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Fate Of Investment Advice Provisions Hinges On House-Senate Negotiations

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The ability of insurance companies and their agents to easily provide investment advice to investors in defined contribution programs will be at stake as House and Senate negotiators begin their efforts this week to reconcile different versions of legislation whose main goal is ensuring the solvency of defined benefit plans.

Insurers, agents and their trade groups will all be lobbying for inclusion of the provisions in the legislation, which the industry believes will jump-start its business and further diversify its products.

One noncontroversial provision calls for automatic enrollment of employees in 401(k) programs when they join a company.

Another provision would encourage employers to provide an annuitization option for a defined contribution plan by clarifying the safest available annuity.

Provisions in the House version of the bill provide for the favorable treatment of long term care riders on annuities, as well as a permanent extension of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001′s annual contribution limits for IRAs and qualified defined contribution plans that are due to sunset at the end of 2010.

A crucial provision for the industry deals with reducing current requirements based on conflict of interest concerns that limit the ability of insurers and their agents to provide investment advice to their 401(k) customers.

Both the House and Senate bills include language dealing with the rules agents and companies must follow in providing investment advice to plan participants and the fiduciary responsibility (and associated legal liability) companies now face from furnishing such advice.

The Senate bill mandates that agents and insurers go through more hoops than they would have to under the House bill to provide this advice to plan participants.

Rep. John Boehner, R-Ohio, chairman of the House Education and the Workforce Committee and majority leader, supports language in the House bill that would allow investment advisors whose funds are available under a 401(k) plan to give investment advice provided certain disclosure and qualifications are met.

Under the House bill, fees paid to the advisor would have to be reasonable (comparable to arms-length transactions), and the plan participant would have to make the actual investment decisions.

Also under the bill, plan sponsors would have no duty to monitor advice and would not be liable for the consequences of the advice.

By contrast, the Senate bill provides more limited options and greater liability. This reflects the concerns of Senate Finance Committee Chairman Charles Grassley, R-Iowa, and Sen. Jeff Bingaman, D-N.M., a senior member of the committee, that the lessons of the broker abuses of the late 1990s and early 2000s should not be dismissed lightly.

As a result, the Senate bill provides liability protections for investment advice from third parties but not for advisors that offer funds under the sponsor’s 401(k) plan.

In a January note to investors regarding the potential performance of life insurance companies this year, Colin Devine of Citigroup said the language in the House bill “could represent a very large opportunity for insurers with large defined contribution record-keeping businesses.”

He said that if the House provision is adopted, “Principal Financial, Prudential, Manulife, Nationwide Financial, American International Group and Lincoln National could be in a very favorable position to capture a material slice of the estimated $250 billion-plus annual IRA rollover market.”

Lobbyists for the American Council of Life Insurers have prepared materials and briefed staffers of legislators expected to be on the conference committee. “We do prefer the House version on the investment advice provision because we believe it will get more advice to plan participants,” said Jack Dolan, an ACLI spokesman.

“Still we would be happy if the Senate version passes,” Dolan said. “Both versions could be included, which would be fine with us, allowing the employer to choose whether it wants to offer ‘affiliated’ or ‘independent’ advice to employees,” he said.

At the same time, lobbyists for the National Association of Insurance and Financial Advisors said they “strongly support” the House bill, called the Pension Protection Act.

“It removes impediments that prevent millions of Americans with 401(k) accounts from receiving critical advice fromsources in the best position to offer it,” said Mike Kerley, a NAIFA lobbyist. “Any pension reform bill sent to President Bush that does not include the investment advice provision could put hard-working Americans in serious financial peril when they reach their retirement years.”

Kerley said statistics show thatonly 16% of 401(k) plan participants have an investment advisory service available to them through their retirement plan. He said current law “discourages employers from engaging agents of insurance companies administering 401(k) plans from offering employees sound advice for how best to manage their account investments.”

Negotiations on the differing bills could continue into March, but the legislation is considered essential to reducing the government’s cost of bailing out defined benefit plans going forward. The Senate’s failure to appoint conferees because Democrats are asking for one more conferee than Republicans want to give them is delaying the start of negotiations.


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