Borzi & Graff – Two Different Views on “Choice”

Last week I attended NAGDCA (National Association of Government Defined Contribution Administrators) and had the pleasure of listening to the head of the EBSA (Employee Benefit Security Administration), and Assistant Secretary of the Department of Labor, Phyllis Borzi and asking her a few questions. One thing she said (as reported by Pensions & Investments) was:

Ms. Borzi discussed the Labor Department’s work on defined contribution plans. “What I’m all about is giving participants enough tools to make the best choices.”

She added: “I think the smaller the number of investment options, the better for plan participants.”

Contrast this with NTSAA/ASPPA’s head, Brian Graff who states in the 403(b) Advisor Magazine the following:

“The result of this kind of consolidation,” says Graff, “is not better products for teachers. The real consequence is that teachers have fewer choices, including the right to work with the very advisors they’ve grown to trust.”

and,

“NTSAA stands for the proposition that teachers should be able to choose the investment option that best suits their needs, “ Graff asserts in the article, “and the freedom to work with the advisor that they trust. The right advisors can help teachers be informed consumers and help them select from among their array of products the ones best suited to their clients’ unique needs.”

Keep in mind that ASPPA’s own retirement plan is not structured in such a way to provide for “choice” – they have a single vendor plan. The argument that NTSAA/ASPPA is making is that retirement plan participants in non-ERISA 403(b) plans should NOT benefit from the economies of scale that could reduce costs and provide for better retirement outcomes.

In my opinion, Advisors who are true fiduciaries will always find a way to work with their clients – they aren’t limited by the ability to sell one product or another – in fact, what makes them a great Advisor is that they are not selling products, but providing a service (that of financial advice).

Now, here is the odd thing – Mr. Graff is quoted in a Wall Street Journal piece stating “The IRA market is like the Wild West,” said Brian Graff, chief executive of the American Society of Pension Professionals and Actuaries, a trade group. “Things go on that would make people wince.” He is saying this as it relates to the DOL’s proposal to make fiduciaries of those who work with IRA’s. The irony is that the 403(b) is the original Wild, Wild West and operates much like the IRA market (except likely worse) – yet Mr. Graff does not support the same proposals for 403(b) as he does for IRA, curious.

Of course, not everyone is happy with Borzi’s position (which is the DOL position) as a recent WSJ editorial made clear “The Borzi Savings Bomb” and which appears to support the NTSAA/ASPPA “Choice” argument when it states:

“When it comes to new regulation, the Obama Administration has impeccable timing. Just as Americans are worrying about how much is left in their 401(k)s, the Department of Labor has decided it wants to reduce the plethora of options that we have for retirement accounts.”

The industry has been in uproar over Borzi’s “Savings Timebomb” of actually requiring those who purport to deliver advice actually put the best interest of those individuals they serve, first. Seems like an indefensible position to me – I wonder what a Senator or Congressman would say when asked the question “Would you want the financial advisor to your mother to be required to put her best interest first?” It’s hard to believe any would say “No”, and if they did the voters should think twice about re-election. Of course, this is the exact position being taken by most Senators and Congressmen.

It seems to me that the integrity of the US financial system was put in jeopardy by Wall Street banks who didn’t have a fiduciary duty to their clients…yet, we haven’t learned our lesson. I for one support Borzi (though I would make a few modifications to the Fiduciary definition – just minor tweaks).

Whose vision will win out in the 403(b) market? My hope is that the Borzi vision wins. I support her efforts in bringing additional transparency to retirement plans.

It’s been almost two months since I challenged NTSAA/ASPPA/Brian Graff to answer some easy questions publicly (see 5 Questions Brian Graff Should Answer Publicly – July 29th, 2011) and there has been no response, only censorship (see Censorship, False “Choice”).

I’ve spoken to numerous individuals who are members of ASPPA who are bewildered by the position taken – I hope they make their voice heard, I have.

Scott Dauenhauer, CFP, MSFP, AIF

Kindle

7 thoughts on “Borzi & Graff – Two Different Views on “Choice””

  1. Very interesting, Scott, thanks. Hard not to draw tough conclusions about the motives of some in the “fiduciary industry” of late.

  2. Scott, all the research I’ve read shows that giving participants too many choices leads to very significant underperformance. At first this seemed counter-intuitive to me, but the University research shows it again and again. I subscribe to the WSJ, but find some of their editorial positions to be baffling. The particular WSJ editorial you cite has (IMHO) no basis in fact, its just their opinion. Look at the research and Borzi is correct.

  3. Graff is emphasizing the need for wide-open choices among VENDORS. Borzi is talking about limiting the number of INVESTMENT FUND choices a participant has WITHIN a given vendor’s plan. There is not actually any disagreement here, because two very different issues are being discussed.

    I have the same take on the research that Kaplan does. Research both about consumer choice in general (say, in the supermarket) and about choices of investment funds within defined contribution plans specifically, supports Borzi’s conclusions. Two many choices just confuse people, and it leads them to choose more or less randomly, or to not choose at all (taking the default option, whatever that may mean in a given case), rather than trying to understand all their choices and rationally making such a complex decision.

    This research is relevant to Graff’s point, too. There is an extra wrinkle, though. The research on choice suggests that for someone entering a 403(b) plan with no idea what vendor or even what kind of vendor to use, having a choice of hundreds or even dozens is going to be difficult, and may lead to the prospective participant deciding not to enroll at all, or to choose randomly and badly. To me, this suggests that some kind of guidance be offered, not that choices be limited. I agree with Graff that choices should be open, in the sense that all legitimate vendors should be eligible to participate. If a plan participant wants to continue to work with his or her trusted financial institution or specific advisor, that should be allowable, unless there are overwhelming administrative reasons why choice has to be limited. In today’s data processing world, limiting choice should not be necessary.

    1. Chuck,

      I appreciate the comment – but they are one and the same – except that the person who has 40 investment choices in their 401(k) is still better off than the person in a massive multi-vendor 403(b). The number of choices is overwhelming and leads to them NOT wanting to enroll. This environment ALSO leads to substantially higher costs overall and a sales environment driven more by commissions than fiduciary responsibility.

      Allowing any vendor needlessly complicates the plan, keeps it a “retail” priced plan, leads to lower participation rates and confuses everyone involved. There is no reason there can’t be a single vendor or a “bid” small choice multivendor plan with fiduciary duty and also allowing the participant to use any advisor who agrees to act as a fiduciary. There are almost no consumer protections in these plans.

      Graff and Borzi ARE talking to the same point – one believes two many choices leads to poor outcomes – the other that too many choices leads to better outcomes – both can’t be right.

      Scott

Leave a Reply