On Nov. 19, 2009, the U.S. Department of Labor (DOL) issued an announcement officially withdrawing the final rule on providing investment advice to participants in 401(k)-type defined contribution retirement plans. The notice withdrawing the final rule was published in the Federal Register on Nov. 20, 2009.
The final rule had been issued by the Bush administration in January 2009 (see DOL Issues Final Rule on 401(k) Investment Advice), but its effective date had been repeatedly delayed by the Obama administration.
The DOL indicated that, sometime in the future, it intends to release for comment a new proposed rule that will more strictly limit the ability of plan service providers to confer investment advice to plan participants.
A New Final Rule
On Oct. 24, 2011, the Obama administration's DOL issued a new final rule intended to improve workers’ access to fiduciary investment advice (see "Obama Administration Issues Final Rule on Investment Advice").
The article below was originally posted on 9/16/09, when the DOL's Employee Benefits Security Administration indicated its intention to drop the final investment advice rule.
The U.S. Labor Department (DOL) is dropping the investment advice regulation adopted as a final rule in the waning days of the Bush administration. The rule, which the Obama administration had put on hold (see DOL Further Delays (Not So) Final Investment Advice Rule), would have implemented sections of the Pension Protection Act allowing 401(k) and other defined contribution plan participants to receive advice from financial firms that act as plan service providers, under certain conditions.
"We believe the final investment advice regulation published in the January 21  Federal Register went too far in permitting investment advice arrangements not specifically contemplated by the statutory exemption," Phyllis Borzi, assistant secretary of labor and head of DOL's Employee Benefits Security Administration, said on Sept. 14, 2009, in Washington, D.C., at DOL Speaks, a benefits conference sponsored by DOL and the American Society of Pension Professionals and Actuaries (ASPPA). "We are taking a fresh look at the regulation that was issued and are working to bring it more closely in line with the [Pension Protection Act's] statutory language," she added.
While signaling the DOL's intention to thoroughly revise the rule prior to its eventual implementation, the department technically issued a delay of the regulation's "effective and applicability date" until November 18, 2009. [Update: On Nov. 17, 2009, the DOL issued an announcement further delaying implementation of investment advice regulations until May 17, 2010, "to allow additional time for the department to complete its analysis of questions of law and policy concerning the rules." But just two days later, on Nov. 19, the DOL issued an announcement that it was withdrawing the final rule and would subsequently issue a new proposed rule that more strictly limits the ability of plan service providers to confer investment advice to plan participants.]
Borzi indicated that DOL would be taking a more restricted view of the widely referenced SunAmerica Retirement Markets Advisory Opinion issued by DOL in 2001, which paved the way for defined contribution plan service providers to offer advice to plan participants through an affiliated adviser using an independently developed computer model. The advisory opinion provided an exemption from the Employee Retirement Income Security Act (ERISA)'s prohibited transaction restrictions, allowing for the use of a model asset allocation portfolio produced by a computer program applying a methodology developed, maintained, and overseen by a financial expert independent of SunAmerica, a manager of retirement plan assets.
Borzi said the department has received reports that the SunAmerica opinion is being interpreted “very broadly,” beyond the intent and reach intended by the opinion. The opinion, she warned, was fact-specific, and advisory opinions cannot be relied on beyond the specific fact situation.
A Controversial Rule
In December 2006, the Pension Protection Act (PPA) signed into law by then-President Bush amended ERISA's prohibited transaction provisions by adding a class exemption to allow greater flexibility for participants of 401(k)-type plans to obtain investment advice from plan service providers or their affiliates. The PPA requires of these "fiduciary advisers" that they ensure that one of the following occurs:
• Charge a flat fee that does not vary depending on the investment choices that plan participants make.
• Investment recommendations/asset allocations are based on a computer model certified by an independent third party to be unbiased and objective (similar to DOL's SunAmerica opinion).
Under either approach, the statute requires several safeguards, including an annual audit of the arrangement. And while the act grants limited liability protection regarding individual investment advice that meets the above criteria, employers are still required to select and manage their investment advice provider prudently.
On Jan. 21, 2009, DOL published the final rule, which was intended to help plan sponsors implement the PPA's provisions. Some U.S. lawmakers, in particular House Education and Labor Committee Chairman George Miller, D-Calif., expressed concern that allowing plan service providers to charge for investment advice could led to firms recommending inappropriate, high-expense products, despite the restrictions in the regulations and in the PPA. Such opposition prompted the incoming Obama administration to put a hold on the final rule by extending the effective date of the rule twice, the second time until Nov. 18, 2009. It was that approaching deadline that prompted Borzi to announce DOL's intention to withdraw the rule.
During a DOL Speaks panel discussion, Fred Wong, DOL senior employee benefits law specialist, said the department is likely to propose a new, more restricted rule to implement the PPA's investment advice provisions, with greater limits on the ability of plan service providers to give advice. Wong said he "can't make any promises" as to when a revised rule would be proposed.
On the same DOL Speaks panel, Jon W. Breyfogle, an executive principal with Groom Law Group Chartered in Washington, D.C., suggested that if a more restricted regulation were forthcoming from DOL, it was likely to focus on computer models provided by independent third-party advisers "with no room for off-model advice under the class exemption, even if requested by the participant." He noted that, adding to the unsettled situation, in March 2009 Rep. Robert Andrews, D-N.J., chairman of the House Health, Employment, Labor and Pensions Subcommittee, proposed the Conflicted Investment Advice Prohibition Act of 2009 (H.R. 1988), which would repeal the advice provision contained in the PPA so as to severely restrict plan service providers or their affiliates from providing advice to plan participants.
One upshot, Breyfogle noted, was if a more restricted advice rule were implemented by DOL, then the Andrews bill "might just go away."
Some predict that revoking the final investment advice rule will lead to a boon for independent advisers who don't sell investment products, although the cost of hiring independent advisers, as opposed to allowing advice from financial firms that act as plan service providers or their affiliates, is likely to raise barriers — especially for plan participants who work for smaller organizations. A possible result: fewer employer/plan sponsors are likely to provide employee/participants with any investment advice, at least until a new regulation is put in place.
Along these lines, Jon C. Chambers, a principal with the investment consulting firm Schultz Collins Lawson Chambers in San Francisco, offered some pertinent observations during his remarks at DOL Speaks. He noted that rescinding the final rule means there will continue to be "lots of complexity, lots of uncertainty and frustration, rather than getting closer to a solution," and that "plan sponsors will not adopt investment advice until that uncertainty goes away."
Chambers recommended keeping in mind what plan participants have indicated they want in terms of investment advice. "Participants want comprehensive help in managing their retirement plans," he stated. "They want advice that is customized to their individual objectives. And they are looking for a relationship with an individual, not a service bureau."
Chambers added that participants are "unwilling to spend more than five minutes, on average, entering data into an interactive program," whereas many sophisticated computer programs require that extensive data be entered, somewhat akin to filing a tax return.
As to plan sponsors, Chambers noted that they want "effective use of their dollars spent on investment advice and a clear delineation of fiduciary responsibility" with a safe harbor from liability if they abide by the rules.
Given these desires, Chambers concluded, advice generated by an independent computer model "does not see a lot of utilization" by plan participants, nor does it provide a significant return on investment for plan sponsors. Limiting the provision of investment advice to such an impersonal approach is likely to result in a "migration away from advice toward a managed-account model" in which participants turn over the ability to control their investments to a third party, removing themselves from the process, rather then empowering them to make decisions in their own interest.
Stephen Miller is an online editor/manager for SHRM.
Labor Department Reworking Investment Advice Rule, InvestmentNews, November 2009
SHRM Online Benefits Discipline