Hawks ?should love ?cheaper 401(k)s

I wanted to spend a bit of time on the U.S. Labor Department’s proposal to place a fiduciary obligation on those who manage or provide investment advice on retirement plans. And I want to explain why fiscal conservatives should rally around this idea as a way to hold down taxes.

The context is a new rule in the United Kingdom that caps retirement-plan fees. Starting in April, annual charges on British workplace pension plans with automatic enrollment were capped at 0.75 percent.

The proposed U.S. fiduciary rules are not an explicit fee cap, but they would require that “any fees and costs paid by the client be reasonable for the services provided.” It is probable that the “best interests of investors” will mean that fees will be reduced from today’s often-excessive levels.

In the U.K., the pension-fund fee-cap proposal was the brainchild of the right-wing Tories. Why? The conservative party has figured out that shortfalls in retirement savings ultimately will be picked up by the government. Pensioners – who like their U.S. counterparts vote in greater numbers than the young – won’t tolerate an impoverished retirement.

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And that means tax increases.

I wish that U.S. fiscal conservatives understood this logic. As my Bloomberg View colleague Matt Levine noted recently, there’s about “$1.7 trillion in individual retirement accounts invested in funds that pay brokers to recommend them. The people who invest in those funds could improve their performance by about 1 percentage point a year by switching to other funds that don’t pay brokers.”

That means there is $17 billion a year – compounded – that won’t be in Americans’ collective retirement accounts 30 years from now. Over time, that adds up to trillions of dollars in increased future government spending – and higher taxes.

The Brits understand this. We should take a page from their conservatives, and lower our future tax burden. •

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