Retirement Security: Importance of an Independent Investment Adviser

Comments to the U.S. House of Representatives
Committee on Education and Labor
Subcommittee on Health, Employment, Labor and Pensions

Retirement Security: The Importance of an Independent Investment Adviser

Now more than ever, American need access to independent and professional investment advice as they manage their 401(k) plans. As demonstrated during the past year, the consequences of concentrated investments, made without regard to risk tolerance or investment horizeon, can be dire for participants and beneficiaries who often lack access to professional, prudent investment guidance.

Department of Labor Investment Advice Regulations

ERISA and the Internal Revenue Code generally prohibit plan fiduciaries from rendering any investment advice to plan participants and beneficiaries that would result in the payment of additional fees to the fiduciaries or their affiliates. The Pension Protection Act of 2006 (PPA) provided a statutory prohibited transaction exemption to the rule (codified at ERISA 408(b)(14) and 408(g) and IRA 4975(d)(17) and 4975(f)(8)] for certain transactions that may occur in connection with the provision of "eligible investment advice" by a "fiduciary adviser," subject to specific requirements. In particular, the final PPA investment advice provision allowed two speific permissible investment advice exceptions: (1) certain "fee-leveling" arrangements; or (2) certified computer model arrangements.

Independent Investment Advice Legislation

With the growth of participant-directed individual account plans, the importance of investment advice to participants and beneficiaries of retirement plans has become increasingly clear. The majority of Americans are not experts on how to appropriately invest their retirement savings. However, due to the shift from defined benefit to defined contribution plans, many Americans are required to do just that.

ASPPA, CIKR and NAIRPA believe that working Americans should not have their retirement assets exposed to conflicted investment advice where the adviser has a financial interest in what investment choices to recommend. Instead, American workers should have access to independent investment advice provided by qualified advisers.

We comment Chairman Andrews for his past leadership in support of independent investment advice for plan sponsors and participants. Legislation providing a safe harbor for plan sponsors with respect to independent investment advice provided to plan participants would be a significant step towards encouraging plan sponsors to make available independent advice.

One of the challenges is encouraging independent advice is to define what constitutes an independent advisor. NAIRPA has developed a criteria for membership that we believe could serve as a model for providing independent advice. Specifically, a member firm:

Does not receive compensation for retirement plan advisory services that varies with the investments selected by the plan sponsor or participants

Agrees in its engagement letters to serve as a plan fiduciary with respect to all plans for which it serves as a retirement plan advisor;

Agrees to clearly disclose all fees expected to be received in connection with retirement plan advisory services in advance of any engagement and all such fees actually received at least annually thereafter;

Is either a federally or state regulated registered investment advisor; and

Is not directly or indirectly part of a controlled group that includes a financial services firm (i.e., an investment manufacturer).

Encouraging plan sponsors to base plan investment offerings on independent advice, and making independent advice available to plan participants, would be a major step forward in securing America's retirement.

Summary
During these difficult economic times, Americans need access more than ever to independent and professional investment advice. ASPPA, CIKR and NAIRPA comment the Chairman for holding this timely hearing. Furthermore, to ensure adequate protection to participants and beneficiaries, ASPPA, CIKR and NAIRPA recommend that the DOL withdraw the Class Exemption portion of the final, DOL investment advice regulation. We also encourage Congress to consider legislation that encourages the provision of independent investment advice to retirement plans and participants.

Source: edlabor.house.gov