With both regulatory and legislative efforts to rebuild investment advice regulation still pending, several of the witnesses testifying Thursday said the system in place based on the Department of Labor (DoL) SunAmerica advisory opinion has proven effective in recent years in getting advice to Americans. It should not be disturbed, the witnesses insisted.
The recent measure approved by the House Education and Labor Committee would make it more difficult and expensive for sponsors to continue their efforts to provide advice, leading many to vow to abandon the advice provision completely (see Andrews Introduces Advice Legislation ).
“The Education and Labor Committee set out to improve the quality of investment advice. However, the bill’s broad reach would, in fact, cause a huge reduction in the provision of sound non-conflicted advice by invalidating pre-PPA arrangements,” said lawyer Robert G. Chambers who appeared on behalf of the American Benefits Council, the Profit Sharing/401k Council of America, and the Society For Human Resource Management (SHRM). “The effect of this reduction in advice arrangements would be very adverse, because, as noted, today, more than ever, participants need advice to get them back on course toward retirement security. In a very large number of cases, the following types of nonconflicted advice would be prohibited or made much more expensive and cumbersome by the Education and Labor Committee bill.”
Christopher Jones, executive vice president of Investment Management and chief investment officer for Financial Engines, agreed with Chambers.
“Financial Engines believes that our ability to operate under the SunAmerica Opinion has substantially facilitated the delivery of unconflicted advice to plan participants,” Jones said. “We believe the SunAmerica framework allows Financial Engines to provide convenient and cost-effective access to independent and unconflicted advice to more participants, particularly those working for smaller companies. Employees benefit when investment advice is part of a single fully integrated source for all their 401(k) plan questions.”
"Employers need clear rules that apply when an employer chooses to make investment education or investment advice available under a participant-directed defined contribution plan," said Mark Ugoretz, president of the ERISA Industry Committee. "Congress should recognize, however, that plan sponsors and fiduciaries are increasingly targeted in class action lawsuits that propose expansive theories of fiduciary liability and seek substantive damages. Even when these lawsuits are without merit, as is often the case, they are expensive to defend and they divert time and attention from the employer's business."
However, one witness argued that the SunAmerica system still does not provide the needed clarity to financial services providers.
"What we have is advisory opinions, prohibited transaction exemptions and information bulletins that leave room for practices I think should be of concern," said Mark A. Davis, vice president and financial adviser with CAPTRUST Financial Advisors, who testified on behalf of the National Association of Independent Retirement Plan Advisors.
Appearing at a recent conference, Assistant Secretary of Labor Phyllis Borzi announced that the DoL was taking a new look at an investment advice regulatory rule proposed by the prior Administration (see EBSA Sets Out Carrot, Stick Agenda ) and that a revised version would be made public shortly. .
The hearing also dealt with concerns raised by defined benefit sponsors around the country about the ultimate impact of accelerated funding requirements raised by the Pension Protection Act (PPA) that kicked in just before the economy went into a tailspin. Witnesses argued that lawmakers need to resolve the issue quickly since employers facing the PPA's funding timetable need to determine now how to fund the plans.
William Nuti, chairman and chief executive officer of NCR who appeared for his company and the American Benefits Council, asserted in his remarks that the situation represents a significant financial problem for many employers, which companies can negotiate if provided the flexibility to do so.
"Given such time, we can manage the losses our plan sustained in the market downturn, and at the same time make the necessary investments to grow our business and create jobs," Nuti said, who told the lawmakers that his pension plan was 110% funded in January 2008 and had plummeted to 75% funded a year later.
"We, and the many other companies in a similar position, will have to make decisions before the end of this year in order to be ready to satisfy the dramatically increased funding obligation we expect to owe," Nuti testified. "Because this obligation is required by law, we will be forced to divert resources from our business and from job retention and creation. At a time when we can least afford to do so, we will need to divert capital away from critical investments in business growth and toward funding for a long-term obligation."
Nuti declared: "As a business, we must undertake steps NOW to reserve cash for this very large liability."
Nuti praised the efforts of Representative Earl Pomeroy (D-North Dakonta) who is readying a funding relief measure (see Pomeroy Continues Filling Out DB Funding Package Proposal ).
Attorney Damon Silvers, associate general counsel for the AFL-CIO, echoed calls for relief from PPA dictates.
"First, pension funds need immediate relief from the provisions of the Pension Protection Act that force funds to behave as if they had to pay out all benefits at any one time," Silvers contended. "This relief should take the form of a return to a smoothing approach to pension asset valuation. This return to a smoothing approach should not be understood as a temporary adoption of a less appropriate approach, but rather a return to a more appropriate approach to pension asset valuation that should be made permanent."
More information about the hearing is available here .
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