Regulations proposed by the U.S. Department of Labor to protect workers and employers from conflicts of interest in retirement plans may be too broad, a JPMorgan Chase & Co. (JPM) executive testified in Washington today.
“Existing standards governing plan distribution education and guidance are sufficient and need not be modified,” Karen Prange, executive director and assistant general counsel at New York-based JPMorgan said at a Labor Department hearing.
Employers generally are held responsible for making sure their 401(k) retirement plans operate in the best interest of employees. The proposed Labor Department regulation would apply a fiduciary standard to those firms who advise plan sponsors about which investments to offer, for example, even if that advice is not given on a regular basis, said Assistant Secretary of Labor Phyllis Borzi in a telephone interview last week. It’s designed to prevent conflicts of interest, such as the recommendation of investments with higher fees.
“The point of this regulation is to make sure that all the investment professionals that provide advice” to employers and participants are held to the same standards, Borzi said. The fiduciary standard, which generally requires advisers to put clients’ interests ahead of their own, would not apply to generic information such as asset allocation charts and graphs provided to customers online, the Labor Department said.
The U.S. Securities and Exchange Commission is also looking at the fiduciary issue and in January recommended a common standard for brokers who provide personalized investment advice and registered investment advisers. The agencies are working together to make sure final rules don’t conflict, said Borzi. The Labor Department is aiming to issue a final regulation by the end of the year, she said.
Improved regulation of retirement plans is needed because employers and participants may not understand that the person educating them about their 401(k) investments may have a financial stake in the choices they make, the U.S. Government Accountability Office said in a report released yesterday.
“If left unchecked, conflicts of interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker’s career,” the GAO said.
Plan service providers, also known as recordkeepers, may highlight their own funds even though they have a financial interest in recommending them, the report said.
The Labor Department is also considering whether its rule should apply to advice given to savers when they are leaving a job and trying to decide whether to roll their money into an individual retirement account, Borzi said.
The hundreds of employees at JPMorgan’s call centers shouldn’t be considered investment advisers because they are trained to give basic information to callers such as taking distributions from their accounts and the tax implications, said Prange. A saver who wants more information about an IRA may be told that JPMorgan has the product and directed to a broker dealer within the company, she said.
The GAO found that cross-selling, in which 401(k) providers sell additional products such as IRAs to plan participants, is an “important source of income” for recordkeepers. Fees on IRAs are typically 25 basis points to 30 basis points higher than fees on 401(k)s, and can be as much as 65 basis points higher, the study said. A basis point is 0.01 percentage point.
“At a time when millions of Americans are saving what they can for their retirement, they shouldn’t also have to fight financial firms scheming to boost their own profits behind their backs,” Representative George Miller, a California Democrat and member of the House Committee on Education and the Workforce, said in a statement yesterday.
“Workers and sponsors of 401(k) plans must have clear and complete information on these backroom deals so that these plans are run in the best interest of account holders, not Wall Street insiders,” Miller said.
The GAO found that revenue sharing, where a mutual-fund company passes some of the fee revenue it earns back to a plan’s recordkeeper, “is a widespread practice.” Compensation can range from 5 basis points to 125 basis points from those arrangements, the study said.
“This situation creates an incentive for the service provider to suggest funds with higher revenue-sharing payments,” potentially including funds with poorer performance histories than other investment choices, the report said.
“Our concern is that the rule is so broadly written,” Ken Bentsen, executive vice president for public policy and advocacy at the Securities Industry and Financial Markets Association, said at the hearing. “That creates huge risk for us.”
Firms may stop providing services to retirement plans because of the increased liability or shift to a fee-based model from commissions, which may increase costs for IRA investors, Bentsen said. Sifma is a lobbying group for banks and brokerages with offices in New York and Washington.
The department also has underestimated the rule’s costs to providers of retirement plans and investments, said Jim McCarthy, managing director of client advisory and retirement services at Morgan Stanley (MS) Smith Barney. It will cost the firm at least $10 million to $12 million to implement the regulation, said McCarthy, who’s based in Purchase, New York. “We have to assess every business practice we have to make sure it’s compliant,” McCarthy said.
Fidelity Is Largest
An estimated 72 million people have 401(k)-type retirement plans with assets totaling about $3 trillion, according to the Labor department.
Boston-based Fidelity Investments was the largest 401(k) recordkeeper at the end of 2009, with 27 percent of the market, or $739 billion in assets, according to Cerulli Associates, a Boston-based research firm. Aon Hewitt, based in Chicago, was the second-largest with $228 billion in assets. Vanguard Group Inc. was third largest with $205 billion in recordkeeping assets. Valley Forge, Pennsylvania-based Vanguard is the world’s largest mutual-fund firm.
Any changes to the definition of fiduciary as it relates to retirement plans “should not threaten access to the guidance that all investors receive every day by placing a call, going online, attending an investor workshop or visiting a local branch for one-on-one assistance,” said John Sweeney, executive vice president for Fidelity’s planning and advisory services.