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March 01, 2010 |
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New 401(k) Transparency Rules Proposed |
(Dow Jones) The U.S. government Friday proposed regulations designed to
enhance transparency for millions of workers covered by 401(k)s,
pensions and other retirement plans, offering long-awaited guidance for
investment firms.
Since the Pension Protection Act of 2006 was passed,
potentially creating a market that would permit investment advisors to
recommend their own funds, some firms have been awaiting further
guidance.
One of new rules would ensure that workers receive unbiased
advice about how to invest in their individual retirement accounts or
401(k) plans. If adopted, it would provide safeguards to prevent
investment advisors from slanting advice for their own financial gain.
It would also require that investment advisors disclose their fees, and
that computer models used to offer advice be certified as objective and
unbiased.
The Labor Department estimates that 2 million workers and 13
million IRA holders would benefit from this rule to the tune of $6
billion. It is accepting comments on the regulation until May 5.
A second rule, which goes into effect in April, will
establish new guidelines on the disclosure of funding and other
financial information to workers taking part in multi-employer
retirement plans, which are collectively bargained by unions and groups
of employers. The rule will ensure transparency by guaranteeing workers
can better monitor the financial condition and day-to-day operations of
their retirement investments, the Labor Department said.
U.S. Reps. George Miller (D., Calif.), chairman of the House
Education and Labor Committee, and Rob Andrews (D., N.J.), chairman of
the pensions subcommittee, welcomed the proposal, released as part of
the White House Middle Class Task Force's year-end report. "We hope
that this proposal will help to ensure that investment advice is based
on what is best for a family's long-term retirement security, not the
investment adviser's commissions," they said in a statement.
The rules were met with disappointment by the Securities
Industry and Financial Markets Association, or Sifma, Wall Street's
main lobbying group. The proposed regulation "will do little to expand
Americans' access to investment advice," Elizabeth Varley, managing
director of government affairs at Sifma, said in a statement. "Today's
move by Labor will hurt participants and investors, not help."
Many in the mutual-fund industry are likely to comment on
the proposal. The Investment Company Institute, the fund industry trade
group, said Friday that it is "a long-time supporter of making
investment advice more broadly available to 401(k) investors by
allowing them to obtain advice from providers that they are familiar
with, subject to strict fiduciary and disclosure conditions." The ICI
said it plans to file "a detailed comment."
The new regulations have a few key differences from the
final regulations presented by the Bush administration, which were
eventually withdrawn, according to Jan Jacobson, director of retirement
policy at the American Benefits Council, a trade group representing
plan sponsors. Under the earlier provisions, advice could be given by
an advisor affiliated in some way with some of the investments offered
under the plan, using a fee-leveling or unbiased computer-model
arrangement. In a fee-leveling arrangement, a firm offering advice must
charge a single flat fee to participants, regardless of which
investments are chosen.
The Bush proposal incorporated an exemption that permitted
the fee-leveling requirement to apply only to an individual advisor's
compensation. Under the rule proposed Friday, however, the company of
the employee providing the investment advice isn't permitted to receive
any compensation that would vary based on what the participant invests
in, Jacobson said. That may mean that some companies would restructure
so that they are able to offer advice through affiliates, she said.
In addition, under the Bush proposal if a plan participant
requested additional guidance beyond the computer model, it could be
provided if certain requirements were met. "That's not permitted under
these new proposed regulations," Jacobson said.
Edward Ferrigno, vice president of the Profit Sharing/401(k)
Council of America, said the new proposal raises more questions than it
provides answers. "Who we really need to hear from are the providers
who really have to interpret this and decide what the net effect of
this is."
On the other hand, Ferrigno said, it is important to bear in
mind that the new regulations have no effect on the 52% of plans that
are giving advice today. "Nobody is getting advice under this model
today," he said.
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