House Committee Reports Out Employee Advice Bill
bill designed to expand worker access to professional investment advice has been favorably reported out by the House Education and the Workforce Committee. The Retirement Security Advice Act (H.R. 2269) has the support of the Bush Administration, as well as wide support from the Investment Company Institute, TIAA-CREF, and the American Bankers Association Securities Association. The legislation could be considered by the full House prior to the end of the session.
The bill would allow employers to provide their workers with access to professional investment advice as long as the investment advisers fully disclose their fees and any potential conflicts. It would bring down the barriers erected by the Employee Retirement Income Security Act that currently prevent employers and investment intermediaries from providing individualized investment advice to workers.
PROTECTIONS
While the bill permits investment advice, it also retains important safeguards and includes new protections to ensure that participants do not receive conflicted advice. For example, investment advice may be offered only by “fiduciary advisers,” which the bill defines as qualified entities already regulated under other federal and state laws, such as registered investment advisers, registered broker dealers and banks.
INVESTMENT ADVICE
GAP
According to Committee Chairman John A. Boehner, the bill closes the existing investment advice gap in two ways. First, it streamlines the employer’s duty in selecting and monitoring investment advisers. Employers must exercise due care in selecting an adviser and their selection must be solely in the best interest of their workers. While employers are not responsible for every piece of advice or every transaction, they must respond to general problems.
Second, the bill maximizes competition in the investment advice market. Current law prohibits many of the most highly regarded firms from offering investment advice through employers no matter how good their reputation is or how perfectly suited their services are to a given workforce. H.R. 2269 will open up the market to the competition they will provide. It will also protect workers by clearly requiring advisers to act at all times in the worker’s best interest, and, if they have any possible conflicts of interest, to disclose them clearly. If they breach that fiduciary duty, emphasized Chairman Boehner, they can be subject to civil litigation and even criminal prosecution by the Labor Department.
BILL RECEIVES
PRAISE
Representing a significant shift from the Labor Department’s opposition to the bill last year, Ann L. Combs, Assistant Secretary for Pension and Welfare Benefits, has praised the bill for creating a strong and protective framework for the provision of investment advice to participants in defined contribution plans. When Congress enacted ERISA in 1974, she noted, employers used traditional defined benefit plans as the primary vehicle for providing pension benefits. Under defined benefit plans, investment decisions are left to professional investment managers, with employees playing no role in the selection or monitoring of plan investments.
ADVICE RELATIONSHIPS
Profound changes have occurred since 1974 in the design of pension benefit plans, however, giving workers more choice and responsibility for their retirement savings. The overwhelming majority of workers are now enrolled in defined contribution plans. A large majority of these plans are 401(k) plans in which participants are responsible for directing the investment of their accounts among a number of choices provided by the plan. In her view, an advice gap arises because the structure erected by the drafters of ERISA does not translate well into advice relationships with individual participants. Thus, the Labor Department supports ERISA changes needed to provide investment advice efficiently to individuals.
