The next Congress will scrutinize a Department of Labor proposal that permits advisers affiliated with an in-house money management unit to recommend whatever products they want, including mutual funds with high management fees, to 401(k) participants.
The proposal raises concerns that advisers might face pressure to sell mutual funds with the heftiest fees.
"It's likely that Congress will be taking a hard look at what the Labor Department has been doing in that area," said Mark Iwry, a non-resident senior fellow with The Brookings Institution in Washington.
He was benefits tax counsel at the Department of the Treasury during the Clinton administration.
INDEPENDENT ADVICE
Ensuring that "workers have access to reliable independent investment advice" is one of the principles outlined by House Committee on Education and Labor Chairman George Miller, D-Calif., in a recent statement on his legislative priorities for 401(k) plans in the next Congress.
"Too often, workers are given self-interested advice from financial advisers or money managers," he said in the statement. "All plan participants should have access to objective advice and investment information to help them better manage their savings."
Other priorities that Mr. Miller has set are improved fee disclosure, bringing younger and lower-wage workers into the system through automatic enrollment, ensuring that low-fee investment options are included in plans, reducing vesting periods and improving the portability of plans.
He wrote a bill in the current Congress that would improve fee disclosure.
In the view of many Democrats on Mr. Miller's committee, "the fee-leveling interpretation is not strict enough," said James Delaplane Jr., a partner and retirement policy specialist in the Washington law firm Davis & Harman LLP.
That led to speculation that the Labor Department's regulation will face congressional scrutiny.
"We do expect George Miller and the Education and Labor Committee will look at what the Labor Department has done," said Liz Varley, managing director of government affairs in the Washington office of the Securities Industry and Financial Markets Association, which also has offices in New York.
"There's going to be a reassessment in terms of their strategy," she said.
For its part, the Financial Planning Association of Denver thinks the regulation needs more teeth.
"We think the DOL proposal is flawed in the sense that disclosure isn't as robust as it should be on conflicts of interest by individual advisers," said Duane Thompson, Washington-based managing director of the trade group.
Although the proposal requires independent audits of procedures that advisers must follow in disclosing possible conflicts, that might not be adequate, he said. Just because an independent auditor sees that all the t's are crossed and all the i's dotted doesn't mean there has been sufficient disclosure, Mr. Thompson said.
"It is very difficult to separate that sales process from the giving-of-advice process," said Diahann Lassus, chairwoman of the National Association of Personal Financial Advisors of Arlington Heights, Ill. "They do need to take another look at that."
Ms. Lassus is also president of Lassus Wherley & Associates PC of New Providence, N.J., which manages $340 million.
In an Oct. 8 letter to Assistant Labor Secretary Bradford Campbell, Mr. Miller as well as Subcommittee on Health, Education, Labor and Pensions Chairman Rob Andrews, D-N.J., urged the department to withdraw its proposed rule on investment advice.
"While advisers are subject to the level fee requirement, the department's proposal would not prohibit advisers from making recommendations that are more beneficial to its affiliates," the letter said.
A CONFLICT OF INTEREST
The concern is that the fiduciary adviser has a conflict of interest, a fear that the Investment Company Institute in Washington considers misplaced.
"The disclosure and other safeguards built into the statute and the [Labor Department] proposal sufficiently mitigates that risk," said Karrie McMillan, general counsel of the ICI.
"They have to disclose to the people they are talking to the fees and the potential for conflicts of interest, which is very similar to how conflicts of interest are treated in securities laws generally," she said. "The idea here was to try to get more advice to more people," Ms. McMillan said. "That's a very laudatory goal."
E-mail Sara Hansard at [email protected].
