Labor Departments 401(k) Proposal Could Rock Pension Advice Business

By Staff Report

Mar. 1, 2010

The Labor Department has released proposed regulations that prohibit financial advisors giving advice to 401(k) plans—or to their employer or the employer’s affiliates—from receiving extra compensation because the plan sponsors bought a product recommended by the advisor.

“They can’t take advantage of the exemption if anyone in that chain gets compensated [from the advice provided,]” Assistant Labor Secretary Phyllis Borzi said Friday, February 26, in a conference call discussing the proposed rules.

The proposed regulations would make it more difficult for advisors affiliated with broker-dealers and insurance companies to provide advice to plan participants, industry observers said. The rules also may pose huge challenges for actively managed funds in the retirement space.

Many advisors had hoped that affiliates of the advisor’s employer would be exempt from the rules.

“We are disappointed the Department of Labor decided to move in this direction after having withdrawn the previous final regulations and class exemption,” Elizabethc managing director of government affairs of the Securities Industry and Financial Markets Association, said in a statement. “The proposed regulation, if approved, will do little to expand American’s access to investment advice.”

The proposal would apply to advisors who recommend target-date funds, Borzi said. One of the major criticisms of target-date funds, she noted, is that they often are made up of the investment managers’ proprietary portfolios.

Under the proposal, if an advisor recommends a fund to plan participants and the advisor’s compensation is affected directly or indirectly by that recommendation, it is considered a prohibited transaction.

The proposed rules also allow for the use of independent computer modeling for advice. The factors the model can take into account, however, caused some observers to wonder if it would create an uneven playing field in favor of index funds.

Specifically, the rules suggest that while computer modeling can take into account such factors as fees and expenses, it may not make sense to take into account historical performance when generating advice.

“If you aren’t using historical performance, you are removing one of the primary justifications for fees for actively managed funds,” said Bradford P. Campbell, an attorney at Schiff Hardin who used to work at the Labor Department’s Employee Benefits Security Administration.

Observers predict that the fund industry will weigh in heavily on this issue during the comment period since it could have huge effects on actively managed funds.

“It means that actively managed funds in the retirement marketplace would very much be in question and could lose market share,” said Ryan Alfred, co-founder and president of BrightScope Inc., which rates 401(k) plans.

When asked about this issue on the conference call Friday, Borzi said she welcomed comment on this question of historical performance.

“There is a difference in opinion as to what extent historical returns are a predictor of future performance,” she said. “If people have concerns with how we have structured the regulation and want to address some of the questions, we urge everyone to participate in the discussion.”

The Investment Company Institute is reviewing the proposal and plans to issue a comment letter, spokeswoman Ianthe Zabel said.

“ICI shares the DOL’s goal of increasing access to advice under conditions that protect plan participants. The new DOL proposal largely tracks the rule published last year but, in addition, the DOL is posing a number of questions related to generally accepted investment principles,” she said in a statement. “ICI is reviewing the proposal and questions carefully and, working with ICI members, looks forward to filing a detailed comment letter.”


Filed by Jessica Toonkel Marquez of Investment News, a sister publication of Workforce Management. To comment, e-mail

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