New 401(k) Advice Rules Set By End of February

The Department of Labor has declared their hopes for releasing the provisions for 401(k) advice by the end of February. Fair warning: The PPA was passed 4 1/2 years ago, and they still have not finalized said provisions. However, after the DoL was a bit embarrassed by the industry backlash by the legal, consumer protection and fiduciary experts, I actually feel optimistic they will get it right this time. In reading Phyllis Borzi‘s comments below, we are hopeful the provisions will look something like this:

• Conflict-Free : Our hope is that the DoL learned from the previously mentioned backlash and has stripped the potential conflicts of interest inherent to allowing an advisor’s affiliated firms to receive variable fees from the investment options of the retirement plan. Allowing for this could create a “puppeteer” effect. In this case, the affiliated firms (broker dealer, insurance company, bank, etc.) whom are providing the advisor the research and advice, to hold the advisor as a puppet providing advice that benefits the affiliated firm, and not necessarily the 401(k) investor. It is our opinion advice should be 100% conflict free and fee-only, and thus the advice provider should not have any “under the table” arrangements with the platform or receive any revenue or rewards based compensation from any investment or insurance company.
• Ongoing Advice Relationship : One of the most misunderstood aspects of 401(k) advice is the frequency. The SunAmerica Opinion was wise to create a requirement for consistent communication (quarterly), as it assists in making sure the advice is ongoing. One-time advice is not a fiduciary relationship. “In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests.” – Wikipedia
• Full Fee Disclosure : If advice and its cost to the participant are not easy to understand, 401(k) investors that need the advice will be slow to accept it. Keep it simple.
• Communication Requirement : As I mentioned before, the SunAmerica Opinion has a requirement of quarterly communications to the 401(k) investor as a reminder for the investor to reach out the advice provider to determine if their situation has changed. If their situation has changed, it is possible that the advice being delivered should as well.

Phyllis Borzi’s comments on Pensions and Investments:

The Labor Department is likely to issue new rules governing investment advice given to 401(k) plan participants by the end of this month, Assistant Labor Secretary Phyllis Borzi said today.

“We’re hoping that by the end of February it will be out,” she said of the new rules, which are now under review by the Office of Management and Budget.

She would not comment on what the new rules would look like, other than to say they “will be much more faithful to the statutory provision than the ones that we saw on Jan. 21, 2009,” referring to rules issued by the Bush administration just as President Barack Obama was taking office.

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