Doling out investment advice can be risky business for the sponsors and providers of 401(k) plans. But the U.S. Department of Labor is planning to reduce that risk.
The DoL has stated it wants to reevaluate its position on the advice issue, although what form that reevaluation may take remains ambiguous. Observers say the department’s 1996 “interpretive bulletin” on educating 401(k) participants lacks specifics.
One area that plan providers find tricky is whether a company that invests a plan’s money can also offer investment advice. Thus far, that question has been handled on a case-by-case basis. For example, the TCW Group of Los Angeles received a ruling in November 1997 that allowed its investment managers to give advice to participants. “That was a big deal because the managers, without some kind of exception, have been seen to be self-dealing, a prohibited transaction,” observes David Wray, president of Profit Sharing/401(k) Council of America, in Chicago.
The issue centers on whether the investment adviser is independent, Wray says. If it is not, then the plan for giving advice must first be blessed by the Labor Department, a process providers find cumbersome. “The process for getting exemptions for prohibited transactions is extremely time- consuming,” Wray contends. “By the time you get an answer, the question isn’t relevant any more. It can take years to get an answer. The process needs to be changed.”
No one is sure what course the DoL will take. But there are a number of ways to improve the process, according to Russ Galer, senior counsel for the Investment Company Institute, the association for the mutual fund industry, based in Washington, D.C. Labor could require full disclosure by advisers to plan sponsors and participants of any fees or benefits the advisers may be receiving for providing their advice. “That s done in the retail environment,” he says. The department could also issue a class exemption, he adds, structured along the lines of the individual exemptions it has handed down in the past.