From the July 2010 issue of Investment Advisor • Subscribe!

July 1, 2010

Retirement Planning: Discord With DOL

Industry participants squabble over proposed final 401(k) advice rules

As the Department of Labor's Employee Benefits Security Administration (EBSA) prepares to move forward soon in finalizing its regulation on investment advice for 401(k)s and IRAs, comment letters have been streaming into the EBSA detailing areas in the proposed rulemaking that must be reconsidered.

Assistant Secretary of Labor for EBSA Phyllis Borzi said at the Investment Company Institute's (ICI) annual conference in Washington in early May that EBSA would move forward with a final rule in the next few months: The proposed rule was released in February and the comment period expired on May 2.

The proposal would not only require that all advisors receive a level fee when giving advice, but would also prohibit brokers from giving "off-model" computer advice to plan participants. The proposed rule would implement provisions of a statutory prohibited transaction exemption, and would replace guidance contained in a final rule released on January 21, 2009, that was withdrawn by DOL last November.

One area of the proposed rule that's receiving considerable attention by industry participants is the DOL's request for comments on whether it should provide regulations on what constitutes generally accepted investment theories.

The Profit Sharing/401(k) Council of America, the ERISA Industry Committee, and the U.S. Chamber of Commerce told EBSA in a joint comment letter that the "DOL should not regulate generally accepted investment theories." While the DOL's questions regarding generally accepted investment theories are "limited to the computer model, ... any finding by the Department will have repercussions beyond that," the groups wrote. "We emphatically urge the DOL to reject this idea. The concept that the Department might prescribe specific parameters on what constitute a generally accepted investment theory is inconsistent with the statute and the Department's longstanding positions on the operation of a retirement plan in compliance with ERISA's fiduciary requirements. Section 408(g)(3)(B)(i) requires the computer model to use generally accepted investment theories. The statute, wisely, does not define this term."

Indeed, Karen Barr, general counsel for the Investment Adviser Association (IAA) in Washington, wrote in her comment letter that "Read broadly, the views the Department may express in the final rule regarding generally accepted investment theories and considerations for investment recommendations could also affect existing computer model arrangements and all other investment decisions for plans and plan participants, such as which investment options are selected for a 401k plan menu and the conditions under which investment managers are permitted to manage defined benefit plan assets." For example, Barr wrote, "the Department's discussion regarding the relative risks of active and passive management and its focus on costs could lead plan sponsors to overweight passively managed funds in 401k plan menus. The Department's potential foray into the investment decision-making process is not appropriate for a number of reasons."

First, Barr continued, the DOL's discussion regarding generally accepted investment theories "goes beyond the scope of the statute and the implementing rule, which are intended to address conflicts of interest implicated by certain advice arrangements. As fiduciaries under ERISA, investment professionals owe both a duty of loyalty and a duty of care to the plan participants to whom they provide investment advice." Second, she wrote, investment professionals "are in the best position to evaluate generally accepted investment theories and the factors to consider in making investment decisions. The proposed rule seeks to enumerate the specific factors that fiduciaries are permitted to consider in developing computer models. The final rule instead should require fiduciaries to use unbiased or objective factors generally."

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