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New 401(k) Advice Rule to Focus on Fiduciaries

The Department of Labor is revising its guidance on investment advice in 401(k) plans by expanding its focus from independent advice to redefining fiduciary duty.

Advice remains "the most controversial" issue in the Pension Protection Act, said Phyllis Borzi, assistant secretary of labor at the Employee Benefits Security Administration, and the issue of how to best offer advice has been "debated by two or three Congresses."

"We have received 70 comment letters and have promised Congress we will be faithful to the intent of the original statute," Borzi said.

To date, the "debate has focused on the question of who should be able to provide that advice, and that this independent advice be reliable, simplified, understandable and relevant," Borzi said.

"Looking ahead, we will take a fresh look at the definition of fiduciary, 35 years after the passage of ERISA," she said. "The rules need to be updated to conform to market reality. [The Employee Retirement Income Security Act] was passed in 1977, before the 401(k) space even existed. I know this is creating extreme angst, but we have a responsibility to protect participants and sponsors."

Speakers on "The Way Forward for Retirement Saving" panel at the Investment Company Institute's General Membership Meeting in Washington earlier this month, at which Borzi made her remarks, concurred that while automatic enrollment and other qualified default investment alternatives (QDIA) features have brought investors a long way, true investment advice in defined contribution plans has yet to become widely or confidently embraced.


"People are still shying away from providing advice due to prohibitive transaction provisions," said Ralph Derbyshire, senior vice president and deputy general counsel at Fidelity Investments. "Advice must come from plan service providers, who can't provide advice. The ERISA advice rule sets a high bar. You can't provide asset allocation with proper guidance, even without fiduciary status."

One important development that is needed to make investment advice in DC plans a reality, said Steve Utkus, principal at The Vanguard Group, would be harmonization of the fiduciary standard among broker/dealers.

Anna Rappaport, who spent 28 years with Mercer Human Resource Consulting and now runs her own consulting practice, said true investment advice is but one of a number of "really big disconnects" on retirement planning.

"We need a longer-term planning horizon, to get [participants] to find out where they stand" and to examine the variables that affect lifetime income, Rappaport said. "These are really critical issues."

"Here's a piece of financial advice for you," said Rappaport, who also lists "retiree" among her credentials. "Keep your skills up-to-date. Consider becoming a 'phased retiree.' If you want to stay in the game, you need career and life planning for your 50s and 60s."

Target-Date Regulation

The Labor Department and the Securities and Exchange Commission are also scrutinizing target-date funds. On May 6, the DOL and SEC issued an investor bulletin on target-date funds to better explain their intended function, glidepaths and appropriate use (see "SEC, DOL to Require More Target-Date Info," MME 5/3/10).

"But this really is only Phase One," Borzi said. "Phase Two will be a checklist for plan sponsors, primarily for use by smaller and mid-size plans.

"Phase Three will be an amendment to the QDIA regulation with respect to target-date funds and the spillover application of the use of target-date funds outside QDIAs in 401(k)s and other retirement plans.

"Plan sponsors need to provide a lot more information," Borzi said.

The SEC and DOL investor bulletin on target-date funds tells people it is aimed at helping them better understand these funds-their objectives and risks, and the significant differences in their asset allocations and glidepaths over time, up to and after the target date of the fund. It suggests ways an investor can evaluate a target-date fund, directing investors to examine the prospectus for information on: performance, objectives, risk levels and fees. Find out what funds the fund-of-funds is invested in, and, in turn, what their holdings are, the agencies advise investors.

The guidance also reminds participants that target-date funds do not guarantee an investor will have sufficient retirement income, and while they are designed as a "set it and forget it" product, an individual's financial situation and risk tolerance may change over time, and, thus, they need to revist their portfolio from time to time.

The Employee Benefits Security Administration has a Phase Four, Borzi said, which actually underpins all of the other issues.

"Looking ahead, we will take a fresh look at the definition of fiduciary duty, 35 years after the passage of ERISA," the assistant labor secretary said.

Other EBSA priorities include clearer fee disclosure in defined contribution plans, both to sponsors and investors, as well as offering lifetime income choices in workplace savings plans.

DOL has received more than 700 comment letters in response to its request for information on lifetime income streams which asked the industry for information in three areas, Borzi said. First, the agency wants "a better picture of new products," she said.

Second, DOL wants to explore reasons why plan sponsors should offer lifetime income streams and why investors should want lifetime income. Finally, the DOL, along with policymakers and other federal agencies, wants to know how it may help the marketplace and plan sponsors better serve shareholders.

The many questions surrounding retirement planning and decumulation should lead people to think more broadly about their overall well-being in retirement, Rappaport said. "Tools are critical, but there's lots of things to think about. The Social Security Administration has good tools on their website, and I am proud I was part of the actuarial foundation to help the agency with that. There's a lot of good information [available] from third-party, neutral sources."

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