Monday, September 21, 2009

Advice restrictions expected

Rejection of Bush-era rule signals tougher regs ahead

Pensions & Investments

By Jeff Nash September 21, 2009, 12:01 AM ET

Industry experts expect a more restrictive investment advice proposal later this year now that the Labor Department has killed a Bush administration regulation on advice to DC plan participants.

The rule, floated in the last days of the Bush administration, would have allowed employees of financial firms that sell investments to provide direct advice to defined contribution plan participants. …

While it's unclear what the new investment advice proposal will say, many experts agree that the Labor Department will work with Congress to find a way for plan participants to receive objective investment advice. As part of that process, Phyllis Borzi, assistant secretary of the Labor Department and head of the Employee Benefits Security Administration, will likely solicit wide-ranging opinions to re-examine three core topics:

• Should the “fee leveling,” condition — which would permit an employee of a financial services firm to offer investment advice directly to DC plan participants if his compensation doesn't vary based on the investment recommendation — be extended to that adviser's employer, as well as any affiliate of that employer? This effectively would prevent money managers from offering advice if they recommend their own products.

• Should new legislation support or invalidate the Department of Labor's 2001 SunAmerica advisory opinion, which allows a DC plan's service provider to offer advice to plan participants through an affiliated adviser using an independently developed computer model?

• Should “off-model” advice be permitted? In other words, can a mutual fund or investment management company design its own computer software to deliver advice, as long as the model is certified as unbiased by an independent third party.

… The EBSA is expected to release new proposals on Nov. 18 — the date the Bush investment advice rules would have taken effect after two delays. …


“I think Phyllis wanted a tabula rasa, and the only thing for certain is that the new rules will be pro-participant,” said Marcia Wagner, an ERISA attorney with Wagner Law Group PC, Boston. “She may well come up with something never thought of, something completely different. Remember this is the woman who basically created COBRA; she's extremely creative.” …

[Rep. Robert Andrews (D-N.J.), chairman of the House Education and Labor Committee's pensions subcommittee],explained the 2006 Pension Protection Act would have to be changed in order for the DOL to issue the kind of investment advice rules Congress would support. “It will take statutory and regulatory change to create the goal of qualified-independent-investment advice affordable to every investor,” he said.

One major area to be considered is what is meant by “fee leveling.” …

… Many experts expect the new proposals also will address the SunAmerica opinion.

“We need to see some clarification and formalizing of this rule, which really avoids conflicts of interest for advisers and ensures some independence,” said Robyn Credico, director of the plan management group practice, North America, at Watson Wyatt Worldwide Inc., Arlington, Va.

But if the Labor Department reverses the opinion, that could force employees to use independent advisers. “Not everyone can use truly independent advisers because they're expensive,” Ms. Credico said.

Questions of scope

Jason Bortz, an ERISA attorney with the law firm Davis & Harman LLP, Washington, said “some people have raised questions about the scope of the SunAmerica opinion — for example, whether a model should take into account non-proprietary funds.”

In July, the House Education and Labor Committee approved the 401(k) Fair Disclosure and Pension Security Act of 2009, which was sponsored by Messrs. Miller and Andrews. The legislation would prohibit employees of financial services firms from offering investment advice if their compensation varies depending on the investment advice they give. …

Another option the Department of Labor might consider is allowing mutual funds and other investment companies to offer advice through their own computer model that has been certified as unbiased by a third party — an idea originally floated in a bill introduced by Mr. Andrews back in May.

Contact Jeff Nash at

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