As American workers continue to watch their retirement assets be devoured by the bear market, the federal government is reconsidering how best to make available investment advice to retirement plan participants.
On Jan. 21, the Department of Labor released final regulations that would make it much easier for financial services firms that also act as plan fiduciaries, to provide investment advice to participants in 401(k) plans and individual retirement accounts.
Under the new guidance, 401(k) participants and IRA holders can receive investment advice by a computer model certified as unbiased and though a fiduciary adviser compensated on a "level-fee" basis. The computer model, however, cannot favor investment options that generate the most income for the fiduciary adviser or person with a material affiliation or material contractual relationship with the fiduciary adviser.
DOL wanted to create a regulatory environment in which DC plan service providers could advise participants about investment options, but also safeguard that advice by ensuring no conflicts of interest occurred between plan fiduciaries and investment experts, says Matt Smith, U.S. national defined contribution practice leader with AON Consulting.
However, when President Obama took office, Rahm Emanuel, the president's chief of staff, issued a memorandum to heads of federal agencies and departments asking them to hold off on implementing certain federal regulation.
"President Obama has asked me to communicate to each of you his plan for managing the federal regulatory process at the beginning of his administration. It is important that President Obama's appointees and designees have the opportunity to review and approve any new or pending regulations," wrote Emanuel on Jan. 20.
The memo, published in the Federal Register, states that published final regulations scheduled to take effect on or after Jan. 20 may be subject to a new effective date and an immediate reopening of a 30-day notice-and-comment period.
The DOL final regulation on investment advice falls into the delayed category outlined in the White House memorandum, explains Cara Welch, director of public policy at WorldatWork, as the rules were to take effect on March 23. After the White House directive, DOL changed the effective date to May 23 and reopened the comment period, which ended in March.
Regs too burdensome?
Some benefits analysts contend that the Obama administration and some Democratic senators may try to undo certain Bush-era regulations on PPA.
"In 2006, when lawmakers were debating PPA, the [question was raised]: Why can't fund providers — such as Fidelity, Vanguard and T.R. Price — offer advice on their own funds?" explains Alan Vorchheimer, a principal at Buck Consultants who specializes in defined contribution plans.
"Well, everyone said that would create a giant conflict of interest. Therefore, the regulations were intended to create a framework in which plan fiduciaries could offer advice to participants," he adds.
Experts debate whether the new rules will have an effective impact on improving access to investment counsel for plan participants. Some plan fiduciary advisers might view the new regulations as burdensome, given that they entail numerous compliance requirements for computer model arrangements, required disclosure and annual audits, Vorchheimer says.
Heavy government compliance may scare off investment and financial services firms that serve as plan fiduciaries from creating business opportunities that exclusively focus on providing investment advice to 401(k) and IRA participants enrolled in their funds.
Overall, Welch says the organization's members applaud government efforts to help workers improve saving for retirement.
Yet, she cautions: "there is also a concern that you can overwhelm an employee with too much information, so you have to make sure that the education or advice that is provided is clear and makes sense to the employee. Information overload can sometimes mean employees don't get as much out of the education or advice as they should get."
Key requirements to investment advice guidance
Fee-leveling: Under a fee-leveling approach, any fees or other compensation received by the fiduciary adviser or received directly or indirectly by any employee, agent, or registered representative that provide investment advice on behalf of the fiduciary adviser cannot vary based on the investment options selected by a participant or beneficiary.
The final regulations indicate that fees and other compensation include investment management fees and any other fees and expenses associated with recommended investments. The investment advice must be based on generally accepted investment theories that, at a minimum, take into account the historic returns of plan investments over defined periods of time.
Computer model arrangements: The computer model must be based on generally accepted investment theories and take information provided by individual participants into account.
A computer model must use objective criteria to avoid recommendations that favor investment options offered by the fiduciary adviser or a person with a material affiliation or material contractual relationship (regardless of whether the agreement is in writing) with the fiduciary adviser.
Authorization by a plan fiduciary: The final regulations require that a plan fiduciary, other than the fiduciary adviser, must authorize the investment advice arrangement.
Annual audit: The fiduciary adviser shall, at least annually, engage an independent auditor to determine whether the investment advice arrangement meets the final regulations by reviewing sufficient relevant information and shall provide a copy of the report to the fiduciary that authorized the arrangement within 60 days of the audit's completion (within 30 days for IRAs).
Source: Morgan Lewis
