401(k) advice faces critical test in House

In the next two weeks, members of Congress are expected to decide on the fate of legislation that would have severe implications for every firm that advised 401(k) plan participants, or planned to.

The House Ways and Means Committee is considering whether to kill the piece of the 401(k) Fair Disclosure and Pension Security Act of 2009 which would allow only independent advisers to provide advice to 401(k) plan participants, according to people familiar with the situation.

The provision was included in the original bill, which came out of the Education and Labor Committee. Ways and Means members expect to meet with their counterparts before deciding on the issue by Dec. 12, those aware of the situation said.

The Ways and Means Committee also is discussing dropping part of the bill that would require 401(k) plan administrators and providers to keep at least one low-cost index mutual fund in the plans. The bill would still include mandates around 401(k) fee disclosure.

A blow for RIAs

The move would be a huge blow for independent registered investment advisers hoping that the legislation would allow them to dominate the 401(k) advice field, said Jason C. Roberts, a partner at Reish & Reicher.

But it would be a win for all other financial advisers as well as for 401(k) plan providers and sponsors because it would allow them to continue to provide advice under the Department of Labor’s 2001 SunAmerica advisory opinion. That opinion permits providers to offer advice through an affiliate using an independently developed computer model.

“This would be much better for investment advisers and for their clients,” said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council. “The legislative language in the Education and Labor bill would have put into question every advice model out there.”

Aaron Albright, a spokesman for the House Education and Labor Committee, said no decisions have been made. Lauren Bloomberg, a Ways and Means Committee spokeswoman, didn’t return calls seeking comment by press time.

During a Ways and Means hearing Oct. 2, members of Congress and industry officials slammed the advice portion of the bill for being too restrictive.

“Millions of people will lose access to investment advice if the Education [and] Labor bill passes,” said Rep. Earl Pomeroy, D-N.D.

But even if Congress kills the advice portion of the bill, there will still be new Labor Department regulations on the issue.

As previously reported (InvestmentNews, Nov. 23), the Labor Department has scrapped a long-delayed Bush-era 401(k) advice rule and is working on a more restrictive revision that it expects to release for comment in the next few weeks.

While the regulations are expected to be more restrictive than the original rule, which would have allowed more advisers to work directly with retirement plan participants, they are not likely to go as far as what Congress’ bill was going to do, experts said.

The Labor Department regulation isn’t expected to repeal the opinion involving SunAmerica Retirement Markets Inc.

“The Department of Labor’s current project is to interpret the Pension Protection Act [of 2006],” said James M. Delaplane Jr., a partner at Davis & Harman LLP.

Specifically, the department will address how far the “fee-leveling” condition should go with regard to whether an adviser can provide advice to retirement plan participants if that advice could affect the compensation of the adviser’s employer or an affiliate of the employer.

Guidance welcome

Industry observers say that instead of legislation on advice, they would prefer guidance from the Labor Department, where they feel that Phyllis C. Borzi, assistant secretary of labor for employee benefit security, and her staff understand the issues very well.

“The folks in charge of the DOL understand the industry better than Congress,” said Greg Ash, head of the Employee Retirement Income Security Act litigation group at Spencer Fane Britt & Browne LLP. “The end product is likely to be better for participants and more easily implemented for the industry itself.”

By removing the advice component from its proposed legislation, Congress will be able to pass the bill, which also includes mandates around 401(k) fee disclosure, more quickly, experts said.

“The advice part is where there was the most opposition,” Mr. Roberts said.

But even if the bill moves faster through Congress without the advice portion, it’s unlikely that anything will be signed into law before early next year, experts said.

“It’s fairly clear that legislation radically changing the rules for investment advice isn’t going to reach the president’s office this Congress,” Mr. Delaplane said.

“There isn’t the appetite to take it up.”

E-mail Jessica Toonkel Marquez at [email protected].