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October 24, 2001
Bill Would Allow More 401(k) Advice
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Federal law places restrictions and safeguards on how investment advice is given to 401(k) participants, so most employers do not make specific investment advice available to employees.
But The New York Times reports that many of those restrictions would be removed under legislation sponsored by Rep John A. Boehner, an Ohio Republican. His bill was approved on Oct. 3 by the House Committee on Education and the Work Force, and he hopes to bring it to a vote on the House floor this year.
While the bill's future is far from certain, there is bipartisan agreement on changing the rules somehow; other bills are in the works even if this one fails.
Supporters of the Boehner bill argue that changing the rules governing 401(k) advice will free investment companies' hands to serve the needs of investors. Opponents say those hands may end up in investors' pockets.
Under current law, the investment firms that manage 401(k)'s are generally prohibited from offering advice to plan participants about their own products. Boehner's bill would lift that restriction. That prospect appeals to these firms, represented by lobbying groups like the Investment Company Institute and the American Council of Life Insurance.
"This legislation will be very helpful for individual investors and employers who are looking to get more information to their employees about how to invest the money in their retirement plans," said Elizabeth Varley, vice president and director for retirement policy at the Securities Industry Association.
Last year, under President Clinton, the Labor Department opposed the bill. But in June of this year, under President Bush, department officials testified in its favor.
Boehner's bill would allow investment firms to give guidance about specific investments, including their own, though they would be obliged to make clear disclosures about conflicts of interest. Proponents of the bill say investment firms would be held liable if they offered advice that was not in the best interest of plan participants.
Those who support the existing restrictions say disclosure requirements would not provide enough protection for investors. "Employees would be left with a choice of conflicted advice or no advice," said Michele Farmer, general counsel for mPower, which is based in San Francisco and is among several independent, Internet-based companies that offer recommendations about retirement plan choices.
Financial services firms that manage 401(k) plans are eager to offer advice that could lead to increased investment in their products. "Investment firms make a lot more money from the products they sell than from the fees they get for advice," said Dallas Salisbury, president of the Employee Benefits Research Institute, a nonprofit organization in Washington, which is neutral on Boehner's bill.
The investment firms, Salisbury added, hope to build relationships with 401(k) investors, and help them manage rollovers into Individual Retirement Accounts when they switch jobs or retire. "A whole lot of this is about asset capture," he said.
Lobbyists for consumer groups worry that allowing firms that manage 401(k) plans to offer advice could mean less independent guidance. "It would be a huge step backward," said an AARP spokesperson.
Because of liability concerns, many employers, especially larger ones, have avoided hiring anyone to give advice. Boehner's bill would remove potential liability as long as employers choose advisers properly.
To view the New York Times story, click here. Registration required.
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