John A. Turner

Abstract

A growing literature has documented the low quality of financial advice that many people receive because of conflicts of interest that many financial advisers have. The Council of Economic Advisers has found that bad advice from financial advisers concerning rollovers from 401(k) plans to IRAs costs U.S. workers $17 billion a year. When a similar situation occurred in the United Kingdom, the situation was termed the “pension mis-selling scandal.” British financial market regulators levied billions of pounds in fines on financial service providers to compensate pension participants for the bad advice they had received. This paper argues that a pension mis-selling scandal is occurring in the United States. Despite the fiduciary duty of financial advisers, and the task of the SEC to enforce that fiduciary responsibility, the SEC has taken no action to protect pension participants relating to advice to roll funds over from low-fee 401(k) plans to IRAs, which generally charge higher fees. Even in the case of advice to roll funds over from the extremely low-fee Thrift Savings Plan for federal government workers (which charges less than 3 basis points), the SEC has taken no action. This paper compares the pension mis-selling scandal in the United Kingdom to the situation in the United States concerning pension rollovers to IRAs. The paper then compares the regulatory response of financial market regulators in the United Kingdom to that of the SEC. The main findings of this paper are the apparent view of the SEC that fees in the context of pension rollovers are not an important issue, and the related finding that there has been a lack of action by the SEC concerning pension mis-selling in the United States. These findings are both consistent with the hypothesis of regulatory capture of the SEC. Because the fiduciary standard of the SEC is weak, extending it to broker-dealers will have limited effect.

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