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Mar 25, 2009 11:50 am
From Investmentnews dot com House wrestles with adviser conflicts of interest issues By Sara Hansard
March 24, 2009 Only advisers who are independent of mutual funds, brokerage firms, insurance companies and other entities that sell financial products could give advice on individual retirement accounts if House Health, Employment, Labor and Pensions Subcommittee Chairman Rob Andrews, D-N.J., has his way.

“Whatever rules exist for IRAs should have ERISA-type protections, whether they’re the new IRAs the president’s proposed or existing IRAs,” he said after a hearing held today on “the importance of an independent investment adviser” held by his subcommittee, which is part of the House Education and Labor Committee.

Mr. Andrews referred to the Employee Retirement Income Security Act of 1974, which stipulates that advisers who are affiliated with entities that sell products can not provide direct advice to pension plan participants.

However, the Pension Protection Act of 2006 contained provisions making it easier to provide direct investment advice to participants in 401(k) plans.

Mr. Andrews and Education and Labor Committee Chairman George Miller, D-Calif., want to limit advice that can be provided to advisers who are not associated with companies that sell investments in an effort to reduce conflicts of interest.

The issue is particularly important because President Obama is proposing in his fiscal 2010 budget great expansion of IRAs through automatic enrollment, Mr. Andrews said.

Under the president’s proposal, the approximately 75 million workers who do not have access to retirement plans through their employer would be automatically enrolled in IRAs unless they chose not to enroll.

“We want to be sure that if there’s this automatic enrollment the president’s talked about, that the beneficiaries get the full protections of ERISA,” Mr. Andrews said.

“Our intention is that someone who gets an automatic enrollment through their employer has the full protection of the law.”

In addition to adding more protections against “conflicted advice” for IRAs, Mr. Andrews wants to require employers who offer investment advice with their 401(k) plans to include an option for employees to choose independent advisers who are not connected with companies selling investments. The employer would have to offer that option in order to enjoy liability protection.

“There needs to be a clearer connection for people to independent advisers,” he said.

Such a plan was outlined at the hearing by Mercer Bullard, founder and president of Fund Democracy Inc., an Oxford, Miss., non-profit. He is an associate professor of law at The University of Mississippi School of Law in the city of University.

Under current regulations, most employers are likely to “bundle” investment advice with other product offerings made by plan providers, which is likely to favor advisers who are affiliated with those companies, Mr. Bullard said.

“What you need to do is have a safe harbor. If there’s the possibility of conflicted advice being provided, then the employer has to make sure that there’s connectivity for independent advice,” Mr. Bullard said.

Under the Bush administration, the Department of Labor this year issued a regulation that would have allowed advisers affiliated with financial services companies to provide advice to 401(k) participants as long as fees earned by the adviser did not differ based on investment recommended.

Yesterday the DOL announced that it is putting the Bush regulation on hold for an additional 60 days ending May 22.

Critics of the proposal regulation argue that financial services companies would pressure their advisers to sell their own investments, which may not be in the best interests of plan participants.

According to a study by the Government Accountability Office presented at the hearing, pension consultants studied by the Securities and Exchange Commission from 2000 to 2004 had annual rates of return of 3.2% to 3.3% if the consultants did not disclose significant conflicts of interest.

Pension consultants who did not have disclosure violations had returns that averaged 4.5% per year, according to Charles Jeszeck, acting director of education, work force and income security at the GAO.

Mar 25, 2009 7:34 pm

Funny thing about this…I hear the “fee-based” model is coming under fire, yet, from what the administration is proposing (or Congress) is bascially saying is taht you need to run all retirement investment advice based on models, or somehow present “impartial” advice.  So I guess I am confused, absent using a model-based advisory platform, how exactly we are to go about doing this. 

  You know who this is going to hurt?  The small investors.  The exact one's it is meant to protect and help.  What will be someone's incentive to jump through hoops for someone with 50K?  It will exacerbate the problems we have right now even further.   I don't know, maybe I'm looking at this wrong.