Industry groups slam Labor Dept. over proposed 401(k) advice rules

Groups representing the mutual-fund and life-insurance industries fired off letters today voicing criticism of a provision in the Labor Department’s proposed rules on advisers’ work with retirement plans that they say would favor index funds over actively managed funds.
In a joint letter, the Investment Company Institute and the American Council of Life Insurers criticized the provision that would keep the historical performance of a fund from being a factor when advisers are using computer models to select investments for retirement plans.
The two groups argued that an investment’s past performance is already a factor when plan fiduciaries select an investment menu for a defined-contribution plan. Further, they said, fiduciaries regularly replace underperforming funds in their plans with better performers.
The groups also claim the Labor Department is stepping outside the bounds of Employee Retirement Income Security Act of 1974 by claiming the authority to define what investments are appropriate for plans, rather than leaving those decisions to the plan fiduciary.
“We think it sets a dangerous precedent for the government to usurp the role of fiduciaries by placing its thumb on the scale for one kind of investment — index funds,” the groups wrote. “Our organizations support that computer models take fees and expenses into account, but believe that investments should not be evaluated solely based on fees.”
The Labor Department’s proposed rules would prohibit advisers who work with retirement plans — and their affiliates — from receiving additional pay as a result of plan sponsors purchasing their recommended investments. They would, however, continue to allow the use of independent computer modeling to provide advice.
The language in the department rule proposal indicates that the computer models used to compare investment options could weigh factors like fees and expenses. But the two groups fear the provision also suggests that differences in historical performance may be less likely to count as a factor. In that case, the computer models would likely favor passive investments, such like index funds, over actively managed funds.
The provision had also raised the ire of the American Society of Pension Professionals and Actuaries, which said the Labor Department shouldn’t endorse any particular investment theory or practice. ASPPA, along with the Council of Independent 401(k) Recordkeepers and the National Association of Independent Retirement Plan Advisors, submitted their comment letter to the Department of Labor today.
“To suggest that the DOL will be able to set parameters in regard to investment theory goes beyond their expertise, and it would stifle innovation in that area — that’s our members’ expertise,” said Craig Hoffman, general counsel for ASPPA.
Today is the deadline for comments on the proposed advice regulations.