Labor Dept. issues investment advice regulation

[October 25, 2011]  DES MOINES, Iowa (AP) -- The Department of Labor on Monday issued a new regulation designed to improve access to expert investment advice for workers with 401(k) and individual retirement accounts.

The rule makes it easier for providers of 401(k) plans such as Charles Schwab, Vanguard, and Principal Financial to offer their own individual account advice and bundle it with other retirement services.

Currently an employer might offer a Vanguard 401(k), for example, but in order to offer advice, it's required to contract with a separate independent investment adviser to comply with regulations against conflicts of interest.

Previous government regulations prohibited plan providers from offering investment advice if their advisers might benefit financially from their recommendations. Because many 401(k) providers also offer their own mutual funds and other investment services, an in-house adviser or the plan provider could benefit financially if investors were steered toward its funds.

As a result, employers who wanted to provide advice hired an independent adviser to make investment recommendations.

Although large employers offering 401(k) plans were more likely to hire an independent adviser, many smaller companies probably did not. They may now be able to add advice to their plans, said David Wray, president of the Profit Sharing/401(k) Council of America, a not-for-profit association of companies that sponsor retirement plans.

Small companies will be interested in the bundled options of a 401(k) plan with advisory services. "They want simple solutions and don't want to deal with four different vendors," Wray said.

The Labor Department estimated that 401(k) plans covering 17 million participants will begin to offer investment advice under the new rule. It expects about 3.5 million of these participants and beneficiaries to seek advice. The department also estimates that 17 million IRA beneficiaries will seek advice under the new rule.

About 16,000 investment advisory firms will provide advice.

The required audits, paperwork and mandatory disclosures will cause plan providers to take a close look at whether it's worth the revenue that might be added from offering advice, said Donald J. Myers, partner at Morgan, Lewis & Bockius, a Washington law firm specializing in employee benefits, investment management and labor issues.

The new regulation, effective Dec. 27, provides an exemption that will permit 401(k) plan providers to offer advice if the investment advice is based on an unbiased computer model or the adviser's compensation is not affected by the investment recommendations. The advice arrangement must be audited annually to ensure it complies with the regulations.

Companies had been operating under the Employee Retirement Income Security Act, or ERISA, which laid out strict regulations designed to protect investors from advisers that might benefit financially from recommending certain investments.

As assets in 401(k) and IRA accounts have grown -- they total about $4.7 trillion -- the government has concluded that individuals could benefit more from the advice of professionals as workers try to manage their mutual fund investment choices.

"Unfortunately, there's evidence that many individuals may make costly investment errors which can certainly result in lower financial retirement account balances," said Phyllis Borzi, an assistant labor secretary.

For companies that are not offering advice, this change may start the conversation about whether to begin, said Dave Gray, vice president of client experience at Charles Schwab.

People who seek advice make significant changes. "Savings rates double, their diversification goes from three asset classes to eight and they stay the course with their investments," Gray said.

He hopes employers realize the benefits that advice can provide and begin to expand their programs. But workers must also ask their employers if investment advice is available, and take advantage of what's offered.

The government estimates increased advice offered as a result of the new regulation will reduce investment mistakes by $7 billion to $18 billion a year.

The cost of implementing the new rules, which include required annual audits, is between $2 billion and $5 billion a year.

Labor officials have attempted to strike a balance between helping investors and ensuring that the recommendations given are objective and in the best interest of the investor, Borzi said.

[Associated Press; By DAVID PITT]

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