Opposition to 401(k) Advice Bill Brewing
August 6, 2001
A House subcommittee approved the Retirement Security Advice Act Thursday afternoon, prompting its proponents to insist that the House will pass it by year's end. It was the quickest markup of a bill in the history of the Committee on Education and the Workforce, lasting a short six minutes. But brewing far from the corridors of those meeting halls is an opposition that hopes for the bill's demise in the Senate.
Many financial planners, the American Association of Retired Persons, the massive union organization AFL-CIO all oppose the bill. Consensus among the opposition groups seems to be that all support making advice more-readily available to 401(k) investors, but they want to limit who provides it. Opponents say the bill allows mutual fund providers to steer workers toward products with higher fees. That conflict of interest, they say, will potentially result in bad investment advice and high costs to investors.
Opponents of the bill, which would allow 401(k) sponsors to contract fund companies to provide investment advice to workers, concede the idea has too much momentum in the Republican-controlled House not to be approved. That has resulted in festering resentment among some interest groups and financial planners, who say they've made a commitment to protecting clients' interests and don't want to see their industry tainted by shady advice.
"The problem we have with the bill is that it doesn't guarantee that employers or employees will have unbiased advice," said Lowell Smith, managing director of ERISA services for the retirement investment company Invesmart. "We don't think it goes far enough to protect the plan sponsors and the participants against inadequate advice."
Invesmart has written letters to the House Committee on Education and the Workforce, which is chaired by the bill's key sponsor, Rep. John Boehner (R-Ohio). The company has also issued a public statement of opposition to the proposed legislation and has spoken with other 401(k)-related firms, such as mPower, which also opposes the bill.
The firms have an ally in the AFL-CIO, which is concerned that the act will allow fund companies to make off with millions of dollars while workers' retirement portfolios suffer. "They're not going to give participants the best advice, they're going to give advice that benefits the mutual fund family or the insurance company or whatever," said Shaun O'Brien, senior policy analyst at the union. "And it's a pretty substantial risk. We're talking about a lot of money here. And even shading the advice a little bit returns a lot of money to the advisors."
O'Brien is pleased that the bill clears up "a gray area" in decades-old law that has left employers wondering who is liable for the advice provided by independent contractors, such as Invesmart. The 1974 Employee Retirement Income Security Act, or ERISA, prevents fund companies from offering advice to 401(k) investors, but allows independent contractors who cannot benefit from suggesting certain funds to provide such advice. But if such an independent contractor provides bad advice, it is unclear whether the employer, known as the plan sponsor, is liable.
The bill in committee now clears up that issue, putting the fiduciary responsibilities on the investment advisor, not the plan sponsor, O'Brien said. He wishes that's all the bill did. "We can clarify the issue of employer liability and cut out all this business of letting conflicted advice providers get into the business," he said. "If the real objective of the Boehner bill were to get more advice to people, they would simply address the liability issue."
The bill's proponents, meanwhile, say the potential for conflicts of interest are mitigated by enforcing stiff penalties for any advisor who doesn't "act solely in the interest of the worker" and disclose any such conflicts, according to a statement released by the House committee. "That's a long-held standard with ERISA that has worked in securities law throughout the last few decades," said Kevin Smith, an aid to the House committee.
In a dramatic shift, the Department of Labor, which opposed the bill before it fizzled in committee last year, endorsed the act last month, citing declining 401(k) portfolio returns and a greater need for investment advice among workers. That, and the fact that the Employer-Employee Relations (EER) Subcommittee approved the bill Thursday with bipartisan support, has Smith speculating that the bill will clear the full committee in September and the House by year's end. In addition, he said, opposition to the bill does not portend any trouble ahead.
"Momentum is definitely moving in our favor," he said. "Those people who have expressed some concerns, like the AFL-CIO and AARP, we're willing to hear them."
But he said the bill has not yet found a sponsor in the Democratic-controlled Senate and he isn't sure when proponents will find one. For Invesmart's Smith, that's a good sign.
"That says this is a special interest bill and that special interest hasn't found anybody to press the bill in the Senate yet," he said. "It'll have a hard time passing the Senate, because the Democrats don't particularly support this piece of legislation."