The mutual fund industry's chief lobby group sent a stern message to the Senate last week, urging it to allow fund companies to provide 401(k) investors with advice as part of the pension reform legislation that lawmakers are now considering.
Investment Company Institute (ICI) President Matthew Fink said in a statement that he wants lawmakers to include provisions in a bill authored by Rep. John Boehner [R-Ohio] in the pension reform proposals that lawmakers have been debating in the wake of the financial meltdown of Enron and WorldCom.
The ICI maintains that by omitting Boehner's advice provisions, the legislation the Senate is currently considering would simply maintain the "status quo" for investment advice. Although the Senate is entertaining the idea of enhancing regulations governing advice through "third parties," such as investment advice consultants, the ICI is pushing for more radical policy changes.
The third-party model, the ICI says, "has yet to be widely adopted, in part, because it typically is provided through fairly complicated Internet-based systems."
As an alternative, the ICI proposes that the Senate approve both Boehner's advice bill and a bill that would make it easier for plan sponsors to provide advice through third parties. That way, the ICI maintains, plan sponsors would have more options for providing retirement advice, and investors would benefit. Advice would help investors avoid such pitfalls as allocating too much of their assets in the stock of companies where they work, the ICI and other supporters maintain.
Observers, meanwhile, say that mutual fund companies support Boehner's bill not just because they think it would be good for investors, but because it would benefit fund companies as well.
Edward Ferrigno, a VP at the Chicago-based Profit Sharing 401(k) Council of America, which supports Boehner's advice legislation, says fund complexes believe that if investors get good advice, fund assets will increase. In addition, fund companies hope advice will solidify their relationships with investors and help them retain rollover assets when they retire, Ferrigno said.
But opponents counter that the Boehner legislation gives fund companies an opportunity to self-deal by steering investors into their own funds or funds that yield higher fees.
The current law has made plan sponsors reluctant to offer advice for two reasons. First, 401(k) advice can only be provided by a third-party, such as a retirement investment consultant. In addition, the law does not make it clear who would be liable if an employee should claim that bad advice led to losses in his or her retirement savings.
Boehner's advice legislation, supporters say, would clarify that issue by placing the fiduciary responsibility squarely on a fund company or other advice provider.
The bill was approved by the Republican-controlled House last November, and again in April when it was packaged in the Pension Security Act, which included President Bush's recommendations for avoiding future Enron-like debacles.
House Republicans, meanwhile, have been outraged that the Democrat-led Senate has not moved more rapidly to enact protective legislation. Moreover, the Senate has eschewed the bills that were passed by the House, including Boehner's advice legislation.
Instead, the Senate is considering different options, including an advice bill that was introduced by Sen. Jeff Bingaman [D-N.M.]. That bill, the Independent Investment Advice Act of 2001, exempts plan sponsors from fiduciary liability, provided they take certain steps in choosing a third-party advice provider. The Bingaman advice legislation has been attached to a pension reform bill called the Protecting America's Pensions Act that was introduced in March by Sen. Ted Kennedy [D-Mass.].
The full Senate is expected to review the issue in the fall.