified set of options.

Now, though, new legislation is being proposed to allow annuities to be included in the array of investment choices. It should come as no surprise that the legislator pushing for the change received campaign contributions from several large insurance companies that might stand to benefit from such changes in the 401(k) offerings. Ironically, this type of conflict of interest is what the fiduciary standard seeks to eliminate.

In theory, annuities can be simple and effective investment tools. But in reality they are almost always the opposite: complex, convoluted products that come with extremely high fees. Guess which kind will likely wind up in 401(k)’s? The correct Jeopardy response to “Pricey 401(k) Financial Products for $400.” If you asked, “What are annuities?” you’d be correct.

As Ethan Schwartz wrote in Bloomberg, "Many annuities sold in the U.S. are complicated, overpriced products with payments determined by sometimes deceptive formulas that even sophisticated investors struggle to understand."

In over two decades of wealth management, I have observed only one instance (One!) where the purchase of an annuity was in the investor's best interest. Perhaps unsurprisingly, I’ve only met a handful of investors who actually understood the annuity they’d purchased. Oftentimes, the broker who sold that person the annuity didn't fully understand the product they delivered.

Many businesses already struggle to provide fiduciary oversight for a menu of investment choices and to connect their employees with fiduciary financial advice. This legislation will make that task more difficult.

The average retirement is comprised of Social Security, personal savings and oftentimes a work-sponsored retirement program like a 401(k). A private or public pension is a wonderful bonus. Adding annuities to the roster of investment choices in a 401(k) is not likely to help most Americans reach their retirement goals.

Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 —, a “fee-only” registered investment advisory firm located near Sandestin.