The Devil's In The Details

Note here actually that the ICI has a point, and it's one I don't disagree with in principle as a voting libertarian. But the problem actually isn't just the idea of the government saying "thou shalt index"—I don't really have a problem with that. The problem with the bill is the peculiar language they use to define what kind of index fund a plan sponsor needs to offer if it wants to take advantage of safe harbor provisions. The definition from the bill:

"102: (a) '(6) ‘(A) which is a passively managed investment with a portfolio of securities that is designed to be representative of the United States investable equity market (including representation of small, mid, and large cap stocks) or the United States investment grade bond market (including Treasury, agency, non-agency, and corporate issues), or a combination thereof …"

Now I totally see how they ended up with this, as it's clearly designed not to favor one particular index. But the irony (as the ICI correctly points out) is that the one index fund most plans already offer—the S&P 500—fails the test. Good news for total market funds I suppose, but still curious.

Perhaps even more interesting, burred in the bill is this little gem requiring a plan to disclose for every investment option:

"'111: '(b) '(2) '(B) ‘(v) whether the investment option is actively managed or passively managed in relation to an index and the difference between active management and passive management …"

In other words, if you put a large-cap growth fund in there along side your Vanguard S&P 500 fund, you're going to have to point out that they are different animals, and, shockingly, how.

That's my kind of disclosure.

Shining A Brighter Light

But here's the thing—I think it's fairly clear why we have the ICI on one side of this bill, and someone like Mercer Bullard from Fund Democracy on the other. (Mercer's 40+ page letter of support for the bill is some of the best advocacy I've read on the subject.)

Taken as a whole, the bill, imperfect or not, shines a very bright spotlight on the fee-burial that's taken place in the 401(k) industry for far too long.

While most large enterprises have made wise choices and provide substantial disclosure to employees, many midsize businesses simply signed up with a single fund provider because it was easy and "free."

Add to that, the legislation would provide additional coal into the firebox of the indexing freight train, and I believe that's an unadulterated good. It's not perfect—legislation never is—but the ICI's got their head in the sand on this one.

P.S.: The Bill does have other provisions as well, but they seem less controversial—primarily making it a no-no to have "independent investment advisors" in a 401(k) plan who get compensated differentially based on which investments a given employee chooses under the umbrella of a plan.

Nobody seems to be objecting to strenuously too those provisions.

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