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House Bill Targets 401(k) Advice

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The ability of insurance and financial advisors to offer investment advice to owners of 401(k) benefits has been imperiled through legislation recently passed by a House committee.

The legislation would reverse hard-fought advances won in a 2006 bill that allowed financial intermediaries who sell 401(k) plans to offer investment advice to plan beneficiaries. In addition, the new bill would mandate substantively greater disclosure of fees charged by 401(k) service providers and plan administrators, a provision that is also opposed by employers and providers.

Moreover, to heighten the chances that Congress would pass the bill, the committee added to it provisions sought by employers that would give them greater flexibility in funding their defined benefit plans.

A staff official of the National Association of Insurance and Financial Advisers acknowledged that adding the defined benefit provision to the bill heightens the chances it would pass Congress.

But everyone in the retirement financial advice industry hopes that “down the road, cooler heads prevail, and the provisions relating to defined benefit plans are allowed to pass,” the official said.

It is unclear when the legislation, a pet project of Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, will be considered in the House.

No companion bill is under consideration in the Senate.

NAIFA members are “deeply disappointed” in the proposed investment advice law changes passed by the committee, the official said.

He said that if they become law, “the practical effect will be that many, if not most, rank-and-file employees will not have access to affordable professional advice regarding their 401(k) plan contributions.”

The proposed changes would roll back advice reforms backed by NAIFA that Congress adopted in 2006, the official noted.

“The 2006 reforms provide legal protection for employers that make advisors available to employees,” he said.

“Without the 2006 protections, it is unlikely that many employers will risk legal liability or pay the expense of offering advisors that pass muster under pre-2006 law or the modifications proposed in the bill passed by the committee,” he added.

The panel approved the bill, the 401(k) Fair Disclosure and Pension Security Act, H.R. 2989, by a 29-16 vote.

It would require 401(k) service providers and plan administrators to disclose fees charged on 401(k) plans, broken down into four categories: administrative fees, investment management fees, transaction fees and other fees.

It would also require 401(k) plans to disclose fees taken from accounts in participants’ quarterly statements and would mandate that if workers get investment advice through their jobs, that the advice be based on the workers’ needs and not the financial interest of those providing the advice.

It would also require plan administrators to offer at least one low-cost index fund to plan participants in order to be protected against liability for participants’ investment losses and would require service providers to disclose financial relationships that potentially might create a conflict of interest.

The defined benefit pension funding relief provisions in the legislation “will help alleviate some of this funding pressure by permitting companies using the spot yield curve for 2009 to be able to elect to use the segment rates for 2010,” according to James Klein, president of the American Benefits Council.

It also would revise the effective date of the Internal Revenue Service funding regulations to apply to plan years beginning after Dec. 31, 2009 and would clarify that the term “target normal cost” excludes plan investment expenses.

According to Klein, an amendment to the bill offered by Representative Brett Guthrie, R-Ken., adds the “two plus seven” provision, under which employers would be required for two years to pay interest on their plans’ 2008 losses to prevent the plans’ shortfall from growing.

But under the amendment, the seven-year amortization of those losses would not begin until the expiration of those two years.

“This relief will help restore companies’ economic footing,” Kline said. “We look forward to the committee returning to this issue as soon as possible,” he added.

Misgivings about the bill were expressed by a number of other industry groups.

These groups sent a joint letter to the committee raising questions about the practical impact of the tough disclosure and conflict-of-interest provisions of the legislation.

The trade groups include the American Bankers Association; the Financial Services Roundtable; the Investment Company Institute; the National Association of Manufacturers; the Profit Sharing/401k Council of America; the Securities Industry and Financial Markets Association; the Society for Human Resource Management; and the U.S. Chamber of Commerce.

“We continue to have some concerns about the underlying 401(k) fee disclosure bill, which continues to expose employers to unacceptable levels of fiduciary liability,” Klein said.

Klein also noted that the investment advice portion of the legislation would not protect the many non-conflicted advice arrangements approved by the U.S. Department of Labor before enactment of the Pension Protection Act of 2006–including those established under the long-standing SunAmerica advisory opinion.

The American Benefits Council had urged lawmakers to validate these pre-PPA arrangements in recent comments on H.R. 1988, which was added to H.R. 2989. The ABC had included in its comments proposed modifications to the bill, but these apparently were not in the bill as passed by the committee.


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