WASHINGTON — A key provision in the new pension reform law allowing money managers to give investment advice to 401(k) participants on products they invest has hit a major stumbling block.
The problem: under one relief provision, financial firms offering advice are required to charge a single flat fee to participants, regardless of what investment options are chosen. That, some industry lobbyists and attorneys say, makes the regulatory relief effectively useless for managers, who typically charge much higher fees for some strategies than for others.
The law — signed by President Bush on Aug. 17 — allows money managers to give investment advice to participants in defined contribution plans where their own products are under consideration. They can do so under one of two scenarios: they can use an independently certified computer model to crank out asset mixes and pick managers, or they can have in-house staff advise participants on their investments.
Either solution would provide one-stop shopping for participants because the same manager could offer investment products and advise participants on their asset allocation and investments. Previously, managers were barred from doing so in most circumstances by the Employee Retirement Income Security Act's conflict-of-interest rules that barred providers from offering advice directly to plan participants in defined contribution plans whose assets they managed.
But it is the face-to-face advice option, which is greatly favored by some managers such as Fidelity Investments, Boston, that has become a major hitch.
Now, some investment management and insurance industry lobbyists have launched a behind-the-scenes effort to persuade lawmakers to change the law to relax the pricing constraints before they adjourn for the year.
Their essential argument is that the pricing restrictions, as written, were a mistake.