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Advice Exception Is Weighed in Congress

If legislation introduced in the House of Representatives late last month becomes law, it would make it easier for fund companies to capture a greater percentage of the nearly $300 billion annual rollover of 401(k) assets, according to industry executives and analysts.

The "Retirement Security Advice Act" seeks to modernize the Employee Retirement Income Security Act by establishing exemptions to the act that would allow plan providers to offer participants advice.

By providing advice, fund companies could establish stronger relationships with participants and would be in a better position to capture a greater percentage of 401(k) assets that are rolled over each year, said Michael C. Henkel, president of Ibbotson Associates of Chicago, a 401(k) advisory firm. According to a study by Sanford C. Bernstein & Co. of New York, fund companies capture 10 percent to 20 percent of the 401(k) assets rolled over annually, Henkel said.

"If [a plan provider] is catching only 10 to 20 percent of the roll over assets, anything they do to capture more of those assets is worth a lot of money," said Henkel.

Currently, it is very difficult for fund companies to track who is rolling over assets in 401(k) programs, said Dennis Dolego, director of research at Optima Group of Wilton, Conn., a mutual fund distribution consulting and research company.

"I think [fund companies] are trying to figure out who's rolling their assets over and they want to establish a marketing portal to those people," he said.

The legislation would require plan providers to disclose to participants and the Department of Labor any conflicts of interest that may exist if they were to provide advice in a plan.

But the disclosure requirements included in the legislation would not sufficiently protect plan participants, said Scott Campbell vice president and general counsel for Financial Engines of Palo Alto, Calif., an Internet-based advisory service for participants in 401(K) plans.

"Those conflicts are there and they are difficult to remove," he said. "They aren't removed by disclosure. Disclosure is not good enough." The only means of sufficiently addressing potential conflicts of interest would be to remove the plan provider's incentive to steer a participant towards its own funds, he said.

Fund firms have an interest in providing advice because it would allow them to steer participants' assets towards particular funds, thereby generating more fees from each participant, said Ted Benna, president of the 401(k) Association of Bellefont, Pa., an advocacy group. Benna is also a developer of the 401(k) concept.

"I don't feel [the legislation] is in the best interest for the participants," he said.

Financial Engines was one of several companies that testified before the House on the measure. Lawyers from Fidelity Investments of Boston and Frank Russell Company of Tacoma, Wash. also testified.

"Some participants need and want investment advice, and the prohibited transaction rules have imposed an unnecessary impediment to the provision of advice by those who have already earned participants' and plan sponsors' confidence," said Margaret H. Raymond, assistant general counsel of Fidelity Investments, in her testimony. Potential conflicts of interest of a plan provider offering participants advice would be adequately addressed by the Investment Advisers Act of 1940 which protects plan participants from "undue bias and bad advice," she said.

Also, competitive pressure would discourage plan providers from providing advice in their own self interest, said Raymond.

"The mutual fund industry and other investment professionals receiving mutual fund revenues would not be willing to risk their reputations by providing bad or biased investment advice," she said.

The Investment Company Institute and the American Council of Life Insurers, both of Washington D.C., have endorsed the legislation.

"To avoid violating ERISA, plans expend enormous amounts of labor and incur great costs, but the result is no meaningful benefit to plan participants," said Carroll A. Campbell, Jr., president and CEO of the ACLI, in a statement. "In fact, the only tangible result is lower benefits than those that would otherwise be offered and, for many Americans, a lack of pension coverage altogether."