In trying to clarify who can give advice to 401(k) plan participants and under what circumstances, the Department of Labor appears to have antagonized just about everybody.
A wide swath of respondents — service providers, trade organizations, consumer groups — found something to dislike about proposed rules on providing investment advice and avoiding conflicts of interest in delivering the advice, according to comments filed recently with the Labor Department.
While praising the DOL for trying to protect consumers and to establish acceptable boundaries of advice-giving, respondents raised questions about specific investment advice issues such as using computer models, establishing fees and determining the relationship between advisers and affiliates.
Some also expressed concern, in written comments and in interviews with Pensions & Investments, that the proposed regulations could take on a life of their own unless they were further clarified.
“In a system as big and complicated as the 401(k), unintended consequences lurk in the shadows of every regulatory change,” David Wray, president of the Profit Sharing/401(k) Council of America, Chicago, said in an interview.
“The Department of Labor is trying to figure out how advice can be provided without participants being taken advantage of,” Ross A. Bremen, a partner at investment consultant NEPC LLC, Cambridge, Mass., said in an interview. “In an attempt to solve this dilemma, the department has come up with something that is simplistic and potentially flawed.”
Both Mr. Wray's organization and the Defined Contribution Institutional Investment Association — a group that represents institutional investment managers, record keepers, insurers, trust companies, consultants and plan sponsors that has Mr. Bremen as its chairman of the public policy and legal committee — filed formal comments asking for adjustments or revisions in the proposed regulations.
The proposed rules relate to the Pension Protection Act of 2006, which created some statutory exemptions to ERISA's prohibitions against certain investment advice for participants in 401(k) plans and individual retirement accounts.
“In general, investment advice given by an investment adviser to plan participants that pay additional fees to the adviser or its affiliates can violate” sections of ERISA and the Internal Revenue Code, the DOL said when it unveiled the proposed rules in March. “This has limited the types of investment advice arrangements available to participants in 401(k) plans and IRAs.”
The DOL's proposed rules seek to establish an exemption for advice that uses a “computer model certified as unbiased.” Another exemption covers advice given on a level-fee basis, in which fees are the same regardless on the investment selected by a participant.
Such exemptions would be subject to several requirements, the DOL said. For example, the plan fiduciary must select the computer model or fee-leveling arrangement independent of an investment adviser or the adviser's affiliates; computer models used in providing advice must be certified in advance as “unbiased”; experts who certify the computer-model validity will be subject to certain qualifications; and fee-leveling deals must prohibit investment advisers from receiving payments from affiliates “on the basis of their recommendations.”