Congress close to passing measure on 401(k) advice

Oct 17, 2005 @ 12:01 am

By Sara Hansard

WASHINGTON - Congress is getting closer to enacting pension legislation that will make it easier for 401(k) participants to get investment advice. But lobbyists for financial planners question whether the Department of Labor will be able to adequately oversee the advisers who provide that service.

In addition, investment advisers associated with registered investment advisory firms are opening another front in the battle over brokerage registration exemptions by complaining that even the most restrictive version of the legislation will allow representatives of brokerage firms to give advice on 401(k) plans.

Liability removed

The investment advice provisions in both bills are aimed at making it easier for employers to offer investment advice with their plans by removing legal liability from employers who follow the criteria laid out in each bill.

Financial advisers and pension experts agree that specific investment advice is a sorely needed component that now is missing in most 401(k) plans.

The Senate investment advice provision requires 401(k) advice-givers to be independent of the company managing the plan. The House version of the bill would allow mutual funds, brokerage firms and other companies that manage the retirement plan assets to give investment advice to plan participants.

The two provisions are likely to be the most controversial elements to be negotiated between the House and Senate if both bodies this year pass pension bills as expected.

Both the Senate and the House are working on legislation aimed at shoring up shaky defined benefit pension plans and reforming pension rules to avoid the conflicts of interest that became apparent when Houston-based Enron Corp. went bankrupt.

The full Senate could take up the legislation as early as the end of this week. John Boehner, R-Ohio, chairman of the House Education and the Workforce Committee, has said he hopes the full House will vote on his committee's pension bill in the "coming weeks."

The Financial Planning Association, based in Denver, has not lobbied actively for either chamber's version of the investment advice provisions, said Duane Thompson, group director of advocacy in the FPA's Washington office. But with legislation getting closer to passage, some version of advice legislation is likely to be enacted this year.

That means "The Department of Labor will be in a major position to oversee investment advisory activities, where they haven't done [it] before," said Mr. Thompson. He questions what resources the Labor Department will have to do that.

"What is the audit cycle going to be for fiduciary advisers under [the Employee Retirement Income Security Act of 1974, which governs retirement and health care plans]? What kinds of controls or exams are going to be conducted to ensure that the law would be effectively administered?" Mr. Thompson asks.

He notes that it has been only in recent years that the Securities and Exchange Commission has been able to examine the investment advisory firms it oversees as often as once every four years.

Previously, some smaller investment advisory firms managed to escape on-site exams and visits altogether because the SEC did not have enough staff to visit them all.

In an e-mailed statement, Sen. Jeff Bingaman, D-N.M., the author of the Senate's advice provision, echoed those concerns.


Mr. Bingaman said it was clear from Senate hearings that "the Department of Labor is not able to adequately oversee investment advisers under current law. Any change of law that would allow investment advisers with conflicts of interest to have access to all of our country's 401(k) participants would completely overwhelm what little oversight capabilities the department currently has."

The Labor Department has "said reassuring things" about its ability and people power to safeguard plan participants if investment advice is allowed with 401(k) plans, said Leslie Kramerich, government affairs officer for retirement and tax policy at the Investment Company Institute in Washington.

"A lot of what DOL does is respond to people who ask specific questions," Ms. Kramerich said. "They have additional ways of policing that don't involve going door to door, plan to plan."

A Department of Labor spokesman did not return calls from InvestmentNews.

Under current law and regulations, few employers provide direct advice with their plans out of fear of incurring greater liability if participants lose money from following the advice.

The mutual fund, brokerage and insurance industries support the House investment advice provision. "Participants would be the recipients of advice that they need if the rules could be updated," Ms. Kramerich said.

While advisers favor the Senate version of the bill, many are wary even of that version. Rick Huff, president of fee-only advisory firm Huff Stuart & Carlton in Forest, Va., does not like that the Senate bill would allow brokerage firm registered representatives, as well as advisers affiliated with insurance companies and banks, to provide 401(k) advice.

The FPA had lobbied for only allowing investment adviser representatives to provide the advice.

'Huge concern'

"To me, that is a huge concern," Mr. Huff said. "It allows the same exceptions that we currently see under the 'Merrill Lynch' rule," a controversial SEC rule exempting registered representatives who charge fees based on assets from investment adviser regulation if they meet specified criteria. The FPA is suing the SEC in federal court to have the rule overturned.

"If they continue to maintain the same status as they have now for exceptions to the Investment Advisers Act, we'll have the same problems we have now. There's the potential for the same abuses," said Mr. Huff. Huff Stuart & Carlton provides advice to 15 small-company 401(k) plans and participants with about $30 million in assets, which makes up 60% of the firm's revenue.

Under either bill, plan advice-givers would continue to be regarded as fiduciaries, as currently is the case. Fiduciaries are required to act in the best interest of clients and can not simply sell products based primarily on what yields them the highest fees.


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