DOL Opens Advice Window for Investment Firms

By Staff Report

Sep. 8, 2008

The Labor Department has proposed to dramatically open the door for mutual funds and other investment companies to offer investment advice directly to participants in defined-contribution plans.

Fund companies long have been effectively barred from offering direct advice to participants because of fears that the advisors might steer participants to the companies’ own investment options.

But under a proposed class exemption published in the Federal Register on August 22, the Department of Labor would allow an investment company’s employees to offer one-on-one advice directly, as long as the employee’s compensation doesn’t depend on the investment options selected by the participant, and the advice meets other key conditions. (The proposal can be viewed here.)

The Pension Protection Act of 2006 included a provision intended to provide limited leeway for plan participants to receive investment advice, but the proposed exemption takes it further.

Proponents of the proposed class exemption, backed by Rep. John Boehner, R-Ohio, insist that DOL action is needed to provide investment advisors with meaningful relief from the advice prohibitions.

“Americans deserve face-to-face, personally tailored advice on a range of investment options to meet their own unique needs,” Boehner said in a release. The proposed exemption “is a major step toward giving workers that.” Calls to Boehner’s office for additional comment were not returned by press time.

Critics, however, said the new proposal goes far beyond the relief envisioned by the pension law.

One key problem is that it would open the door for conflicts of interest and then rely on after-the-fact enforcement efforts to ferret out abuses.

“This is blind to the way ethics sometime play out in the marketplace,” said Norman Stein, a professor of law at the University of Alabama, Tuscaloosa, and senior advisor to the Pension Rights Center in Washington.

“We all know that there will be winks and nods and bonuses that will be discretionary. If conflicts are possible, they’re going to happen.”

Rep. George Miller, D-California, chairman of the House Education and Labor Committee, said in a release: “The rules proposed by the [DOL] are nothing more than a boon for Wall Street and corporate executives, and I urge the department to immediately withdraw these harmful proposals.” Miller was in Denver last week for the Democratic National Convention and could not be reached for further comment.

“The Bush administration is proposing to further tip the scales toward special interests by opening the door to conflicts of interest among the very consultants purporting to offer unbiased investment advice, and potentially allowing companies to reap windfall profits at the expense of American workers,” Miller added.

Still, supporters of the proposed class exemption argue the DOL has provided adequate safeguards to protect the interests of plan participants.

“I think with the care that has gone on with developing and balancing these rules that this concern [about conflicts of interest] may start to diminish or maybe even disappear,” said Andrew Oringer, an ERISA attorney for New York-based law firm White & Case.

Supporters of the proposed class exemption said that department intervention is needed to provide meaningful advice relief. The advice provisions of the PPA provided too little relief to be of much value, they maintain.

Under one reading of the new law, mutual fund employees could provide the advice only if all of the mutual fund’s investment options were offered at the same price, regardless of whether they are, for example, active or passive.

In a Field Assistance Bulletin issued February 2, 2007, the DOL, however, interpreted the new law to mean the fee-leveling requirement did not apply to a fund’s investment options if the fund’s advice provider worked for a separate affiliate of the fund and the fees received by the separate affiliate didn’t vary depending on the selection of the investment options.

ERISA attorneys say the August 22 proposed class exemption proposes to extend the relief from fee leveling to firms that don’t operate their investment advice and investment management services through separate affiliates.

“The class exemption is a helpful effort by the Department of Labor to rationalize the investment advice structure Congress created with the Pension Protection Act,” said Jason Bortz, an ERISA attorney for Davis & Harman in Washington.

“The net result is it’s going to be a lot easier for plan participants to get investment advice and a lot easier for advisors to give investment advice to the largest possible group of people,” said Melanie Nussdorf, a partner at the law firm Steptoe & Johnson in Washington.

DOL officials say the exemption would make it easier for defined-contribution plan participants and individual retirement account holders to get personalized investment advice.

But the proposal comes with a number of strings attached.

It essentially says that advice would be OK if offered through computer models independently certified to be unbiased or if the compensation of the advisor providing one-on-one consultation doesn’t vary depending on the investments selected based on the advice.

The proposed exemption also would permit advisors to provide participants with follow-up advice if the participants want more options than those offered by a computer model.

To qualify as an “eligible investment advice arrangement,” under the proposed exemption, advice also would have to rely on “generally accepted” investment theories and take into account the participant’s retirement age, risk tolerance and investment preferences.

In addition, to qualify as an eligible investment advice arrangement, the arrangement must be expressly approved by a plan fiduciary and audited at least annually. The manager also must disclose to participants all fees or compensation that the manager or its affiliates might receive and keep records on the advice for at least six years.

Despite the fact that the department’s proposed class exemption would allow major mutual fund companies to offer their own advice, it’s unclear how the ruling will affect existing advice providers.

The class exemption could stimulate interest in the proprietary advice programs offered by Vanguard Group Inc., said Dennis Simmons, a principal in Vanguard’s ERISA and fiduciary services team.

“At the end of the day, it will help our advice programs because plan sponsors will have a clear road map in confirming that the programs are consistent with ERISA,” he said.

Nonetheless, Simmons said Malvern, Pennsylvania-based Vanguard planned to continue offering interested plan sponsors the independent third-party advice services of Palo Alto-based California Financial Engines Inc.

At T. Rowe Price Retirement Plan Services Inc. in Baltimore, officials have no plans to provide direct advice. “Right now, we expect to continue with our existing model” of using third-party providers, said spokesman Brian Lewbart.

A spokesman for Fidelity Investments in Boston had no comment.

Peng Chen, president of Chicago-based Ibbotson Associates said there still will be a place for independent advice providers. “A lot of record keepers and plan sponsors will continue preferring third parties because of the independence and experience and the potential cost savings a firm like Ibbotson can bring to the table,” he said.

As of June 30, Chicago-based Morningstar Inc. subsidiaries Morningstar Associates and Ibbotson Associates were providing third-party computer-model advice to 15.6 million retirement plan participants through 136,000 plan sponsors and 29 plan providers, according to Courtney Goethals Dobrow, a Morningstar spokeswoman.

Comments on the proposed class exemption, along with a related proposed regulation, are due October 6. They can be emailed to

Filed by Doug Halonen Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail

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