Sunday, February 28, 2010

“Access” Points

On Friday, the Department of Labor, as part of the White House’s Middle Class Task Force, formally unveiled a couple of initiatives.

The “new” one—and the one likely to capture the attention of the retirement plan community over the next several weeks—deals with investment advice for participants (see “DoL Proposes New Advice Rule”).

At a high level, the DoL has taken a major step back from the position it took in the final regulations on the subject put together—by the DoL—in 2008 before being halted, and then withdrawn last November by the new Administration (see “IMHO: Executive Order”). They also, IMHO, seem to have taken a step back from the admonitions of the Pension Protection Act of 2006 (PPA) to draft regulations that would craft an exemption to ERISA’s prohibited transaction rules that have long barred the ability to be compensated for advice on a basis that might vary according to the recommendations of the adviser1.

Withdrawal “Symptoms”

Now, many (including, apparently, some that signed that legislation) have always had an issue (to put it mildly) with this particular provision of the PPA, which they fear opens the door to “conflicted” advice (see “IMHO: Irreconcilable Differences”). Of course, proponents of the PPA’s interpretation have argued that part of the DoL’s charge was to build compliance and disclosure structures that would prevent that result. However, that apparently wasn’t possible—at least for the current DoL, which, after halting the publication of the rules and putting it back out for comment, decided last fall to withdraw its proposal “in response to concerns raised in public comment letters questioning the adequacy of the final class exemption's conditions to mitigate the potential for investment adviser self-dealing2.”

Let me be clear: I’m not faulting the DoL for essentially adopting the position that the solution that they had crafted under the leadership of one Administration was not workable under another. Greed is a corrupting force, and even the most able, honest, and forthright adviser could, on any given day, be tempted to offer advice that better fits his or her own needs than that of a participant (we also know that there are plenty of advisers out there who are neither able, honest, nor forthright). Let’s face it—the folks most in need of investment advice are most assuredly also the least likely to read (or to understand) the disclosures that are supposed to put them on notice that the advice they are about to receive could be tainted (note that, even with those opportunities muted by the new regulations, the proposed disclosure form runs FIVE pages). In large part, IMHO, requiring that compensation for investment advice be “level”—as the newly proposed regulations do—is no more than a return to the status quo.

That, of course, is also its limitation. After all, while the new regulations were touted as a means of “increasing access” to “high quality investment advice,” I think it’s fair to say that the practical result is an emphasis on “high quality” (read “not from a source whose compensation varies according to the advice provided”) rather than “access,” because I’m hard-pressed to see how the new regulations will do much to engender a real expansion of advice offerings3.

Shifting Gears

Mitigating the impact of this shift in position—and, make no mistake, it is a shift—is the reality that there are many more fee-based advisers serving this space today than there were even as recently as 2006. Perhaps some of these were motivated by the ability to offer participant advice, but I see little connection between that movement and these particular regulations. Another reality is that a growing number of participants are simply being defaulted into investment options without the “intervention” of the participant, much less an advised participant.

Additionally, the proposed regulations contain new restrictions on the design and deployment of the computer model (the selection must be made by a plan fiduciary unaffiliated with the adviser), and some intriguing questions about the applicability of specific investment theories4, as well as a determination that it is not only the adviser, but the adviser’s firm whose compensation impact must be considered. However well-intentioned, these new elements will almost certainly impede, rather than accelerate, the availability of these tools.

While the DoL made an effort to estimate the impact advice can have5, we have no such estimates on the impact of potentially conflicted counsel. Presumably, those conflicts could put participants in the clutches of a “Madoff wanna be,” but, frankly, I’m hard-pressed to understand the difference between the recommendations potentially incentivized by the personal interest of an adviser versus those of a plumber, real estate agent, used car salesman, or lawyer (though perhaps a rigid adherence to ERISA’s prohibited transaction rules provides the requisite justification).

No one—certainly not this writer—is in favor of promoting advice that isn’t good for participants. Ultimately, keeping the door closed on potentially conflicted advice may be the safest and most prudent course, though one might be inclined to think that the structures already in place (the selection of an adviser is a fiduciary duty, after all, and providing investment advice for a fee is a fiduciary act) would keep the worst at bay—and that new proposals could be crafted to weed out the rest. Or one might be inclined to insulate the participant from even potentially “good” advice, because that advice might also serve the adviser’s personal interest.

Regardless, the Labor Department has laid out a new course on how participant advice can be offered, and how advisers can be compensated for that service. They have asked for input on that new direction6—and I sincerely hope they get it.

—Nevin E. Adams, JD

1 “A final rule and related class exemption published in January 2009 were withdrawn in November 2010 in response to concerns raised in public comment letters questioning the adequacy of the final class exemption's conditions to mitigate the potential for investment adviser self-dealing.”

2 Not to be cynical about it, but those concerns were expressed by just 28 individuals/institutions (which the DoL has published at More accurately, there weren’t (even) 28 expressions of concern about the regulations themselves. Many, as you might suspect, were simply pointing out areas of needed clarification; several were just pointing out the need for final regulations, noting that the lack of certainty about the rules had created a legislative limbo in which nobody was doing anything, or at least anything different, regarding the provision of investment advice. That said, apparently somewhere in that relatively modest number of comments lay arguments compelling enough to persuade the Labor Department that there was no way to thread that particular needle.

3 The DoL would presumably take issue with my conclusion, since the regulations repeat the assumption associated with the prior—but very different—version that this approach would “extend investment advice to 21 million previously unadvised participants and beneficiaries.”

4 This may well be the “battleground” of commentators over the next several weeks. The DoL solicits comments “on the conditions applicable to investment advice arrangements that use computer models.” This is a far-ranging section of the proposed regulations, ranging everywhere from “what investment theories are generally accepted” and should this regulation not only specify them, but “require their application.” I suspect at some level that some may draw comfort from this apparent effort to bind in not only what process is appropriate for these models, but what inputs. One can’t help but wonder, however, if those findings might at some point be extrapolated (implicitly or explicitly) to other applications.

5 There are some interesting acknowledgements in the proposed regulation: that there is no requirement to “offer, provide, or otherwise make available any investment advice to a participant or beneficiary”; that in scoping the impact of the regulations, the DoL assumed that, on average, participants and beneficiaries who are advised make investment errors at one-half the rate of those who are not.

6 Written comments on the new investment advice proposal should be addressed to the Office of Regulations and Interpretation, Employee Benefits Security Administration, Room N-5665, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, D.C. 20210, Attn: 2010 Investment Advice Proposed Rule. The public also may submit comments electronically by e-mail: or through the federal e-rulemaking portal at

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