May 6, 2010

Public Interest Comment on Investment Advice

Participants and Beneficiaries
  • Jerry Ellig

    Former Senior Research Fellow
  • Christina Forsberg

Key materials
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The Labor Department’s Employee Benefits Security Administration seeks comment on a proposal that would allow fiduciaries that provide individual retirement savings plans (such as 401(k)s and IRAs) to offer investment advice to plan participants. The proposal outlines exemptions to the Employee Retirement Security Act, which generally prohibits fiduciaries from giving investment advice in order to prevent conflicts of interest.

The department proposes to adopt one set of exemptions that are mandated by law and originally implemented by the Bush administration in January 2009. However, the department does not plan to implement a discretionary “class exemption” that the Bush administration also finalized in January 2009. The class exemption allows fiduciaries to give tailored investment advice to plan participants if the individual giving the advice is not compensated based on the investments chosen, or if the participant first receives advice from a computer model or other specified investment education materials.

To make a decision that truly advances investors’ interests, the department must weigh the potential benefits from more widely available investment advice against the possibility that some advisors might recommend investments that generate higher fees but deliver less performance for the investor. Unfortunately, neither the Regulatory Impact Analyses produced in these proceedings nor the comments cited by the department offer much solid evidence that would help the department make this tradeoff. Before making a final decision on the class exemption, the department should conduct evidence-based analysis that articulates a clear theory of how the class exemption might create conflicts of interest and examines data that would help determine whether the theory is true.