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Experts Testify Against Last-Minute Bush Regs Permitting 401(k) Advice

Advice One of Many Regulations Obama is Reviewing


A last-minute Bush administration regulation that would permit advice in 401(k) plans was called into question Tuesday by a number of consumer advocates and other experts who testified before the House Committee on Education and the Workforce.

The proposal, finalized on Jan. 21, would permit plan administrators to give what some view as self-interested financial advice to participants.

Witnesses testified that it would permit financial advisers to charge higher fees and give conflicted investment advice on products in which they have a financial interest.

"If workers receive investment advice, it should be independent and free of conflicts of interest," said U.S. Rep. Rob Andrews (D-N.J.), chairman of the subcommittee. "During a time where American workers have already lost $2 trillion in assets due to last year's market downturn, exposing their hard-earned retirement savings to greater risk by allowing advisers to offer them conflicted advice is irresponsible and imprudent."

Mercer Bullard, founder of Fund Democracy, said, "Rather than promote the providing of independent financial advice to participants, the [new regulation] will promote conflicted advice, higher fees and lower investment returns."

The Department of Labor regulations would make it much easier for financial services firms that also act as plan fiduciaries to provide investment advice to participants in 401(k) plans and individual retirement accounts. Under the new guidance, 401(k) participants and IRA holders can receive investment advice by a computer model certified as unbiased and through a fiduciary adviser compensated on a "level-fee" basis.

The computer model, however, cannot favor investment options that generate the most income for the fiduciary adviser or a person with a material affiliation or material contractual relationship with the fiduciary adviser.

The Labor Department wanted to create a regulatory environment in which providers of defined contribution plan services could advise participants about investment options and safeguard that advice by ensuring no conflicts of interest occurred between plan fiduciaries and investment experts, said Matt Smith, the leader of Aon Consulting's U.S. national defined contribution practice, in an interview.

However, the day Barack Obama was sworn in as president, Rahm Emanuel, his chief of staff, issued a memorandum to heads of federal agencies and departments asking them to hold off on implementing certain federal regulations.

"President Obama has asked me to communicate to each of you his plan for managing the federal regulatory process at the beginning of his administration. It is important that President Obama's appointees and designees have the opportunity to review and approve any new or pending regulations," Emanuel wrote in the Jan. 20 memo.

The memo, published in the Federal Register, stated that published final regulations scheduled to take effect on or after Jan. 20 may be subject to a new effective date and an immediate reopening of a 30-day notice and comment period.

The Labor Department's final regulation on investment advice falls into the delayed category outlined in the White House memorandum, said Cara Welch, director of public policy at the nonprofit group WorldatWork, as the rules were to take effect March 23. After the White House directive, the Labor Department changed the effective date to May 23 and reopened the comment period, which ended in March.

Some analysts said the Obama administration and some Democratic senators may try to undo certain Bush-era regulations in the Pension Plan Act of 2006.

Alan Vorchheimer, a principal at Buck Consultants in New York, a subsidiary of Affiliated Computer Services of Dallas, said, "In 2006, when lawmakers were debating PPA," a question was raised: Why can't fund providers such as Fidelity, Vanguard and T. Rowe Price offer advice on their own funds?

"Well, everyone said that would create a giant conflict of interest," Vorchheimer said. "Therefore, the regulations were intended to create a framework in which plan fiduciaries could offer advice to participants."

Experts debate whether the new rules will improve plan participants' access to investment counsel. Vorchheimer, who specializes in defined contribution plans, said some plan fiduciary advisers might view the new regulations-including annual audits and ensuring computer models are in compliance-as burdensome.

That may discourage investment and financial services firms that serve as plan fiduciaries from creating business opportunities that focus on providing investment advice to 401(k) and IRA participants enrolled in their funds.

Welch said that, overall, her organization's members applaud government efforts to help workers save for retirement. But "there is also a concern that you can overwhelm an employee with too much information, so you have to make sure that the education or advice that is provided is clear and makes sense to the employee," she said.

"Information overload can sometimes mean employees don't get as much out of the education or advice as they should get," Welch said.

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