Into the WildJune 11, 2008
In his book The Great Risk Shift, Jacob Hacker describes the transformation of American society from one in which government and private businesses protect citizens and employees from many risks to one with a much more libertarian ethos, every man for himself. Hacker argues that we have moved too far towards this view, and that civil society would be better off with a return to more risk sharing among citizens, businesses and the government — particularly in the areas of health care and pensions.
Hacker is more enamored with top-down federal government solutions than I am, but much of what he says rings true. Americans, more than at any other time since the Great Depression, are asked to shoulder the burden of providing for their income in retirement. They face this task by confronting a bewildering array of investment options, risks that are difficult to gauge, and costs (fees) that even sophisticated investors would have difficulty explaining. And these products are all-too-often marketed by individuals that act as faux-fiduciaries, easily convincing otherwise-intelligent people that they have their best interests in mind when that is not always the case.
It is not the government’s responsibility in these situations to make people’s decisions for them. But it is their responsibility to ensure that individuals of middling financial sophistication at least have information presented them in a way that allows them to make a reasonable choice for themselves. The Federal Trade Commission demands a high level of product and price transparency when we enter the grocery store, but the same cannot be said for the market for financial services. Today’s employee and tomorrow’s retiree heads into this wild marketplace with little confidence that what they see is what they get. And they have good reason to feel that way.
Federal disclosure regulation for insurance, mutual funds, mortgages, annuities, and even some markets for basic assets such as bonds are so far out of date it almost hard to overstate their impotence. This lack of transparency has two important effects, some people are sold products and services they don’t need or worse yet do them financial harm while others do not enter markets that might be beneficial to them. The first part of this problem has garnered some modicum of attention in media, but the second has not. Lack of transparency and its associated confusion causes some people who should own stock mutual funds not to own them, some who should have a life annuity as a part of their retirement income plan not to have it. This is a powerful, but hidden, cost of this problem.
People of good will can disagree about how much risk should be born by the government and how much of life’s risks and rewards should be left to the individual, but regardless your political views it is absolutely essential that to the extent we vest individuals with these important decisions we compel those who seek to affect their choices to provide them with clear and correct information — the kind that can be read by normal human beings and not just attorneys. Transparency in these marketplaces needs to be a priority of whichever administration takes office next January.