Conflicting Opinions: Advice Bill Introduced in Senate

November 14, 2001 ( ? Senators Jeff Bingaman (D-New Mexico) and Susan Collins (R-Maine) have introduced a new investment advice bill, one that purports to protect employers without removing some of the party-in-interest barriers that currently prevent investment management services firms from providing investment advice.

The Independent Investment Advice Act of 2001 would create a safe harbor in the Employee Retirement Income Security Act (ERISA) that would shield plan sponsors from liability for the selection and monitoring of qualified investment advisers, subject to certain critieria.

A new Section 404(e) would be added to ERISA protecting plan sponsors or other fiduciaries that designate and monitor investment advisers against liability for any loss with respect to the provision of investment advice, according to the Bureau of National Affairs.

Protection Conditions

In order to qualify for that protection, employers would be required to:

  • contract with a “qualified investment adviser” –a category that includes registered investment advisers, registered representatives, or registered broker or dealer,
  • review qualifications of an investment adviser, including the fee structure and contract, as well as a Uniform Application for Investment Registration as filed with the Securities and Exchange Commission (SEC) of comparable filing with the Department of Labor,
  • on an ongoing basis, investigate the investment adviser after receiving information questioning the adviser’s qualifications or a significant number of employee complaints

For its part, the adviser would be required to acknowledge fiduciary duty and, after reviewing plan documents, guarantee that the contracted relationship will not be in violation of any existing prohibited transaction rules under ERISA. The adviser must also determine that there is no material reason not to enter into the engagement.

Competing Interests?

However, by leaving the ERISA Section 406 prohibited transaction rules regarding a retirement plan and party in interest in place, the bill is expected to draw support from many currently opposed to those provisions in the Retirement Security Advice Act of 2001 (H.R. 2269), sponsored by Representative John Boehner (R-Ohio). That bill, which is expected to come for a full House vote in the next several weeks (see Ways and Means Greenlights Advice Bill ), would allow firms that manage money for a fee to also charge for investment advice regarding investment options. The bill also offers protections for employers that choose to offer investment advice.

Boehner’s bill has gained the support of the Administration, including the Secretaries of Treasury and Commerce and the Department of Labor (see Advice Bill Gains Treasury, Commerce Support ).

However it has been criticized by the Association of American Retired Persons (AARP) and the AFL-CIO, among others, for opening the door to “conflicted” advice from providers who might have financial incentives to promote their own offerings. Yesterday the American Society of Pension Actuaries (ASPA) issued a letter of support for the Bingaman-Collins bill , and this morning the Committee on the Investment of Employee Benefit Assets, an affiliate of the Association for Financial Professionals, also threw its support behind the Bingaman/Snowe version. A number of industry surveys have suggeste