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Investment Managers Seek to Advise 401(k) Participants

If the big financial services firms that manage 401(k) plans for corporate America had their way, they would be allowed to give participants in those plans detailed advice on how to invest their money. Critics argue that would be akin to letting the fox guard the henhouse, since those firms would have a financial incentive to recommend their own investment funds regardless of whether they were best for investors.

For the time being, the Employee Retirement Income Security Act makes the matter moot by prohibiting investment firms from giving such potentially conflicted advice. However, in a lively debate at the SVIA Forum, attorney Jon Breyfogle of the Groom Law Group argues that legislation sponsored by Representative John A. Boehner, (R-OH), would provide adequate conflict-of-interest safeguards to allow investment firms to give individualized advice to retirement plan participants. Passing that legislation, he says, would make advice available to more investors by increasing the number of companies providing advice. That, he said, would drive down the cost of advice and enhance its quality.

Under Boehner's Retirement Security Advice Act, investment managers providing advice to a retirement plan's participants would have to make comprehensive disclosures about the fees they receive for doing so, about other services they provide to the plan, and about any limitations to the scope of their advice. They would retain fiduciary liability for the advice they provide, although plan sponsors also would be liable for the prudent selection of their advice provider. The legislation, supported by most of the financial services industry including SVIA, has been received favorably in the House of Representatives but has not won comparable backing in the Senate, where Senators Jeff Bingamin (D-NM) and Susan Collins (R-ME) have introduced a competing bill. Called the Independent Investment Advice Act, one of its distinguishing features is that it would provide a fiduciary safe harbor for employers that offer investment advice through independent advisors.

However, the influential American Association of Retired Persons, represented in the SVIA debate by its director of federal affairs David Certner, opposes legislation that permits investment managers to also offer advice. "It seems clear to us," Certner says, "that you would not want to remove the conflict of interest prohibitions already in place. It seems ludicrous that we bring in independent advice in the defined benefit (pension plan) marketplace, which has sophisticated investors, but that we would not insist on independent advice for less sophisticated individual investors in the defined contribution plan market. Our sense is that if we are going to proceed down this path, let's do it right and make sure they (advice providers) have the interests of the participant at the top of their priority list."

With the year drawing to a close, no one expects either the Boehner or the Bingamin-Collins bills to be voted upon in 2002, setting the stage for further debate next year.

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