Potential Challenge to Unbiased Investment Advice
Congress met in late March to discuss rules governing 401(k) advice now slated to take effect May 22. The new rules, which would allow financial advisers affiliated with mutual funds and brokerage firms to dispense investment advice to IRA and 401(k) holders, were finalized in January and recently put on hold by the Obama administration. Experts have rallied both for and against the new legislation, and the recent debate has raised more fundamental questions about the nature of financial advice and the impact of conflicts of interest.
New 401(k) and IRA advisory rules would allow a financial services firm, like Fidelity, to offer retirement planning advice while promoting its own products. Those in favor of the new legislation argue that significant safeguards would be in place to protect investors, including fee disclosure and fund selection methodology. In the past, financial services firms have been restricted to offering general investment advice to investors in lieu of more specific investment recommendations.
Supporters of the legislation argue that now more than ever retirement plan participants need independent professional advice and recommendations to manage their savings. Melanie Franco Nussdorf spoke on behalf of the Securities Industry and Financial Markets Association during the March 24 hearing, arguing that plan participants have been requesting more professional advice. “Our member firms hear every day that benefit-plan clients would like additional advice and support on retirement planning, investment allocation and strategies,” Nussdorf noted.
Opponents of the legislation argue that conflicts of interest could affect the way that financial advice is dispensed to retirement plan participants. “The exemption will have the effect of suppressing the providing of independent advice to participants while encouraging participants to rely on advisers whose incentives are to maximize their own compensation at the expense of participants,” noted Mercer Bullard, associate professor of law at the University of Mississippi.
The Investment Company Institute reported in February that U.S. workers had $15.9 trillion in retirement assets at the end of 2008, a decrease of $1 trillion dollars from a June 30, 2008, estimate. While the legislation is slated for May release, rules regarding the specifics of the advice have not yet been released. Some financial services companies are now arguing that the implementation of new regulations, including annual audits, could prove too burdensome even if the new rules are passed.
When the Labor Department first released the final version of the new rules on Jan. 16, it was noted that the Labor Department stated in its Jan. 16 release that “access to professional investment advice is particularly important now for workers as they manage their 401(k) plans and IRAs in changing and volatile financial markets.” While experts continue to debate the most effective means of delivering such advice, 55 million Americans will continue to manage their own defined-benefit accounts in volatile economic conditions unless they take the initiative themselves and seek out private help.
