In Depth – New Administration Embraces Investment Advice Bill

Washington, DC, July 17, 2001 ( - In a turnaround from its position under the Clinton administration, the Department of Labor Tuesday voiced support for the Retirement Security Advice Act (HR 2269), a bill similar to one that died in Congress last year.

The DoL position was voiced in testimony by Ann Combs, Assistant Secretary of Labor for Pension and Welfare Benefits before the Subcommittee for Employer-Employee Relations, chaired by this year’s and last year’s sponsor of the legislation, Representative John Boehner (R-Ohio).

The bill would offer employers more explicit protections for providing investment advice to their participants, while at the same time removing ERISA-imposed barriers that have largely precluded money managers from offering the service for a fee.

Almost exactly a year ago, the DOL had taken a significantly different stance on HR 4747, a bill nearly identical to HR 2269. The DoL then argued that current law did an adequate job of protecting employers who were prudent in their selection of an advice provider. (see The Details: How Far Can Education Go Without Crossing the Line? ).
Education Not Enough

“Investment education, while important, is simply not enough,” Combs said Tuesday. “The Department’s 1996 guidance sought to allay these fears, but a conforming statutory amendment would serve to provide the certainty employers seek.” Combs was referring to fiduciary concerns that have prevented many plan sponsors from offering advice, concerns that the DoL sought to address in a guideline it issued in 1996.

“The growing integration of the financial services industry,” coupled with “the desire of many employers to deal with one provider for all 401(k) services” has led some providers to seek a prohibited transaction exemption to offer the advice, albeit “conditioned on fairly specific structural limitations,” Combs said.

Combs said that the Department was presently conducting a review of agency policy that would lead to a “common sense” approach that protects participants, but is flexible enough to allow for competition and innovation.”  She said that review would be completed this fall.

What If?

In a subsequent question and answer session, Representative Robert Andrews (D-NJ) offered two “what if” scenarios to clarify Comb’s understanding of the bill in its current form. He was addressing the potential conflict of interest critics of the bill charge will emerge when money managers are also allowed to offer paid investment advice.

  • In one scenario, he outlined a situation where an employee is “told” about the potential conflict of interest in the advice product in a large manual at the point of hire, and no more.  Combs said that situation likely wouldn’t pass muster under the current bill, which requires “clear and conspicuous disclosure.”  Andrews honed in on language in the bill requiring that disclosure take place “at the time of advice or before.”  Chairman Boehner noted the intent was to offer “contemporaneous disclosure”, and suggested the language might be tightened to clarify that point.
  • In the second situation, Andrews outlined a situation where a bank employee working in the pension department was offering advice, though they were not certified or registered to do so in any way.  Combs said that in her understanding of the current bill, that person could offer advice – that the bank would be the fiduciary, bound by the law.  She also noted that the bank, in all likelihood, would want to make sure that the individual was trained or licensed in some way.

In response to questions from Representative Carolyn McCarthy, (D-NY), Combs offered to provide numbers