Despite Complaints, Labor Department Nixes Additional Fees for 401(k) Advisers

By Darla Mercado

Oct. 24, 2011

The Labor Department has finalized a rule that will deter advisers from receiving additional compensation based on the funds they choose for retirement plans.

The rule, which covers investment advice for participants and their beneficiaries, will apply to employees in 401(k) plans as well as clients in individual retirement accounts.

The regulation, effective on Dec. 27, 2011, will give fiduciary advisers two choices on how to provide participants with advice. First, they can receive compensation on a level fee basis, which means they–and their affiliates–won’t be able to receive variable compensation based on the investments they choose.

Alternatively, advisers can use a computer model that’s certified as unbiased by an independent auditor. That outside auditor will examine whether the model is set up according to generally accepted investment principles.

Labor Department Assistant Secretary Phyllis Borzi noted that the final version addressed one of the hot-button issues raised by advisers when the rule was proposed in March 2010. At the time, critics claimed the computer model would be biased toward passive investments and against active options.

They argued the rule’s original language said that it should be designed to avoid selecting options based on factors that could not be expected to persist in the future – such as performance.

“The big question is how relevant is historical performance,” said Borzi on a call with reporters Oct. 24. “While historical performance isn’t always an indicator of what the future will hold, you could provide that information as part of this model, with the caveat that the past isn’t always prologue.”

Darla Mercado writes for InvestmentNews, a sister publication of Workforce Management. To comment, email

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