New Rules For 401k Advice

Lax standards among financial advisers who manage 401(k)s and IRAs are in the crosshairs of the White House, which has proposed rules that require advisors to either use independent computer models that spit out advice, or else avoid steering workers into funds to which they are tied or that pay them a fee based on their recommendation.

Lax standards among financial advisers who manage 401(k)s and IRAs are in the crosshairs of the White House, which has proposed rules that require advisors to either use independent computer models that spit out advice, or else avoid steering workers into funds to which they are tied or that pay them a fee based on their recommendation.

The new rules are part of an overall package of reforms, and are open to public comment until May 5. Financial institutions that offer 401(k) programs to employers and offer financial advice to their employees fall under the rules.
According to the Department of Labor, which issued the proposed rules, the regulation should affect around 16,000 investment advisory firms (including b/ds), over 83,000 defined contribution pension plans with 2 million participants, and 13 million IRA beneficiaries.

Announced Friday at the unveiling of the annual report of the Middle Class Task Force headed by Vice President, Joe Biden, the proposed rules come amid a push for financial services reform in Washington. In one recent new poll for Allstate and National Journal, only 15 percent of respondents expressed strong trust in their FAs. “A lot of folks are not getting the best treatment, the best advice and the most help in figuring out how to deal with their retirement plans,” Biden said.

The DOL estimated that the cost of implementation of the proposed rules in the first year would include around $240 million for the preparation and distribution of disclosures to 15 million plan participants, $289 million to audit investment advice arrangements and $539 to certify computer investment advice arrangements. Every year after that these costs would total $125 million, $289 million and $269 million, respectively.

One Merrill Lynch broker had a slightly cynical reaction on Monday. “I didn’t think we had any unethical FAs anymore,” he told Registered Rep. “I thought the problem with workers’ retirement funds was the government. What happened to workers retirement funds was not my fault, it was the economic downturn.”

Still, this Merrill broker was unfazed, noting the burden of the proposed rules could weigh more heavily on others, such as smaller broker dealers that only offer a handful of fund families to clients. “I can see the reason for having some sort of third-party model that the adviser has to prove his recommendations is justified,” he said.

For the independent companies that track portfolio performance, the rules were welcome. Norman Pappous, who operates the Website, EvaluateMyAdvisor.com, told Registered Rep: “At the end of the day the [Obama] administration is effectively stating that FAs have harmed the performance of their clients, resulting in a reduced nest-egg. That lower performance is monetized in the fees generated by the advisors and in the firm’s income.” (See, How You Doin'? Registered Rep, September 1, 2009)

Pappous, a former broker, said he is critical of some advisors who are employed by broker dealers that normally do not have fiduciary responsibility. “Independent advisors are normally of a much higher caliber,” he added.

Until recent years, many employers feared inviting advisors to provide investment advice to their employees because of ERISA regulations. The fear was that employers faced legal sanction if any of the advisors’ recommendations did not work out. However, that fear began to dissipate in 2006 when the Pension Protection Act was enacted. (See, 401(k)s Coming Your Way, Registered Rep., April 1, 2007.)

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