Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
Breadcrumb
  1. Home
  2. Print
June 14, 2010 01:00 AM

Participant advice proposal satisfies no one

'A' for effort, but groups fault Labor Department plan

Robert Steyer
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Doug Goodman
    Worried: David Wray said 'unintended consequences' could result from the plan.

    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.”

    Second time around

    This is the second time the DOL has issued advice-giving regulations. The Bush administration's rules, scheduled to take effect March 2009, were delayed by the Obama administration on the grounds that officials wanted more public comment and more time to review the regulations.

    In November, the Labor Department withdrew the regulations, saying a portion of the Bush-endorsed rules didn't adequately guard against conflicts of interests involving investment advisers and affiliates.

    When the DOL offered its revised rules in March, officials said they were nearly identical to the Bush administration's regulations. Comments from industry participants, however, point to potential problems.

    When Mr. Wray used the words “unintended consequences,” he was referring to fears by his organization and by several others that the new rules could be interpreted as requiring certain computer models or investment theories as acceptable advice. “The consequences can be quite broad — beyond the context of the regulation,” he said.

    The PSCA, the U.S. Chamber of Commerce and the ERISA Industry Committee told the Labor Department that the government should refrain from recommending investment theories as part of the advice-giving regulation. “In the preamble to the proposed rule, the DOL requests comments on whether it should provide regulations on what constitutes generally accepted investment theories,” their jointly filed written comments stated.

    “These questions are limited to the computer model, but any finding by the department will have repercussions beyond that,” they added. “We emphatically urge the DOL to reject this idea.”

    If the Labor Department starts recommending investment theories, they warned, “then it will override the fiduciary obligations of the plan sponsors and the professionals.”

    Computer modeling provoked testy comment letters. “The department seems to be expressing a preference for a particular type of investment strategy, which is unprecedented and inconsistent with past DOL positions,” wrote David Certner, legislative counsel and legislative policy director for AARP, Washington.

    Noting that the DOL rule allows computer models to exclude advice on certain types of investments — including annuities and target-date funds — Mr. Certner argued that “a competent recommendation on investments cannot be made without ... taking into account all investment options.”

    Vanguard objects

    Vanguard Group, Malvern, Pa., objected to a passage in the Labor Department's discussion of its proposed rules that asked if restrictions should be placed on information used in creating the computer advice models. Restrictions could include historical risks and returns of different asset classes, information about participants, expenses for each investment option or the asset allocation for each option, the department said.

    “Presumably, by limiting a computer model to a consideration of only these factors, it would be difficult to compare actively managed funds in the same asset class, thus establishing a strong preference for index vs. actively managed funds in an acceptable computer model,” wrote managing directors R. Gregory Barton and George U. Sauter.

    Although Vanguard is a strong proponent of index funds, “we also believe that there is clearly a role for actively managed funds in an acceptable computer model,” they added.

    Active vs. passive was the issue that prompted the words “simplistic” and “flawed” from Mr. Bremen of NEPC. “If the DOL stipulates that inclusion of low-cost investment options are appropriate and that more expensive active management funds are less appropriate for the advice model, there's a danger that these regulations could impact other plan sponsor decisions,” he said in an interview.

    For example, sponsors might worry about using active or passive investments “as part of their core lineup or what kinds of target-date funds to offer,” said Mr. Bremen.

    The DCIIA raised several red flags in its comments. Because investment models and theories change over time, “it would be counter-productive to narrowly define the way in which models are created or to mandate the use of specific models,” the association wrote. “Plan fiduciaries, including investment advisers and plan sponsors, should be encouraged to take into account a broad range of considerations including fees, risk and historical investment performance” in preparing an investment menu.

    Recommended for You
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Carving a Path For Fixed Income Through Shifting Scenarios
    Sponsored Content: Carving a Path For Fixed Income Through Shifting Scenarios
    Sponsored
    White Papers
    2023 Hot Topics in Retirement and Financial Wellbeing
    Bonds: Shaken, but Not Stirred
    Today’s rate cycle and US equities in target date portfolios
    A Study of Allocations to Alternative Investments by Institutions and Financial…
    Unlocking Hidden Value in Japan
    The Art of the Possible in Data Automation for Institutional Investors
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars