DC plan participants need credible advice, and quickly

Thanks to foot-dragging by Congress and the Department of Labor, millions of participants in defined-contribution retirement plans have struggled through the financial crisis and market crash without professional guidance. Most DC plan participants need professional help, but many can't afford to pay for that advice. And most employers are unwilling to pay for investment advice for their employees. The Labor Department, under the Bush administration, had proposed rules that would have allowed representatives of mutual fund companies to offer investment advice to DC plan participants. Under those rules, the same fund companies that provide the investment options to the employees would be able to provide some investment advice to them. The costs of advice would be bundled into the fees paid by employers and employees. The Labor Department under the new administration now has killed those rules before their implementation.

Additional delay

The department plans to introduce a revised proposal in a few weeks, and after a short period for comments, a rule will be finalized. So there will be an additional delay, and there is an excellent chance that by the time the rules are finalized, the financial crisis will be over, the market largely will have recovered, and most DC plan participants will have struggled through both without professional help. Many will have made critical mistakes along the way — for example, selling all their stocks near or at the bottom — because they didn't have a professional to guide them and prevent panicky moves. This is a case where the search for the perfect has driven out the passable and left millions of DC plan participants unprotected. Yes, there were problems with the Bush administration rule proposal. There was the possibility that some financial advisers affiliated with mutual fund companies, or mutual fund company representatives, might have taken advantage of their clients by giving conflicted advice. However, many participants would have received useful information that might have helped them deal with the fear induced by the financial crisis. The Labor Department now must move expeditiously to provide an avenue for the great mass of DC plan participants to get guidance in investing their plan assets in a complicated investment world. It will face the same complications that the Bush administration and Congress faced: how to make investment advice available to millions of DC plan participants at a cost that the employees and employers find acceptable. Congress has been unwilling to foot the bill — through tax breaks — that independent financial planners and investment advisers would charge. Most employers also have refused to pay separate investment advisory fees. Who, then, will pay for the investment advice that employees need? Most likely, this administration's Labor Department, like its predecessors, will have to allow representatives of investment management providers — e.g., mutual fund companies and insurance companies — to provide advice under strict conflict of interest rules. The difficult task will be to draft conflict-of-interest protections that are tough enough to prevent advisers from taking advantage of participants, without making them so strict that only totally independent advisers can meet them, thus leaving participants still without affordable advice. The Labor Department, once it drafts and promulgates its new rules, will have to stand ready to monitor them closely to ensure that plan participants are getting advice and that such advice is unbiased. It must be prepared to change the rules quickly if they prove so stringent that the great mass of participants still do not have access to investment help.