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CCH® PENSION — 08/25/11

House panel hears concerns with Labor Department's proposed fiduciary regs

Witnesses at a July 26, 2011 hearing of the House Subcommittee on Health, Education, Labor, and Pensions expressed concerns about the Labor Department's proposed regulations on the definition of "fiduciary." The proposed regulations, issued by the Employee Benefits Security Administration (EBSA) in October 2010, would more broadly define the circumstances under which a person is considered a "fiduciary" under ERISA by reason of giving investment advice to an employee benefit plan.

Rep. Phil Roe (R-TN), chairman of the subcommittee, was critical of the proposed rules. "For more than 35 years," he said, "regulations surrounding fiduciary responsibility have provided certainty to employers and other retirement plan sponsors. Currently, an investment adviser is considered a fiduciary under the law if they offer individualized advice on a regular basis for a fee. The fiduciary's advice must be provided pursuant to a mutual agreement and be the primary basis for a resulting investment decision. However, the Labor Department has now decided to rewrite the rules of the road."

Under the proposed regulations, Roe contended, fiduciary status would no longer hinge on whether advice was provided regularly or served as the primary reason for an investment decision. "While we support looking at ways to enhance this important definition," he said, "the current proposal is an ill-conceived expansion of the fiduciary standard. It will undermine efforts by employers and service providers to educate workers on the importance of responsible retirement planning."

Witnesses say rules would have unintended consequences

A number of witnesses criticized the proposed regulations for imposing unknown costs on employees and retirees. Kenneth E. Bentsen, Executive Vice President for Public Policy and Advocacy at the Securities Industry and Financial Markets Association, said that the proposed regulations "lack sufficient cost benefit analysis, and absolutely no cost benefit analysis related to its impact on IRA owners." The proposed regulation should be "re-proposed," said Bentsen, "and in particular, re-proposed without IRAs."

Kent Mason, of Davis & Harmon, LLP, said that the "concern is that the proposed regulation would have very adverse unintended consequences and result in a dramatic decrease in both the availability of critical investment information for low and middle-income employees and the efficient delivery of workforce retirement plans."

Mason said that economic studies of the effect of the proposed regulation need to be completed and those studies need to be the subject of public comment. At the same time that the economic study is made available for public comment, the regulation itself should be re-proposed, he said.

Current rules "flawed," says EBSA secretary

Phyllis Borzi, assistant secretary of Labor for EBSA, told the subcommittee that the proposed rules would amend a flawed 35-year-old rule under which advice about investments is not considered to be "investment advice" merely because, for example, the advice was only given once, or because the adviser disavows any understanding that the advice would serve as a primary basis for the investment decision.

The impact of investment advice depends on its quality, said Borzi. Prudent, disinterested advice can reduce investment errors, steering investors away from higher than necessary expenses and toward broad diversification and asset allocations consistent with the investors' tolerance for risk and return. Accordingly, she said, "it is imperative that good, impartial investment advice be accessible and affordable to plan sponsors and especially to the workers who need it most."

The proposed regulations have prompted "a large volume of comments and a vigorous debate," Borzi noted. She said that the Labor Department is committed to developing and issuing "a clear and effective rule that takes full and proper account of all stakeholder views, and that ensures that investment advisers can never profit from hidden or inappropriate conflicts of interest."

Source: Hearings, House Education and the Workforce Committee, Subcommittee on Health, Education, Labor, and Pensions, July 26, 2011, http://edworkforce.house.gov/Calendar/EventSingle.aspx?EventID=252576.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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