The Labor Department's revamped proposal on investment advice could give index funds a big leg up in winning DC assets at the expense of active managers, leaving some experts fuming.
The proposal, released by Vice President Joe Biden at a Feb. 26 White House briefing would bar the use of performance data from computer models that generate advice, placing greater reliance on fees, which favor index funds.
“This could give passively managed funds an advantage over actively managed funds,” said Jason Bortz, an ERISA attorney for the law firm Davis & Harman LLP, Washington.
Another major concern is that the proposed Obama administration regulations — which would set the ground rules for providing investment advice to participants in defined contribution retirement plans — would define what “generally accepted” investment theories, or prudent investment strategies, must be used as the basis for computer-driven and direct-to-participant advice. These have not been defined by the government in the past.
“Given the government's track record as a money manager, I think we should all be concerned that the department is considering defining "generally accepted investment theories,'” said Bradford P. Campbell, an attorney with the law firm Schiff Hardin LLP, Washington. He was assistant secretary of labor for the Employee Benefits Security Administration from 2006 until January 2009.
“The government has not before, and should not now, try to micromanage the fiduciary process,” Mr. Campbell added in a statement. “It is not in the best interests of workers to develop a one-size-fits-all rule in which the government, not fiduciaries, makes investment decisions.”
Said David Abbey, managing counsel and vice president at T. Rowe Price Associates Inc., Baltimore: “The question this raises is whether it's appropriate for the regulators to be defining the term or whether this should be left to investment professionals who can respond to changes in the marketplace when providing advice.”
The proposed Obama rule could favor use of certain data, such as fees and expenses, over performance.
“While some differences between investment options within a single asset class, such as differences in fees and expenses or management style, are likely to persist in the future and therefore to constitute appropriate criteria for asset allocation, other differences, such as differences in historical performance, are less likely to persist and therefore less likely to constitute appropriate criteria for asset allocation,” the proposed Obama rule stated.