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Protecting Participants:
Should Congress Make It Easier to Offer Investment Advice?

Nothing, it appears, is without controversy when it comes to providing investment advice to participants in defined contribution plans.

In June, U.S. Representative John Boehner (R-Ohio) introduced the Retirement Security Advice Act to make it easier for employers to offer investment advice to their employees without fear of incurring additional liability for that advice. Reported out of subcommittee in July, the bill would establish a statutory exemption from the ERISA prohibited transaction rules for the provision of investment advice to a retirement plan, its participants or beneficiaries; the sale or acquisition of assets pursuant to such advice; and the direct or indirect receipt of fees or other compensation in connection with providing the advice.

Under this proposed legislation, advice providers could be registered investment advisors, banks, insurance companies, registered broker/dealers, or affiliates or employees of the above. They would be required to make a host of disclosures to plan participants, including notice of all fees received in connection with their advice service and any limitations in the scope of their advice.

With many workers clamoring for help in allocating their retirement assets, and with a host of companies springing up to offer that help online at little or no cost, supporting Boehner's bill would appear to be a no-brainer. But some high-profile dissenters have surfaced, including the AFL-CIO and the Department of Labor. Their concern: by knocking down barriers to providing investment advice, workers could be left with insufficient protection against poor or unbiased guidance.

"If plan participants perceive us as lowering the bar, we've only delayed the day that fear and backlash develop," said Leslie Kramerich, acting assistant secretary for the U.S. Labor Department's Pension and Welfare Benefits Administration, in addressing the 2000 National Forum of the Stable Value Investment Association in October. Kramerich said her office is working closely with Congressional staffers to find a solution that would both empower and protect U.S. workers.

A key issue in the debate, said ERISA attorney Donald Myers of the Washington, D.C. office of Reed Smith, is the concern that workers could lose the protections they have now from receiving advice designed to benefit plan fiduciaries rather than plan participants. For example, current law recognizes that plan providers earn higher fees on some investment options than on others. The law makes it clear that advice to plan participants cannot simply favor the higher-cost investment options in a plan. Even if such advice were appropriate, the DOL would find that it violates fiduciary rules against self-dealing. That's a strong protection, and one that critics say could be compromised under the proposed legislation.

"The fundamental problems the framers of ERISA tried to address are still with us," observed ERISA attorney Phyllis Borzi, counsel to the Washington, D.C. law firm O'Donoghue & O'Donoghue, who also spoke at the SVIA forum. "The question is, do you deal with potential bias issues simply by disclosing them? I'm not sure it is."

Borzi also argued that Boehner's bill isn't fleshed out in sufficient detail, and that the liability for plan sponsors under the proposed legislation isn't clear. (See "Investment Advice: The Liability Issue")

"The bill says that notwithstanding anything in the bill, plan sponsors must still prudently select and monitor the advisor, but assume no responsibility to monitor the actual investment advice," Borzi said. "This is very puzzling to me."

Myers said that while there was a chance that Boehner's bill could be acted upon in the current Congress, "the general feeling is that's not likely."

In the meantime, advice providers such as Financial Engines, mPower, Morningstar and Standard & Poors are continuing to attract growing numbers of new clients. One of these providers—Standard & Poors—has gone to the trouble of securing a prohibited transaction exemption from the Department of Labor, a ruling which indicates that S&P's advice service doesn't violate ERISA rules against prohibited transactions. Ibbotson Associates, another advice provider, has sought a similar exemption.

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