Nearly three and half years after the Pension Protection Act became law, and after the first set of related investment advice laws were thrown out by the incoming Obama administration, new rules were finally released on Friday. The intent of the rules is to ensure 401(k) participants can receive unbiased advice. To accomplish this, the rules call for the advice to be either level-fee or based on a computer model that meets certain criteria. The immediate reaction as reported by InvestmentNews is that the rules will certainly have a dramatic effect on the way the 401(k) advice industry does business. Supporters of the rules say that conflicted advice can be worse than no advice at all and welcome the changes, while opponents believe the new rules will lead to much of the industry staying out of the advice business altogether, leaving 401(k) participants as vulnerable as ever.
The proposed rules will be available on the Federal Register this week, with a public comment period lasting until the first week of May. Fi360 will have our thoughts on the proposed rules available here on the blog later this week.
Now on to the rest of the best links from the last week.
In the news/commentary:
- We knew it was coming, but the release this week of Dodd's reform bill is expected to include the Johnson amendment [InvestmentNews]
- The Committee for the Fiduciary Standard begins the fight against Johnson's amendment [Financial-Planning]
- Blaine's Fiduciary Corner column on 12b-1 fees from nearly two months ago continues to draw reaction [InvestmentNews]
- The Andy Rice, AIF, column on Roth IRA conversion also gets challenged [InvestmentNews]
- IAA lobbyist Neil Simon explains the current state of the fiduciary debate in reform and what pro-fiduciary proponents can still do to educate lawmakers [RIABiz]
- Don Trone lists seven traits for being a leader as a financial advisor [RIABiz]
From the organizations/associations/government/academia:
- SEC Commissioner Elisse Walter addresses regulation harmonization in a speech at the IAA Compliance Conference, among other topics. Included in her speech was support of the "fiduciary pledge" idea from the New York Times two weeks ago. [SEC]
- The Investment Advice rules announced by the DOL coincided with the announcement of an annual report by the White House's Middle Class Task Force, which included the rules as part of a broader section on improving retirement security [White House]
From the blogs:
- Sheryl Garrett, AIF, uses a case study to demonstrate why the fiduciary standard matters [The Motley Fool]
- Roger Wohlner looks at target date fund composition using the fi360 Toolkits [Chicago Financial Planner]
- After years of accumulating assets, even more questions arise once an investor nears retirement [The Investment Fiduciary]
- Kate McBride wonders why a study is needed to determine the needs of investors should be put placed first by advisors [Wealth Manager Web]
After following the development of the DOL advice regulation over the past 2-3 years in light of the PPA, the proposed reg by the DOL is potentially a huge boon for 3(38)'s. Essentially, broker/dealers and insurance companies with brokers are being forced to decouple the once lucrative link between advice to the plan, advice to participants and advice to IRA rollovers (not to mention other types of IRAs). Since non-fiduciary reps, brokers and agents are disqualified from being plan fiduciaries under the proposal, they will be disqualified from acting as a "fiduciary adviser" as defined by the PPA for advice given to plan participants.
Additionally, under ERISA it is a prohibitive transaction for a plan fiduciary to make a recommendation to a participant to take a distribution from the plan and to advise how the distributed assets are to be invested. As such, an advisor acting as a fiduciary adviser to participants is restricted from advising IRA rollover beneficiaries on when and how to rollover and invest IRA assets. The quandary facing the broker/dealer, mutual fund and insurance industries will be which of the three before mentioned groups they will focus on going forward. My guess: follow the money - they will go after the IRA rollover business and forget the other two, thus leaving a huge void for 3(21)s and
3(38)s to dominate the market at the plan level.
Another quick point: the proposed reg is huge in another aspect in that it eliminates the class exemption. As noted by Matt and Mark, this is another big blow to the large b/d and insurance companies. The previous DOL proposal would have allowed another broker or agent - other than the named fiduciary adviser - of the same broker/dealer to handle transactions on any IRA rollovers thus assuring the home office of a lucrative revenue stream. The new DOL proposed reg virtually eliminates such internal transactions, virtually assuring a decoupling of the affiliated b/d of the fiduciary adviser and the IRA rollover broker/dealer.
Posted by: Robb Smith, AIFA | March 06, 2010 at 05:32 PM