With the DoL's SunAmerica opinion, who needs Boehner bill?
I am writing in response to the "fact" sheet issued by Rep. John Boehner on Jan. 14 titled "Why the DoL SunAmerica Advisory Opinion Will Not Close the Investment Advice Gap." This fact sheet largely misrepresents the significance and basic facts of both SunAmerica's proposal and the Department of Labor's advisory opinion (Pensions & Investments, Dec. 24 and Jan. 21).
In the fact sheet, Rep. Boehner depicts the SunAmerica proposal as a third-party company using "generic computer models" to offer advice to clients - something companies have been doing for years. If Rep. Boehner had read the SunAmerica proposal, he would know SunAmerica was asking the Department of Labor if it could create and have discretionary management of participant accounts using an independent financial expert to formulate the basis by which fund allocations of participant accounts are invested, and gathering information from participants through required ongoing personal conversations with its representatives.
The proposal also requested the ability to automatically enroll participants in these separately managed accounts. So, SunAmerica is not proposing to offer third-party advice; SunAmerica is proposing to offer:
1) discretionary management;
2) unbiased fund allocations;
3) automatic separate account enrollment; and
4) personal outreach on a regular basis from a SunAmerica financial representative, which could include face-to-face meetings.
Rep. Boehner also misinterprets the significance of the Department of Labor advisory opinion. He states the opinion simply affirms the legality of offering third-party advice (even though the Department of Labor itself specifically stated in a press release that "the opinion is an important precedent and will facilitate the provision of investment advice").
While it is true that offering third-party advice has always been legal, that's not what the Department of Labor affirmed in its advisory opinion. The Department of Labor affirmed that SunAmerica (or any other financial institution) could directly manage participants' assets and that participants could select and/or be automatically enrolled in these separately managed accounts as long as, among other things, an independent third-party expert provides the basis upon which allocations are made on a regular basis. The novel aspect of the advisory opinion is that the investment vehicles could include SunAmerica funds, from which SunAmerica could receive variable fees and profits depending on the allocations.
Most importantly, from a plan sponsor's standpoint, SunAmerica, a large financial institution, is responsible for all aspects of the program. The practical effect of this is to greatly insulate the plan sponsor from potential liability, and the Department of Labor letter allows for the plan provider to receive additional compensation for assuming fiduciary responsibility for providing these value-added services.
The SunAmerica plan closes the advice gap because it allows participants easy and affordable access to professionally managed retirement accounts, prescribed by an unbiased financial expert and managed and administrated by a live financial representative from the participant's provider. This plan makes it easy for the participant to appropriately allocate plan accounts on a regular basis; for the plan sponsor to hire a financial institution to effect appropriate allocations of participant accounts, in a manner which is far more effective than investment advice, while minimizing potential liability; and for plan providers to begin building relationships that are far more likely to endure up to and through retirement with plan participants.
What no one's talking about with regard to the Boehner bill is that it would actually increase sponsor liability risk for advice. While the bill lets sponsors off the hook for the specific allocation decisions based on advice, this really accomplishes little because it merely restates current law. However, under current law, plan sponsors could not be saddled with the responsibility of selecting and monitoring a conflicted provider because such conflicts are prohibited. By removing these conflicts, the Boehner bill would materially increase the burden of plan sponsors, as they could be required to monitor and assess the effect of previously prohibited conflicts of interest.
Not only does the Boehner bill put sponsors at risk, but it also eliminates current protections of retirement assets that prevent financial service providers from offering biased advice to clients. Given the current Enron Corp. debacle and the history of abuse in the financial services industry, no knowledgeable person could believe that disclosure alone will ensure that companies provide impartial asset allocation recommendations to clients. Thus, the disclosure that would be provided in the Boehner bill would be useless to participants in assessing whether or not to follow conflicted advice. Thus, the Boehner bill simply lets the fox into the hen house.
The Department of Labor's advisory opinion lays out a legal and prudent framework for the financial service industry to provide asset allocation services that would enable financial service institutions to achieve every legitimate goal they could have. It permits them to provide the type of services that result in the control of the client - without removing protections that prohibit self-dealing.
