WASHINGTON - At long last, the Department of Labor is expected to come out this month with its interpretive bulletin on investment education for defined contribution plans, but some experts fear the guidance may be more trouble than help.
"It is important that the Labor Department - in this area - not discourage the creative and innovative approaches companies are taking," said David Wray, president of the Profit Sharing/401(k) Council of America, Chicago.
"The possibility for unintended consequences is a critical issue," he said.
Assistant Secretary of Labor Olena Berg said the guidance will be user friendly; the purpose of the bulletin is to encourage plan sponsors to give defined contribution plan participants more education and not less.
In fact, release of the bulletin has been delayed largely so the Labor Department could give practical examples and not to simply state the rules.
In addition, an internal copy of the interpretive bulletin has been passed to the Securities and Exchange Commission to make sure it doesn't conflict with the Investment Advisers Act of 1940.
Sources said the Labor Department's bulletin will provide examples of plan sponsors giving investment advice instead of investment education - and what liabilities the plan sponsor would face under the Employee Retirement Income Security Act and the Investment Advisers Act.
The bulletin is expected to address bundled services and how computer software plays into educating participants, but sources said they were unsure what would be said in this area.
Plan sponsors should not be concerned about becoming investment advisers and fiduciaries under the Investment Advisers Act, Heidi Stam, SEC associate director, said at a recent Profit Sharing/401(k) Council conference in Washington. Under the act, plan sponsors would have to register as an adviser only if: they provide advice on securities; they are being paid to give advice; and they are in the business of providing advice on securities.
Under the act, general education materials are not considered advice; even if plan sponsors cross the line and provide the advice, more than likely the plan sponsor wouldn't be considered to be in the business of providing investment advice, Ms. Stam said.
While many agree the Labor Department is going out of its way to provide helpful guidance, 401(k) service providers are concerned what the bulletin will say.
"We are in an active dialogue with the Labor Department," said Paul Stevens, general counsel at the Investment Company Institute, Washington. "We've been assured that (the bulletin) will be helpful. I'm very very hopeful this will be the case because the consequences will be very severe if otherwise."
At issue is what might happen to vendors of investment options who also provide education information. Most of them already are registered as investment advisers for purposes other than giving advice to participants in defined contribution plans. Investment managers and others said they were concerned the Labor Department will define investment advice very broadly.
If the interpretive bulletin classifies investment education as advice, it would make these providers fiduciaries under ERISA standards.
Regina Pizzonia, associate legal counsel at T. Rowe Price Associates, Baltimore, said the firm's materials are quite general, but the interpretive bulletin might consider its investment education as advice.
"When we provide information, we don't mean to have it (considered as) investment advice," Ms. Pizzonia said. The Department of Labor "should clarify existing rules such as what is an individual adviser."
Some of T. Rowe Price's materials give the meaning of diversification, for example. The materials also include videos on the importance of saving and quizzes employees can take to decide whether they are conservative or risky investors.
"We'd like to stay on this course," Ms. Pizzonia said.
What's more, if the Department of Labor considers using a broad interpretation of investment advice, many plan sponsors will need to use outside education providers, who do not provide any investment options. While that sounds great for education providers, it is going to be very expensive for the plan, experts said.
But the interpretive bulletin might be just what is needed by plan sponsors just beginning to give out investment education, said Richard Joss, resource actuary at Watson Wyatt Worldwide, Washington. Some are looking for guidance to make sure they don't step into the fiduciary role, he said.
"The further you are down the trail (of providing investment education), the less likely you are to want" the interpretive bulletin, Mr. Joss said.
Experts said it is going to be difficult to coordinate guidance under both ERISA and the Investment Advisers Act, because ERISA's disclosure rules focus on the information about the plan and not the investments the plan makes.
"The problem is that the laws that govern the action of the SEC and the Labor Department are different, but the activity to be regulated doesn't fall clearly under one or the other," said the Profit Sharing/401(k) Council's Mr. Wray.