Bill Would Ease Some ERISA Rules On Who Can Offer Investment Advice

By

Washington

Can life insurance companies and agents that provide services to defined contribution plans also provide plan participants with unbiased investment advice?

That was the question debated at a hearing last week on legislation strongly supported by the life insurance industry that would allow financial services firms already providing products and services to plan sponsors to also provide investment advice to participants.

The legislation, H.R. 2269, would ease the fiduciary rules of the Employee Retirement Income Security Act, which currently bar these firms from offering investment advice.

Under H.R. 2269, affiliated financial services firms could provide advice subject to strict disclosure requirements regarding fees and relationships that could create conflicts of interest.

In testimony before a House Education and the Workforce Committee panel, the American Council of Life Insurers says the time has come to modernize the ERISA restrictions.

Jon W. Breyfogle, a Washington attorney who represents ACLI, says both employers and participants will benefit from a change.

Such a change, he says, will allow employers and participants to choose among advice services offered by both independent providers and full-service financial services firms.

“In addition, as a practical matter, employers that sponsor plans may not make advice services available to plan participants if they are required to separately contract with someone other than the financial services firm that administers the 401(k) plan to provide advice,” Breyfogle says.

H.R. 2269 contains numerous protections against conflicts of interest, he adds. For example, Breyfogle says, the ERISA fiduciary rules continue to apply to the provision of advice.

“These rules make it illegal for fiduciary advisors to make specific investment recommendations for the purpose of increasing their compensation,” he says. “The advisor would be personally liable to make up any losses caused by a breach of fiduciary duty and would be subject to civil penalties.”

ERISAs fiduciary rules will also apply to the employer who selects the advisor, he adds.

Because of these and other protections, Breyfogle says, ACLI believes H.R. 2269 strikes the right balance.

But Joseph Perkens, immediate past president of the American Association of Retired Persons, disagrees.

He says AARP acknowledges the need to provide better investment advice to plan participants, given the explosion of individual account pension plans over the past two decades.

However, Perkins says, it is not in the best interests of plan participants to encourage plans to provide advice subject to inherent financial conflicts.

ERISA has long recognized, he says, that advice should be free from financial conflict. Advice providers who stand to benefit financially from the type of advice given face just such a conflict, he says.

“Even with the disclosure of potential conflicts, the participant is not left with much real choice,” he says.

“The individual either chooses to accept advice that is subject to a conflict, or the individual can choose no advice at all,” Perkins says. “Providing pension participants with qualified advice is simply not the best approach.”

In a letter to the House committee, the Atlanta-based Financial Planning Association says it conditionally supports H.R. 2269, but agrees that as currently drafted the bill will maintain investor protection as intended under ERISA.

Duane R. Thompson, director of government relations for FPA, cites as an example a situation where an advisor could encourage plan participants to select investment options in a firm’s proprietary mutual funds in which the firm and the advisor typically earn higher fees than from other suitable investment options.

Such risks can be minimized, Thompson says, by restricting the ERISA exemptions in H.R. 2269 to investment advisors registered with the Securities and Exchange Commission or with their home states.

Indeed, Thompson says, registered investment advisors are the only proposed exempted class in H.R. 2269 with minimum competency requirements within the scope of providing investment advisory services.

Moreover, he says, registered investment advisors already comply with comprehensive disclosure requirements that go beyond those of H.R. 2269.

But David Winston, vice president of government affairs for the National Association of Insurance and Financial Advisors, Falls Church, Va., says proposals to modify H.R. 2269 to limit the professionals who can provide investment advice are based on false assertions that certain financial services professionals uphold higher standards of ethical conduct than NAIFA members.

“This position is nothing more than a blatant, self-serving attempt by one sector of the financial services industry to monopolize the market, and limit competition and consumer choice, for providing services to employees in connection with their retirement plans,” Winston says. “Such a limit is antithetical to the fundamental goal of this legislation–to expand the availability of investment advice for plan participants.”

Winston says NAIFA members also have strict competency and ethical standards.

“The truth is that NAIFA members and other financial professionals who would be qualified to provide financial consulting services under this bill are closely regulated and meet all of the relevant measures for providing sound professional services to their clients,” he says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 27, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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