Yet Another Wrinkle in the 401(k) Advice Bill?

December 28, 2001, 1:00 a.m. EST 2 Min Read

As legislators debate the issue of 401(k) providers also providing advice, one governmental agency has taken a first step toward allowing such advice

According to a recently released advisory opinion from the Department of Labor, investment management of 401(k) accounts by retirement plan providers is okay as long as the provider uses a qualified independent financial expert (the software vendor and financial adviser that calculates the asset allocation models) and the expert does not receive more than 5% in gross income from the fees paid by the plan provider.

The Labor Department issued the advisory opinion in response to a query sent by Sun America wondering if the hiring of Ibbotson Associates as an investment adviser for their 401(k) program was against ERISA regulations. A spokeswoman for Sun America was unavailable for comment by press time.

The clarification is potentially a big one for financial planners looking to get into the 401(k) business.

"The opportunity lies in the fact that the DOL is now recognizing that plan participants need advice and they need help with their 401(k) investments," said John Blamphin, VP of marketing and public relations at The Scarborough Group, a company that manages 401(k) accounts. "That will open more and more opportunities to work with plan participants and plan sponsors."

Yet this is a tough niche for independent advisers to enter, as the technology investment is considerable and choosing the right partners can be difficult.

Some planners emphasized the need for strict regulation in order to ensure that conflicts of interest do not exist between the plan provider and the chosen financial expert. "The problem that I see is the good old boy network -- having buddies come in and doing management," said Charles Sims of The Sims Financial Group in Memphis, Tenn.

Officials said the potential for a conflict of interest between the provider and the financial expert is "highly unlikely." "Their reputation really depends on them doing an objective job based on their product," said Ivan Strasfeld, director of exemptions at the Labor Departments Pension and Welfare Benefits Administration.

However, industry experts wondered how the Labor Departments decision will affect the adoption of the Retirement Security Advice Act of 2001 by the Senate. The bill, sponsored by Republican John Boehner of Ohio, calls for 401(k) plan and IRA fiduciaries to provide investment advice, despite the potential conflict of interest between mutual fund companies giving advice and management on their own funds.

Blamphin said the Labor Department may be sending mixed messages. On the one hand, it supports the legislation, but then, "this advisory opinion comes out and says that plan providers -- people with that potential conflict of interest -- still could offer advisory services if they do it in this way."

"The Senate is going have to look at lot more at what this advisory opinion means to the market. But I wouldnt say that it automatically cancels it out," Blamphin said.