More retirement savers may get investment advice through their 401(k) or IRA due to a new Labor Department rule published this week. Retirement plan administrators will be able to give advice to account holders beginning on December 27 if they meet specific requirements that are meant to ensure unbiased recommendations.
The new rule is an exemption from an existing retirement account law that prohibits fiduciaries from providing advice about investments they receive compensation from. In the past, retirement plan providers needed to hire an independent third party if they wanted to provide advice for plan participants in order to prevent fund managers from recommending funds with high fees and commissions.
To prevent conflicts of interest, the new rule requires that advice dispensed through a retirement account be given by an adviser whose compensation does not vary based on the investments selected. Alternatively, plan sponsors can give advice using a computer model that is certified as unbiased by an independent expert. Investment advisers will also be required to disclose their fees and be subject to an annual audit for compliance with the regulation.
Many employers already offer investment advice through advisers who are unaffiliated with the 401(k) plan. Over half of 401(k) plans (59.4 percent) offered investment advice in 2010, according to a Plan Sponsor Council of America survey of 820 401(k) plans with 10.5 million participants, typically over the Internet (62 percent), through one-on-one counseling (59 percent), or using telephone hotlines (56 percent). However, less than a quarter (22 percent) of retirement account participants used this advice when it was offered.
The Labor Department says the new rule will improve employee access to fiduciary investment advice. "Given the rise in participation in 401(k)-type plans and IRAs, the retirement security of millions of America's workers increasingly depends on their investment decisions," says Phyllis Borzi, assistant secretary of the Employee Benefits Security Administration. "This rule will make high-quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest."
But the Plan Sponsor Council of America, a trade group for 401(k) and profit sharing plans, says complying with the rule will be complex and expensive. “There is now a thriving community of advice providers operating under the original ERISA standard,” says David Wray, president of PSCA. “We need to wait and see if the major plan service providers go to the time and expense necessary under the rule to add advice to their menus.”
The cost of advice under the rule is expected to range between $1.9 billion and $5.1 billion and yield benefits of between $7 billion and $18 billion annually. The net financial benefit of the legislation is expected to be approximately $5 billion to $13 billion. “This final rule is expected to make quality fiduciary advice available to participants at a lower direct price, because advisers will be able to rely on indirect revenue sources, subject to the safeguards and conditions of the final rule, to compensate their efforts,” according to the final rule published in the Federal Register. “It may also make such advice available at a lower total cost to participants.”