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House Panel Revisits Advice Rules

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Some House Democrats want to rewrite a Bush administration rule that would permit advisors who sell 401(k) plans to give plan participants investment advice.

The final rule, released in January, “raised substantial questions of law and policy” and, as issued, “would have allowed conflicted financial advice to workers with regard to their 401(k) and other types of defined contribution plans,” according to Rep. Robert Andrews, D-N.J., chairman of the Health, Employment, Labor and Pensions Subcommittee, an arm of the House Education and Labor Committee.

Andrews talked about the rule Tuesday at a hearing on the importance of having an independent investment advisor.

The Employee Benefits Security Administration, part of the U.S. Department of Labor, announced Friday that it is postponing the effective date of the final rule until May 22. The effective date was going to be March 20.

The final rule would have allowed producers who sell defined benefit or defined contribution plans to employers to offer financial advice to the plan participants.

As written, the rule could allow advisors to violate the Employee Retirement Income Security Act by concealing income they receive from other sources, such as other vendors servicing the plan, Andrews said..

Investment advice can be beneficial to workers as long as it “is independent and free from conflict,” Andrews said. “During a time where American workers have already lost $2 trillion in assets due to last year’s market downturn, exposing their hard-earned retirement savings to greater risk by allowing advisers to offer them conflicted advice is irresponsible and imprudent.”

The Bush administration developed the investment rule to implement provisions of the Pension Protection Act of 2006.

The provisions changed the prohibited transaction provisions of ERISA to permit DB or DC plan providers to offer investment advice to plan participants, if the providers disclose that they will receive income from the investments purchased.

The manner in which the Bush administration issued the rule “paved the way for creation of a statutory loophole so that conflicted advice could be offered to participants through the regulatory process,” Andrews charged. The rule as promulgated “would expose millions of Americans to the Madoffs of the world,” he said, referring to the recently convicted investment advisor Bernard Madoff.

But some witnesses urged lawmakers to let the final rule take effect and asserted that plan participants sorely need professional investment advice.

“The inability of participants to get employer-facilitated investment advice of the type that other investors can get is one of the greatest problems with our retirement system,” said Andrew Oringer, a partner with White and Case L.L.P., New York. “I think it’s pretty clear that employees want this advice, and that employers want them to have it.”

Speaking on behalf of the Securities Industry and Financial Markets Association, Melanie Franco Nussdorf, a partner at Steptoe & Johnson L.L.P. Washington, said stock market conditions have damaged employees’ confidence in their financial security and in their ability to retire. Without professional advice , this situation will not change, Nussdorf warned.

“Our member firms hear every day that benefit plan clients would like additional advice and support on retirement planning, investment allocation and strategies for these assets,” Nussdorf testified.

Also during the hearing, a U.S. Government Accountability Office expert told lawmakers that a new study by his agency appeared to show an association between inadequate disclosure of conflicts of interest by plan consultants and lower returns for plan investments.

The results, based on a study of defined benefit plans, appear to show that plans whose consultants did not fully disclose potential conflicts achieved lower investment return on average than did plans serviced by pension consultants who disclosed their interests, said Charles Jeszeck, a GAO acting director.

“Competing interests can make it difficult for a plan’s fiduciaries, in general, to fulfill their duties impartially and could cause them to breach their duty to act solely in the interest of plan participants and beneficiaries,” Jeszeck said.

Links the written versions of the witnesses’ testimony and other hearing documents are available here.


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