Automatic IRAs 'Highly Probable'

If this is enacted, I would expect to see employers move away from 401(k) plans, cancel plans they have, and embrace the IRA, which is less burdensome and less costly.

Second, the government is offering to match the employee contributions to the automatic IRAs in some cases and at certain levels, say 50 percent, rather than the employer. Again, why would an employer not simply let the government fund the match?

Third, there is a cost issue. The proposal calls for a very simple disclosure of fees in all plans. The objective is to move money out of the industry’s coffers and into the participants’ pockets. This suggests that participants will go looking for the lowest costs. We have been trying to do this for years within 401(k) plans, but the 401(k) structure is simply too complex.

Fourth, there will be a requirement of a low-cost option, such as an index fund. The implication is that there is no need to manage for returns. People can choose on cost, so why focus on alpha. This could eliminate the incentive to compete on performance.

When you put all these things together, this is about introducing a change that will really suck the wind out of 401(k) growth. I’m not saying that everyone will drop their 401(k) plans, but certainly companies looking to save money may do so.

This is great news for firms, like Vanguard, with strong retail-distribution operations, and low-cost products vs. those with a more advisor-oriented structure.

And what role could advisors have?

The recent discussions in Congress indicate that advisors that receive compensation from investment firms will not be permitted to advise these new vehicles. Financial advisors could get involved with this, though. And I’d say the best job for an advisor is to be able to evaluate the plans they now serve and advise these clients about whether or not they can move into this new IRA space with its new structure.