Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Aron Szapiro. He is our director of policy research. He recently wrote a paper on the ways that government can help incentivize more investors to be out in the market. We're going to talk to him about it today.
Aron, thanks for joining me.
Aron Szapiro: Thanks so much for having me.
Glaser: Let's start by looking at this paper. It really takes a bigger view of what government can do to encourage investing, not just looking at individual rules but the tools. Why do you think it's important to take this broader view?
Szapiro: I get a lot of questions that are aimed at specific regulations, bodies of regulations, specific regulators. What I wanted to do is take a big step back and look at what tools does the government really have to help investors and try to evaluate how well those tools have worked so that we are not just looking narrowly and we are able to really see the forest through the trees. That was the idea behind this paper.
What I did was I zeroed it on three tools: tax incentives, which the government uses to encourage people to save for retirement and other goals like college education; disclosure, which the government hopes will help people make wise decisions about investing; and of course regulating advice, which has been deployed somewhat unevenly.
Glaser: Let's talk about tax incentives first. Obviously, some big changes to the tax code just rolled out. How successful has this been in broadening the base of investing?
Szapiro: I don't think there's anything in the recent tax reform that's really going to help create more retirement plans. I think we just got to be honest about the limits of tax incentives. We've been in a stasis for a long time where about 60% of people have access to plans at work and about 50% of people participate in them. That's not a very good result. The reason is that the tax incentive mechanism just has hard limits. We actually expanded the tax incentives in 2001 and 2003 with the EGTRRA legislation. We didn't see a big increase in new plan formation, and I think it's pretty clear why.
If you are an employer and you are struggling just to pay the bills, the tax incentive is just not that strong. I'd also note, there's an interesting little quirk with the tax reform which is that it tries to do a textbook thing, which is have lower marginal rates with fewer loopholes, and that's great. But if you are relying on tax incentives on those loopholes to execute a public policy strategy, in this case, getting people to save for retirement, those incentives just got less valuable because the marginal rates are lower. We need to think beyond that. Automatic IRAs, multiple employer plans, other tools to get more people saving for retirement. We've got the gas pedal all the way down on tax incentives, and the car is not going any faster.
Glaser: Let's talk about disclosure. It's easy to kind of throw out these 10 pages that you get maybe when you are applying for a mortgage. Is there really scope here for disclosure to make a bigger difference in investors' lives?
Szapiro: I think there is, but I think regulators misunderstand the audience for disclosure. Disclosure to me is typically not going to have a big impact on an individual. We have lots of public information campaigns and they are all premised on the idea that people will take that information and act on it. That probably works a little better when you are telling people, hey, don't start a fire in the dry woods. People will sort of be receptive to that message and they will understand it. When you are trying to use disclosure to subtly move people into making the best investment decision for them, you are relying on them to pour through those 10, 20, 100 pages of disclosure. Think about all the prospectuses you have for all the investment lineups in, say, a 401(k).
Disclosure does work very well when it's got a standard taxonomy and third parties can use it to contextualize all that information for ordinary investors. The reason is, the private sector is just better at doing that and they can revisit the way they present information much more quickly. The government maybe revisits a form every 10 years, and look, they should make things as understandable as possible. But private sector companies that specialize in interpreting complex information, they get pretty much instant feedback from their users: this makes sense, this doesn't, I'm following you here. I think that disclosure is a very powerful tool, but the government really needs to understand that it works best when they have private sector partners helping to interpret it.
Glaser: Let's talk about regulation then. This is a very hot topic right now, the SEC's new rules. How much can regulation impact?
Szapiro: I want to use the term regulation just specifically to talk about regulation of advice. I think regulation is a nefarious term; people use it to mean laws and rules and whatever else. Just zeroing in on regulation of advice, the bottom line for me here is that this is a tool that has been deployed extremely unevenly. What we have is, a historically divergent sense of regulations for broker-dealers and registered investment advisors, and converging business models. The end result has been mass confusion among investors and I would also say professionals as well.
What exactly is the difference between an advisor with an "E"'s responsibility and an advisor with an "O"'s responsibility. Not to mention that when you are getting advice inside your 401(k) plan, there is a whole other standard of fiduciary advice. This has been deployed very unevenly. This is the thing the SEC was quite aware of with the new rules, the thing they tried to solve. I think that there is probably some ways they can improve that; they did not go for a true uniform standard. We are still evaluating the SEC rule of course. I think we've got 90 days to do it, and I think we'll have lots of sort of helpful suggestions and feedback, as I'm sure many in industry will. It is an attempt to try to create more of a uniform standard so that investors understand what is the standard of conduct that their advisor is being held to and what questions should they be asking.
Glaser: Aron, Thanks for sharing your research today.
Szapiro: Thanks so much for having me.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.