DoL Rule Gives More Advice Options

The DoL’s rule recently published in the Federal Register updates the Pension Protection Act (PPA) to allow for investment advice from investment companies to participants of 401(k)s and IRAs. It includes provisions to limit the conflict of interest this could create (see “DoL Finalizes Investment Advice’).

The rule was finalized before the new administration took over, unlike the 408(b)(2) regulations pertaining to fee disclosure, but still looks to be affected by the temporary moratorium on new federal rules (see “White House Executive Order Snares Fee Disclosure, Advice Regs’). However, upon release, it was immediately met by some opposition in the House. Congressman George Miller (D-California) hopes to block it (see “Miller, Andrews Threaten to Block Advice Regulation’). The rule could very well meet some changes or a delayed effective date, currently slated for March 23.

Those who are in favor of the regulation see it as a way to provide investment advice (which is expensive) to those who can’t afford it, taking the risk that the advice is conflicted, explained Roberta Ufford, Principal at Groom Law Group, to PLANADVISER.com. The regulations seek to fully disclose the conflict and impose conditions that limit the risks of biased advice, she said. “Miller’s answer seems to be that conflicted advice is never worth it,’ Ufford said.

Opportunity for Retirement Plan Advisers

The regulations open up the advice market, but also rein it in. For the first time, the DoL is really diving into regulating advice of IRAs, said Jason Roberts, head of the ERISA Plan and Investment Fiduciary Practice Group with Edgerton & Weaver LLP in Hermosa Beach, California. Roberts told PLANADVISER.com that, through promoting level compensation, the DoL seeks to achieve two competing goals: Get as much investment advice out to 401(k) or self-directed participants and bring as many players to the table to give that advice; meanwhile, the DoL is trying to “limit the conflict of interest so that the advice is truly disinterested.’

For instance, advisers that are so-called conflicted or receive unlevel compensation have to use a computer model, and if a participant wants personal advice beyond that offered by the model, they have to sign off on the fact that they are receiving it before the adviser can offer the advice.

For traditional retirement plan advisers, who were already provided for under the PPA, this regulation could be a way to further differentiate themselves, Roberts said. Essentially, the DoL has pronounced that “advice is good,’ especially when it is not conflicted. Furthermore, Roberts said, plan sponsors are receiving more demand from participants for advice as well as increased regulatory/litigation pressure. Savvy advisers can make the pitch to sponsors that they can either receive advice that has to be run through a computer model, or they can receive advice that is already tried-and-true to be not conflicted “and I think that’s an easier sell,’ he said. “The perfect method is a truly disinterested adviser…The plan adviser is in a great position here no matter what happens,’ Roberts said.

Effect on IRAs

The IRA rollover business is a burgeoning piece of the advisory business, and the new regulation affects rollovers as well. The regulation requires the disclosure of all fees or other compensation that a fiduciary adviser receives in connection with a rollover or other distribution of plan assets.

The new regulation requires IRA advice to be delivered by a fiduciary adviser, as defined in the PPA. Roberts said that although many aspects of the rule could change—as previously mentioned, the new administration has yet to review it—it will likely still include that provision. Roberts pointed out that the regulation affects advisory firms that previously were not affected, as IRAs are a huge part of business for many firms.

The advice regulation is available here.