Controversy Brews over Investment Advice Regs

The DoL recently gave the public until last week to comment on its final rules for providing investment advice to participants.

While one industry trade group enthusiastically backed the DoL’s advice final rule issued in January (see “DoL Finalizes Investment Advice Rule’), other commentators blasted the regulation for not adequately protecting those in retirement plans from conflicted investment advice providers.

At the request of the White House (see “White House Executive Order Snares Fee Disclosure, Advice Regs’), the DoL put off implementation of the regulation until May 22 and gave members of the public until March 6 to submit comments about the rule. The rule permits the providing of advice to 401(k) participants and IRA investors under certain circumstances (see “DoL Suggests Advice Rule Delay’).

For some advisers, it could help business by underscoring the need for independent advice, but the regulations also add new regulations for many advisers. For instance, the regulations stipulate that advisers must be fiduciary advisers (as defined by the Pension Protection Act) to deliver IRA advice (see “DoL Rules Gives More Advice Options’) Some advisers and others see the rules as allowing for advice that is conflicted and not good for the participant.

Retirement plan adviser Stace Hilbrant, managing director of 401(k) Advisors in Wilmette, Illinois, said the advice regulations do little to help the average American worker, wrote: “The recent Bush Administration provisions that allow vendor/investment manager personnel to provide “investment advice’ to participants investing in their fund offerings is very poor legislation, poorly researched, and stands to destroy years of progress that has been made in the financial services industry in bringing advice/guidance to the average American worker.’

He noted that vendors have a vested interest in promoting their own funds, asset allocation products, and services. “Blatant financial conflicts of interest may be muted, understated or undisclosed,’ he wrote. “No amount of industry regulation will be able to eliminate the many different types of “conflicts of interest’ that these arrangements contain and no rules or governing body will be able to assure compliance with any potential stop gap measures designed to “police’ vendor personnel from promoting their own interests through “deemed object/independent” advice arrangements.”

Other Letters

Other comment letters posted on the DoL Web site included a letter from the American Society of Pension Professionals & Actuaries (ASPPA) and the Council of Independent 401(k) Recordkeepers (CIKR), which showed some hesitation about the regulation. “In particular, we have concerns that working Americans should not have their retirement assets exposed to conflicted investment advice where the adviser has a financial interest in what investment choices to recommend, regardless of what disclosure is being provided,’ the letter read. “Although the Final Regulation provides that plan participants can always hire an independent investment adviser on their own, as a practical matter, most plan participants would be unlikely to take this additional step and would thus be a ‘captive’ audience. Even with the fiduciary adviser being subject to fee-leveling in the Class Exemption, there is no protection to ensure that investments for which the adviser’s employer has a financial interest are not favored over other plan investment options.”

Four Congressional lawmakers, including U.S. Representative George Miller (D-California) and U.S. Senator Edward Kennedy (D-Massachusetts), also weighed in. Miller has been very vocal about opposing the rule (see “Miller, Andrews Threaten to Block Advice Regulation’). “We are deeply concerned that the Department’s proposed participant investment advice regulation exceeds Congressional authorization and will have a devastating impact on participant and beneficiaries’ retirement savings,’ the letter read. “(The regulation) would further endanger workers’ retirement savings by permitting advisors to make investment recommendations that would benefit their own and their affiliates’ interests. Though the proposed regulation provides a fee leveling requirement for advisors, it fails to prohibit advisors from recommending investment options that are more beneficial to their employer’s affiliates.”

Contrastingly, the Investment Company Institute (ICI) backs the regulations. Mary Podesta, senior counsel—pension regulation at ICI, wrote: “The Final Rules thoughtfully implement the PPA provision in a manner that will encourage plans and providers to offer investment advice programs to assist participants and beneficiaries of ERISA plans and IRA holders in managing their accounts—exactly the outcome Congress intended in adopting the provision. The need for investment advice programs is clear, particularly given the recent economic uncertainty and market turmoil. During recent months, as markets fell, participants have reached out in record numbers to their plan providers for assistance. Providers need to be able to respond and to develop new advice products to address market developments and participant needs.”

All of the comment letters are available here.

The regulation published in the Federal Register is available here.