Now that the Department of Labor is scrapping a rule proposal that would have allowed brokers affiliated with financial-services firms to provide advice to 401(k) participants, Congress will move forward with legislation that would require that such advice be given by independent advisers, according to a key congressman.
The rule proposal was one of several Labor regulations put forth by the Bush administration during its final days.
Labor Secretary Hilda Solis “will work with Congress to find ways to further develop the existing market of qualified independent advice,” said Rep. Robert Andrews, D-N.J., chairman of the House Education and Labor Committee's Health, Employment, Labor and Pensions Subcommittee.
His comments came last week after Assistant Labor Secretary Phyllis Borzi, head of the Employee Benefits Security Administration, told a conference of 401(k) administrators that new regulations will be issued for investment advice to participants in the $2.3 trillion 401(k) market.
She gave no timetable for issuing a new proposal.
In July, the House Education and Labor Committee approved the 401(k) Fair Disclosure and Pension Security Act of 2009.
The bill, which was sponsored by Mr. Andrews and committee Chairman George Miller, D-Calif., prohibits advisers affiliated with financial services firms from offering advice if their compensation rises and falls with specific product recommendations.
CHANGING THE PPA
The Pension Protection Act of 2006 would have to be changed in order for the Labor Department to issue the kind of investment advice rules Congress would support, Mr. Andrews indicated.
“It will take statutory and regulatory change to create the goal of qualified independent investment advice affordable to every investor,” he said.
It's a legislative problem, said Mercer Bullard, president and founder of the mutual fund shareholder advocacy organization Fund Democracy Inc. “Without repealing the relevant provisions of the PPA, the DOL is going to be constrained to allow some degree of conflicted advice,” he said.
Although the PPA encouraged employers to hire outside investment advisers to work with their employees, the Labor Department didn't issue a final ruling on who, technically, could provide such counsel to plan participants until January, shortly before President Obama took office.
In its ruling, the Labor Department permitted brokers and reps affiliated with financial services providers to provide 401(k) participants with investment advice. Labor Department officials noted at the time that this would give employers access to a larger field of prospective investment advisers.
The actual implementation of this ruling, however, has been delayed twice since then, and has been a frequent target of criticism from members of the new administration.
“The PPA essentially codified conflicted advice to a limited extent,” Mr. Bullard said.
Most likely, Congress and the Labor Department will reach a compromise that will fall between the Bush regulation and the Miller-Andrews bill, said Jason Roberts, a partner with the Reish & Reicher law firm who specializes in em-ployee benefits and securities regulation.
“[Ms.] Borzi will use the Rob Andrews bill as a road map for regulation,” he said.
Predictably, the mutual fund and brokerage industries favored the Bush regulation.
“ICI supports providing more access to advice programs to assist investors in managing their accounts,” Investment Company Institute spokeswoman Rachel McTague wrote in an e-mail. “We agree with Congress' judgment in the Pension Protection Act that the law should address this need while ensuring certain protections for participants, including a strict fiduciary duty and robust disclosures,” she wrote.
The Bush regulation “would expand availability of advice to 401(k) plans,” Travis Larson, a spokes-man for the Securities Industry and Financial Market Association, said in an e-mail.
Making it harder for advisers affiliated with large financial services companies to provide advice will open the market to independent advisers, said Scott Revare, chief executive of Smart401k LLC, a registered investment advisory firm that manages $1.2 billion and provides 401(k) participant advice.
Many 401(k) plan providers offer a full range of services, including providing fund options, assisting companies in selecting funds in the plan, and participant education. “While in some cases that can be very convenient for the employer, it can also limit their choice,” Mr. Revare said.
The DOL decision “will force the availability of more choices for different vendors to provide different services within the plan,” he said.
Craig Freedman, managing di-rector of 401(k) Certified Independent Investment Advisors LLC, argues that educating plan sponsors about the availability of independent advice will help boost that market.
“The plan sponsors don't know that they can even get [independent advice],” he said. “The people who they are relying on to get answers as to who can provide investment advice are the people that are now being prohibited from providing it.”
Mr. Freedman recently left Securities America Inc. and to set up his registered investment advisory firm, which does not yet manage any assets. “Recognizing the changing times, the RIA [provides] the only ability for us to provide investment advice and the protection under the PPA to plan sponsors from liability for the advice,” he said.
E-mail Sara Hansard at [email protected].
