With new rule, DOL nixes additional fees for 401(k) advisers

The Labor Department has finalized a rule aimed at deterring financial advisers from receiving additional compensation based on the funds they choose for retirement plans.

The rule, which covers investment advice for participants and their beneficiaries, will apply to employees in 401(k) plans as well as clients in individual retirement accounts.

The regulation, effective Dec. 27, will give advisers two choices on how to receive compensation.

First, they can receive compensation on a level-fee basis, which means that they won’t be able to receive variable compensation based on the investments they choose.

Alternatively, advisers can offer their clients investment advice by using a computer model that is certified as unbiased by an independent auditor. That outside auditor will examine whether the model is set up according to generally accepted investment principles.

Currently, if an adviser receives variable compensation for his or her investment recommendations to a 401(k) and provides advice, that is a conflict of interest. These two exemptions would remediate such a conflict.

Phyllis Borzi, assistant secretary of the Labor Department, noted that the final version addresses one of the hot-button issues raised by advisers when the rule was proposed in March 2010.

At the time, critics claimed that the computer model would be biased toward passive investments and against active options. They argued that the rule’s original language said that it should be designed to avoid selecting options based on factors that couldn’t be expected to persist in the future such as performance.

“The big question is: How relevant is historical performance?” Ms. Borzi said during a call with reporters last week. “While historical performance isn’t always an indicator of what the future will hold, you could provide that information as part of this model, with the caveat that the past isn’t always prologue.”

Ms. Borzi added that the auditor reviewing the model won’t be deciding whether a client should be in active or passive funds. Instead, the auditor will examine whether the model itself is unbiased and whether it includes a fair representation of passive versus active options, plus a correct disclosure of all fees.

Ms. Borzi stressed that the rule doesn’t apply to advisers who aren’t fiduciaries.

Email Darla Mercado at [email protected]