Arbitrary Financial Protocols and Rules Favoring Wall Street Over You
Abstract: Post discusses a recent WSJ article that shows how automatic disbursement protocols can lead to older retirees taking on excess financial risk. Post also discusses previous posts in this blog where Wall Street firms adopted rules and protocols that favored the firm and hurt the investor.
A June 7, 2025 WSJ article on a simple 401(k) disbursement shows how difficult it is to get and act on accurate information about retirement savings.
The article was written by a retired WSJ editor, a fairly sophisticated investor.
The article pertains to the News Corp 401(k) plan the retirement plan for a highly reputable firm.
The article pertains to a plan administered by Fidelity, a top financial firm.
The author (the retiree) asked that the 401(k) plan disbursements be made pro-rata. Pro-rata disbursements are disbursements, which are proportional to the initial balance.
Rather than making pro-rata disbursements, the fund made hierarchal disbursements starting from the least risky fund. According to the article, Fidelity reps were initially unaware of the actual definition of pro-rata. Eventually, it became clear that the disbursements were made from the least risky funds because this was the policy of the 401(k) plan.
There are several problems with this situation.
First, the fund did not disclose its arbitrary disbursement rule.
Second, a disbursement rule that prioritizes automatic disbursements from the least risky funds first is the absolute worse disbursement rules for retirees who are aging and who need to shift savings to less risky funds as their future life expectancy declines. Many 401(k) plans use lifecycle funds to automatically transfer savings to less risky funds and reduce risk as people age and their appetite for risk declines. The disbursement rule used by the News Corp fund actually leads to increased and excessive risk for older retirees who are dependent on disbursements to fund consumption.
Third, the market is volatile. Things could really go wrong if you disburse all funds from the low risk fund the day before a large market downturn. Whether outcomes from a hierarchal disbursement strategy are good or bad will be affected by the timing of market events. The market rebounded quickly on the last downturn but may not do so next time.
Wall street firm automatic rules are often more effective at protecting the interests of the firm than they are the investor, although the gains to the firm in this case appear to be relatively small.
The use of rules and protocols which favor wall street firms over savers is especially problematic because of tax incentives which encourage retirement saving over retirement and the Secure Act 2.0 provision, which mandates automatic contributions to retirement funds unless the worker opts out of the contributions. If the government is going to put its hands on the scales to encourage savings over say debt reduction the government should establish rules that lower the likelihood of bad outcomes.
Wall Street protocols often favor investment firms over savers, as evidenced by several other posts in this blog.
The protocols for fixed income investors encourage automatic rollovers of CDs at interest rates substantially lower than the market rate, encourage continued investments in 60/40 stock/bond portfolios when interest rates are near zero, and rule out the use of series I Savings bonds inside retirement accounts.
Workers who use 401(k) plans for retirement often lose substantial wealth because of high fees. Often rules governing the disclosure of fees and rules governing 401(k) rollovers do not minimize the impact of 401(k) fees. For example, the rule requiring automatic contributions to 401(k) plan rule, unless workers opt out is not coupled with a rule requiring automatic rollover of 401(k) funds from plans with high fees to low-fee IRAs when employees depart to a new firm. The result of a decision to not roll over funds from high-fee IRAs is often a substantial loss of retirement income.
As noted here, be careful about automatic disbursement protocols.