WASHINGTON - Fidelity Investments has pulled its support for legislation that would allow service providers to offer investment advice to 401(k) plan participants.
The legislation, sponsored by Rep. John Boehner, R-Ohio, would let investment advisers to plans offer investment advice as long as they disclose any fees they earn from the advice as well as other possible conflicts of interests in recommending their own funds. The legislation would require the service providers to assume fiduciary duties under federal pension law, but would not protect employers from being sued by participants for financial losses they suffer because of the advice they receive.
The Employee Retirement Income Security Act prohibits service providers from offering investment advice to plan participants - those wishing to advise participants must obtain special permission from the Labor Department's pension office.
Fidelity's break from the pack is yet another indication that the Bush administration's attempts to parlay the Enron Corp. debacle into securing passage of Mr. Boehner's investment advice legislation might be backfiring.
"The underpinning of the Enron fiasco is conflict of interests on many levels," said David Certner, senior coordinator for economic issues at the AARP in Washington. "ERISA right now has a prohibition on transactions that involve conflict of interests. It's absurd, in the post-Enron era, to think of eliminating the prohibition."
The pension proposals to protect retirement dollars that Mr. Bush outlined in late January included Mr. Boehner's legislation, which was reintroduced last year and passed the House of Representatives Nov. 15. The legislation has not yet made headway in the Democratic-controlled Senate.
The legislation received a setback when Sen. Charles E. Grassley, R-Iowa, the ranking Republican on the Senate Finance Committee, last week broke with his party by declining to include Mr. Boehner's legislation in a Senate version of Mr. Bush's package.
Mr. Grassley noted he had left out the investment advice provision in the president's package because it's controversial. "There's a lot of disagreement over how to get advice to the workers who need help," he said in a statement when he introduced the National Employee Savings and Trust Equity Guaranty Act on Feb. 26.
The Investment Company Institute has been lobbying furiously for enactment of Mr. Boehner's Retirement Security Advice Act. Thus it was a huge upset for the mutual fund trade association to discover that its largest member, Boston-based Fidelity, is bailing out. In fact, Fidelity officials are in discussions with Sen. Jeff Bingaman, D-N.M., who, along with Sen. Susan Collins, R-Maine, has offered alternative legislation that would continue the federal pension law's current ban on service providers' offering investment advice to plan participants.
Despite Fidelity's defection, the association informed P&I in a statement that it remains "strongly committed to the Boehner bill and the president's advice proposal."
The Bingaman-Collins bill, the Independent Investment Advice Act, would clear the way for employers to offer professional investment advice to retirement plan participants without fear of liability. Nearly all plan sponsors surveyed recently by the Profit Sharing/401(k) Council of America said the fear of being sued is the top reason they don't offer investment advice to participants.
Most employer groups, including the Profit Sharing/401(k) Council and the American Benefits Council, also support Mr. Boehner's legislation and, with the exception of the American Society of Pension Actuaries, oppose the Bingaman-Collins bill.
The Committee on the Investment of Employee Benefit Assets, an affiliate of the Association for Financial Professionals, which represents the nation's largest corporate plan sponsors, supports both bills.
Staff in Mr. Bingaman's office declined to comment on the nature of discussions with Fidelity officials.
Sources speaking on condition of anonymity said Fidelity officials told the ICI the nation's largest mutual fund company jumped ship on Mr. Boehner's legislation. A spokesman for Fidelity would only say that while the company had, in the past, supported the legislation, its position has evolved and it now also is studying the Bingaman-Collins legislation introduced in November.
"We are simply evaluating both to see how plan participants would benefit the most," he said.
Sources, speaking not for attribution, said Fidelity's move away from Mr. Boehner's investment advice bill comes as no surprise, and is viewed as an effort by Fidelity to limit competition. The sources said Fidelity executives fear that if the Boehner bill were to pass, it would benefit Merrill Lynch & Co. and other large Wall Street firms more than Fidelity.
Still, sources say Mr. Boehner's bill is certain to be part of the pension reforms that emerge from the full House. The provision is one of the key elements of the House version of Mr. Bush's pension package, the Pension Security Act, or H.R. 3762, introduced Feb. 14.
And even though numerous academics and investment experts warn the only way to prevent another situation like Enron is to limit participants' holding of employer stock within retirement plans, such legislation is widely viewed as dead.
The split between the Republican-controlled House and the Democrat-controlled Senate has become obvious during the debate. The House is expected to pass legislation broadly based on Mr. Bush's pension package, while the Senate is expected to push for more substantial reforms
"The president's bill is the minimum that would pass, even if the employer and financial communities are uncomfortable with it," said Jon Breyfogle, a partner at the Groom Law Group, Washington. "The president put down a marker and it will be really difficult for the Republicans to do less than that," said Mr. Breyfogle, who has close ties to the current administration.
Apart from investment advice, other key elements of Mr. Bush's pension package that are likely to pass would:
* let employees sell company stock - including that received as an employer match - after three years of participation in a retirement plan;
* require employers to give workers quarterly benefit statements about their retirement accounts and emphasize the importance of diversification; and
* ban company executives from buying and selling company stock in their retirement plans during a "lockdown," or the blackout period when a plan prevents participants from moving between investment options while it changes record keepers.
The company stock sale provision would not apply to employee stock ownership plans, but would apply to retirement plans that include an ESOP feature. While some Democrats have said they would prefer to let employees sell their holdings of employer stock after a year of participation, that is unlikely to succeed.
A provision to reiterate that employers have a fiduciary responsibility for workers' investments during a blackout period is considered controversial.
"Employers hate that provision. Lawmakers will need to get some compromise from employers if they want that," said a source who did not wish to be identified.
Politics is a complicating factor in trying to predict the passage of Enron-related legislation. Because of midterm elections in November, lawmakers have a shorter legislative calendar. The Senate Health, Education, Labor and Pensions Committee, chaired by Sen. Edward M. Kennedy, D-Mass., intends to vote on a pension package March 13; the House committee with jurisdiction over pension matters also is likely to vote on the issue soon.
Still, some sources suggest Democrats stand to gain by delaying a vote on the pension package until just before the elections - giving Republicans running for re-election less chance of taking credit for the legislation in their campaigns.
Although numerous Senate Democrats have introduced competing bills to prevent another Enron-type scandal, Mr. Kennedy's legislation, which he will introduce this week is likely to be the one that Democrats ultimately support. Recognizing that caps on company stock ownership in retirement plans are not likely to succeed, Mr. Kennedy has a novel suggestion - letting employers choose between offering company stock as a match or an investment option, but not both. AARP's Mr. Certner first floated this idea.
Mr. Kennedy also expects to include a provision similar to the Republican package that would let employees sell their employer stock after three years, and require companies to give their workers a 30-day notice before any lockdowns.
Like the Bush package, Mr. Kennedy's legislation also would require companies to give workers information on the benefits of diversification. However, Mr. Kennedy's bill is likely to include some version of Mr. Bingaman's investment advice provision instead of the Boehner bill.