From the April 2010 issue of Research Magazine • Subscribe!

New Rules Coming for 401(k)s

The latest news on possible 401(k) regulation; Roth IRA trends; fund inflows; and developments at the top fund shops.

The White House organized a forum with the U.S. Department of Labor in late February to announce two new rules that it believes can "enhance retirement security and transparency for the millions of workers covered by 401(k), pension and other retirement arrangements," according to a Labor Department press release.

"These rules will strengthen America's private retirement system by ensuring workers get good, objective information," said U.S. Deputy Secretary of Labor Seth Harris in a statement.

The first of the two sets of rules proposes to "ensure workers receive unbiased advice about how to invest in their individual retirement accounts or 401(k) plans," according to the Labor Department. It requires investment advisors to disclose their fees, and computer models used to offer advice must be certified as objective and unbiased.

The department estimates that some 2 million workers and 13 million IRA holders should benefit from this rule to the tune of $6 billion.

How does the industry feel about the new rules affecting investment advice? Industry organizations have varied views.

"ICI has long supported making investment advice more broadly available to 401(k) investors by allowing them to obtain advice from providers that they are familiar with, subject to strict fiduciary and disclosure conditions," a spokesperson for the Investment Company Institute said in a statement. "We are pleased that the DOL has moved this important issue forward and we will file a detailed comment with the agency."

The Securities Industry and Financial Markets Association, however, was far more critical. "We are disappointed the Department of Labor decided to move in this direction after having withdrawn the previous final regulations and class exemption," said Elizabeth Varley, managing director, government affairs, in a prepared statement.

"The proposed regulation, if approved, will do little to expand American's access to investment advice. Americans are seeking the best paths to saving and investing for their retirement and deserve rules that allow them to do so," Varley said. "Today's move by Labor will hurt participants and investors, not help."

The second rule sets new guidelines on the disclosure of funding and other financial information to workers participating in multiemployer retirement plans -- those collectively bargained by unions and groups of employers. The rule will go into effect in April 2010, the Labor Department says.

The proposed regulation affecting investment advice allows advice to be given under a statutory exemption in two ways. One is through the use of a computer model certified as unbiased. The other way is through an adviser compensated on a "level-fee" basis (i.e., fees do not vary based on investments selected by the participant).

Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive. And the department estimates that the regulation will affect 16,000 investment advisory firms (including broker-dealers).

Also in February, the Labor Department published a Request for Information (or RFI) asking for ideas on how the industry can help reduce the chances that workers will run out of funds during their retirement years.

The RFI aims to explore whether and how to enhance retirement security for employees in defined contribution plans by facilitating access to, and the use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement.

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