The U.S. retirement system is far too complex

In some instances, there are as many as five regulators overseeing 401(k) plans.

For the past decade, the financial services industry has engaged in a heated debate over the appropriate market conduct standard for investment advice. The debate is ratcheted up a notch in the retirement arena, where the Department of Labor joins multiple other agencies with overlapping authority.

The Comptroller General of the Government Accountability Office, Gene Dodaro, reinforced that point recently, in a much broader context, in testimony before the Senate Special Committee on Aging, in which he repeated the GAO’s call for comprehensive reform of the national retirement system.

In 2016, the GAO convened a panel of 15 retirement experts, and all agreed that there was a need for a comprehensive review.

During that discussion, several panelists said the current system was needlessly complicated. The panel also discussed how the private-sector retirement system poses financial and litigation risk for employers, “especially with respect to investment decisions, fiduciary duty and fees,” Mr. Dodaro said.

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Advisers could offer plenty of examples, too. For one, a financial adviser providing a single investment recommendation for a client’s retirement portfolio is subject to oversight by at least three regulators: the DOL, the Securities and Exchange Commission and the Internal Revenue Service. There are two more — state insurance regulators and the Financial Industry Regulatory Authority Inc. — if the product happens to be a variable annuity.

Since the enactment of the Employee Retirement Income Security Act in 1974, three independent federal commissions have been established by either Congress or the president to study retirement-related issues and make policy recommendations. Unfortunately, policymakers have ignored many of them.

For example, the first retirement-related commission, appointed in 1979 — only five years after ERISA became law — identified many of the same issues we face today. That panel’s recommendations included the creation of a universal pension system providing portable benefits as a supplement to Social Security, and applying more consistent tax treatment to retirement savings options.

In a 2017 report, the GAO suggested a limited number of policy goals as a starting point for a new commission. Those included consideration of some of the same issues addressed nearly 40 years ago, such as the aforementioned universal retirement savings vehicle, and reducing the complexity and confusion created for plan participants and plan sponsors who must navigate the labyrinth of retirement savings program structures. The last point touches on the current debate over the inconsistent application of the fiduciary standard to those who provide advice to retirement plans and participants.

Although the GAO report did not reference the important role of the SEC in the realm of retirement regulation, the agency (as well as state regulators with jurisdiction over investment advice) should participate in any new commission, along with representatives of other agencies, employers, labor unions, academics and the financial services industry.

To advance the discussion, the commission would need to address big ideas. In 2008, the Bush administration’s Treasury Department proposed a radical new blueprint for modernizing the regulatory structure by consolidating financial regulators into three primary agencies, including a business conduct regulator, to oversee all types of firms providing financial advice and products.

Unfortunately, the blueprint was released just before the financial crisis of 2009, and Congress lost its appetite for starting from a blank sheet. Instead, under the Dodd-Frank reform law, federal agencies were called upon to adopt some 400 new rules, some of which were never completed. Whether the content of the 2008 Treasury blueprint was on the mark or not, the initiative’s concept of comprehensive reform is what is needed now to move us away from the current morass.

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We have seen glimmers of bipartisanship when it comes to retirement saving issues in the current divided Congress. However, even if Congress is unable to pass legislation creating the commission, the president has the authority to issue an executive order. President Ronald Reagan, for example, created a special working group to examine problems associated with the October 1987 stock market crash.

To make all parts of the retirement system work seamlessly, it is important to look not only at federal and state legislative efforts to encourage retirement savings, or reforms to “fix” investment-advice rules, but to think strategically about what is needed to provide viable, comprehensive and efficient long-term solutions. An independent commission tasked with improving the overall retirement system offers perhaps the best opportunity to have that happen.

Blaine F. Aikin is executive chairman of fi360 Inc.