House Evaluates 401(k) and IRA Financial Advice Rules

Experts debated whether financial services firms should be allowed to offer investment advice


The House held a hearing this morning to review the rules that govern how financial advice is dispensed to 401(k) and IRA participants. The debate was largely in response to a Labor Department rule, finalized in January, that would allow financial advisers affiliated with mutual funds and brokerage firms to give investment advice to IRA and 401(k) account holders, as long as they disclose how the company earns fees and the computer models used. The rule is currently scheduled to take affect May 22.

Critics of the rule say it will allow investment companies to offer advice that benefits financial services firms and not employees. “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,” said Rep. Robert Andrews, a New Jersey Democrat who heads the House subcommittee on pensions, in his opening statement.

Several of the experts warned in their testimony that allowing financial services firms to offer investment advice could further deplete worker’s retirement accounts. “The Pension Protection Act’s conflicted advice exemption and the Department of Labor’s interpretation and extension of the exemption will promote the providing of conflicted advice to pension plan participants, and participants will pay higher fees and experience inferior investment returns as a result,” said Mercer Bullard, an associate professor of law at the University of Mississippi who testified on behalf of the Consumer Federation of America. “The exemption will have the effect of suppressing the providing of independent advice to participants while encouraging participants to rely on advisers whose incentives are to maximize their own compensation at the expense of participants.”

Plans that have pension consultants with significant undisclosed conflicts of interest are associated with lower returns, according to a Government Accountability Office study discussed at the hearing. “We found lower annual rates of return for those ongoing plans associated with consultants who had failed to disclose significant conflicts of interest, with lower rates generally ranging from a statistically significant 1.2 to 1.3 percentage points over the 2000 to 2004 period,” said Charles Jeszeck, the GAO’s assistant director of education, workforce, and income security issues. “Updating regulations to better reflect the potential impact of undisclosed business arrangements among 401(k) service providers will help Labor provide more effective oversight of 401(k) plans and likely result in reduced fees for 401(k) plan participants. Without such changes, Labor will continue to lack comprehensive information on all fees being charged directly or indirectly to 401(k) plans and 401(k) plan participants’ returns are likely to be potentially affected by some conflicts of interest.”

Other panelists pointed out that the Labor Department rule will allow 401(k) and IRA participants easier access to financial advice. “Current advice programs do not reach enough workers in ways that are comfortable for those workers, to make professional investment advice the norm, rather than the exception,” said Melanie Nussdorf, a partner at law firm Steptoe & Johnson, speaking on behalf of the Securities Industry and Financial Markets Association, a Washington trade group. “If the rules promulgated under the Pension Protection Act are allowed to take effect, plan participants will have access to advice providers who offer advice on a wide variety of investments, in person or on the phone, in a cost-effective manner.”

But safeguards to that advice are important. “The Holy Grail here should not be the delivery of purely conflict-free advice, it should be the delivery of conflict-safe advice,” said Andrew Oringer, a partner at law firm White & Case in New York. Oringer recommends not calling advice from brokers “conflicted advice” but instead “inside advice”.

Tell us, should financial services firms be allowed to offer investment advice?