Bill would give indie advisers sole right to offer 401(k) advice

After focusing their efforts on increasing 401(k) fee disclosure, members of an influential committee last week approved a more comprehensive package of potential retirement reforms.

The House Committee on Education and Labor’s bill — the 401(k) Fair Disclosure and Pension Security Act of 2009, which passed by a 29-17 vote — includes a provision that may restrict 401(k) plan sponsors to hiring only independent investment advisers to counsel their plan participants.

“We think that investment advisers should only have one interest in mind, and that is the individual,” Rep. Rob Andrews, D-N.J., said last Wednesday at a meeting of the committee.

“CONFLICTED ADVISERS’

Brokers or money managers whose compensation could be influenced by the advice they provide have the potential to place their own, or their firms’, interests ahead of participants’, he said.

Such “conflicted advisers,” as Mr. Andrews has labeled them since he introduced his own proposal on the subject in April, ultimately could cause the performance of a participant’s 401(k) investments to suffer dramatically, he argued before the committee.

It is still early in the legislative process, but observers noted that the bill has significant implications for the investment advisory community.

In particular, independent advisers who would qualify under the rules account for just 5% of the total population of more than 200,000 retail advisers and registered representatives in the United States, according to estimates from The Tower Group Inc., a Needham, Mass.-based consulting firm.

“With the losses many workers have suffered in their 401(k)s over the last year, there’s tremendous demand building for participant investment advice,” said Kyle Brown, retirement counsel at Watson Wyatt Worldwide in Arlington, Va. “And this could have a major impact on the supply and availability of that advice.”

Only a small percentage of em-ployers, 21%, provide their 401(k) participants with access to in-person investment advice, according to a recent report from Lincolnshire, Ill.-based consulting firm Hewitt Associates LLC. This presents a massive market opportunity for investment advisers to work with plan sponsors and 401(k) participants.

“But before employers go out in any significant way and hire investment advisory firms to work with participants, there has to be some certainty in the rules,” said Gregory Ash, chairman of the Employee Retirement Income Security Act litigation group at Kansas City, Mo.-based law firm Spencer Fane Britt & Browne LLP.

“And in the last few years, there has been no clarity over who could, or should, qualify to provide advice,” he said.

Although the Pension Protection Act of 2006 encouraged employers to hire outside investment advisers to work with their employees, the Department of Labor 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.

“In the final hours of the Bush administration, the Department of Labor gave Wall Street a long-sought-after way to line their pockets at the expense of the account holder. They said that it’s perfectly fine to recommend a product or investment because it will increase your in-come, not because it is the best for the worker,” Education and Labor Committee Chairman George Miller, D-Calif., said at Wednesday’s meeting.

“It’s about time that Wall Street stop viewing workers’ 401(k) accounts like a gold deposit to mine,” he said.

The bill approved last week wouldn’t technically override the Labor Department’s final ruling, said Aaron Albright, press secretary for the Education and Labor Committee. Rather, he said, the legislation would “rewrite and re-establish the rules of the road for the DOL to ensure that any investment advice given at the workplace be independent and free of any direct or indirect conflict of interest.”

Mr. Andrews’ advice movement has been met with some opposition, including a recent argument from a pair of fellow Democrats during the committee meeting last week.

Reps. Rush Holt of New Jersey and David Wu of Oregon proposed an amendment that would have negated Mr. Andrews’ proposal in the broader bill.

Mr. Holt argued that it would be a “step too far in the repeal of pension legislation” to ban brokers from advising 401(k) participants. His amendment, however, was shot down.

Mr. Miller noted during the meeting that the bill is still a work in progress, and congressional leaders are now discussing what steps will be taken before the legislation goes to a full vote on the floor of the House.

When that may be, however, isn’t clear. “But it is clear that this is an important issue in the eyes of this administration, and it will prove to be critical for both employers and investment advisers as well,” Mr. Ash said.

E-mail Mark Bruno at [email protected].