With this clear blessing from the Department of Labor, why do we need the Boehner bill?
independent consultant and architect of the SunAmerica
managed account product
I read your Page 1 article, "Enron fallout sparks much soul-searching," with interest. I certainly agree with Professor William F. Sharpe that it's very dangerous for "human capital and investment capital" to share the same risk factor.
Unfortunately, Professor Sharpe's company, Financial Engines, has spent about 10,000 words attempting to convince listeners of the importance of Monte Carlo simulation mathematics for every word that it has uttered on the subject of company stock. As a result, the questions that I am typically asked about online advice are esoterica like, "Does your program use Monte Carlo simulations?" or "How do you model the tails of the asset-class distribution?" Until Enron, I was rarely confronted by the far more important question: "What exactly do you say about company stock?"
But I'm glad they're asking. In Morningstar ClearFuture, we have created a "company stock" alert that automatically warns any participant who holds more than 10% of his or her assets in company stock that such a position violates standard financial-planning advice. The participant is then steered toward a tool that indicates how the participant's retirement-income projections improve if they reduce their positions in company stock. We have been doing this now for two years. Nothing fancy. Nothing that has created a single iota of buzz for us in the marketplace. Just key information for the plan participant. But isn't that the point of online advice, to tackle the key issues to the participant?
Morningstar Associates LLC
Your Oct. 15 profile of real estate investment firms did not include Wachovia Timberland Investment Management. We would like to submit the following information for your next issue.
Our tax-exempt net assets were $989 million as of June 30.
For further information please contact:
Wachovia Timberland Investment Management
191 Peachtree St.
Atlanta, GA 30303
Phone: (800) 457-8184
Fax: (336) 732-4568
client service representative
No need for more legislation
Regarding the Dec. 24 Page 1 story in Pensions & Investments: The Department of Labor issued an advisory opinion on Dec. 14, based on an application by SunAmerica for a prohibitive transaction exemption. The DOL issued the advisory opinion because it did not believe an exemption was warranted.
Many organizations have expressed their support for the advisory opinion. However, in a statement released Jan. 14, representatives of the Congress' education and workforce committee expressed concern that the advisory opinion "will not close the investment advice gap and does not increase worker access to quality investment advice or ease employer concerns about liability."
After reading their statement, we kept asking ourselves whether the committee is promoting the Retirement Security Advice Act for the benefit of participants or the providers.
The reason employees lack access to investment advice is because of employers' concern about liability. The Profit Sharing/401(k) Council of America's 2001 Investment Advice Survey found that among companies not offering advice, 93% cite as their reason, "Fiduciary concern about liability for advice that results in a loss, even if the adviser is competent and there is no conflict."
The advisory opinion will go a long way in reducing those concerns, and thereby increasing access to quality investment advice. As the education and workforce committee rightly points out, "It has always been true that third-party advisers could offer advice, and the DOL simply affirmed that."
So if offering advice is not prohibited, and the DOL opinion publicly affirms that, we have to ask ourselves whether we need the Retirement Security Advice Act. The education and workforce committee's act is controversial because of the potential for conflicts of interests, which is one reason employers fear advice.
The committee's statement says, "Current law still excludes the individuals and companies who are best positioned to provide workers with quality advice from offering those services." The committee fails to explain why they believe plan providers are better positioned to give quality advice, when in fact they have the potential for the conflict of interests employers want to avoid.
The DOL opinion makes clear the need to maintain a separation between the investment provider and the adviser. The opinion outlines the DOL's approval of "financial experts" separate from the plan's investment product provider.
The committee responded, saying, "The generic computer models that SunAmerica will use are no substitute for face-to-face, individually tailored advice ..." The DOL agrees, and wrote in its opinion that the advisory model must incorporate personal "facilitators" to validate the investment models into which individual participants are placed. These facilitators will regularly and proactively contact the participant. The Scarborough Group's Savings Plan Management service was the model for this portion of the SunAmerica prohibited transaction exemption application.
We believe the DOL advisory opinion provides for the ability of plan sponsors to immediately begin providing high-quality advice services to 401(k) plan participants - without the need for more legislation.
J. Michael Scarborough
president & CEO, The Scarborough Group Inc.
Letters and other submissions may be sent by mail to the attention of Barry B. Burr, Pensions & Investments, 360 N. Michigan Ave., Chicago, IL 60601; by fax, to (312) 649-5228; or by e-mail to [email protected] crain.com.