DC advice provision challenged

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.

"We understand that in the rush to get the bill to the floor, there were some drafting errors," said Jack Dolan, a spokesman for the American Council of Life Insurers, Washington, which is leading the lobbying charge. "We hope that Congress' clear intent with regard to the investment advice provisions will be reflected in a follow-up technical corrections bill."

But critics of the move see the price cap as a deliberate component of a legislative compromise — one that should remain in effect.

"That was part of the price for being able to offer conflict-tainted advice in the first place," said David Certner, legislative policy director for AARP, Washington.

Kevin Smith, a spokesman for House Majority Leader John Boehner, R-Ohio, said no decision had been made on the asset management industry's plea for legislative relief. "At this time, we're in the information-gathering process and not contemplating any action right now," Mr. Smith said.

Before the Pension Protection Act was passed, defined contribution plan providers could only offer advice to participants through independent third parties.

In a December 2001 advisory opinion, the Department of Labor basically opened the door to investment advice, but under certain conditions. Officials at that time said SunAmerica Retirement Markets Inc. — now AIG SunAmerica — could offer one-stop shopping, so long as an independent financial expert made the asset allocation decisions. That opinion opened the door for firms such as Financial Engines Inc. and Morningstar Inc., which rely on computer-generated models, to provide third-party advice.

The Pension Protection Act of 2006 opened the advice gates much wider, but with the restriction on fees for face-to-face advice. Managers want a technical amendment to the act, allowing firms to have flexible fees while keeping the compensation for a provider's individual adviser the same, regardless of which investment a participant selects. Industry officials say conflict-of-interest concerns will be adequately addressed by targeting the compensation of the individual and not the firm for which the individual works.

"I believe the intent was to have the fee-leveling occur at the registered rep level and not at the level of the financial institutions," said A. Richard "Brick" Susko, an ERISA attorney with Cleary Gottlieb Steen & Hamilton, New York.

"You won't have people implementing this (advice option) as quickly as people would like to until they get some clarity," added Elizabeth Varley, vice president and director of retirement policy for the Securities Industry Association, Washington.

Mark Iwry, a senior fellow at the Brookings Institution, Washington, said the asset management industry's motivation for changing the fee-leveling provision in the law was not necessarily a desire to make more money. He said the industry can also argue that making it easier for money managers to counsel plan participants serves the nation's interest in encouraging better investment choices and increased savings by workers.

"If they can do well by serving that need, then we're all better off," Mr. Iwry said.

Vincent Loporchio, a Fidelity spokesman, declined to provide details about the company's plans for offering investment advice but said in a statement that the firm's clients want it. "We welcome the fact that the PPA requires an independent third-party certification of an advice provider's methodology and an annual audit of the arrangement," Mr. Loporchio said. "This should help to assure plan sponsors and participants that what we're doing is in their best interest."

However, Charles Vieth, president of T. Rowe Price Retirement Plan Services, Baltimore, said his firm is planning to continue offering advice through independent third parties, in part because "plan sponsors have shown a preference for having independent third parties provide advice to their participants," Mr. Vieth said.

Industry officials said they are also seeking legislative clarification on whether the new law's disclosure provisions require them to provide detailed descriptions of self-directed brokerage windows, something they say would be impossible to do under the current PPA, as written.

In addition, asset management officials would prefer legislative guidance on whether they must include company stock in the overall computer models.