401(K) Plans: Improved Regulation Could Better Protect Participants from Conflicts of Interest

In April 2015, after multiple rounds of public comments, Labor re-proposed a rule to mitigate the effects of conflicted investment advice on participants in retirement savings programs. In a statement on July 13, 2015, President Obama affirmed the importance of this re-proposed regulation and stated they will push for finalization. The rule addresses this recommendation by requiring service providers who make investment recommendations to formally acknowledge fiduciary status and provide impartial advice. It also addresses written disclosures by requiring that either an adviser operates without a conflict of interest (and no compensation that varies based on investment choices) or the adviser signs a written contract disclosing any conflicts of interest and adopting policies to mitigate those conflicts so that all advice is made in the best interest of the recipient. It will no longer be permissible for an adviser to provide conflicted advice simply by disclosing it. Labor held public hearings on this rule in August 2015 and expects it to soon be issued in FY2016.

The Department of Labor (DOL) took significant steps to begin addressing this recommendation. DOL published a proposed amendment to the 408(b)(2) disclosure regulation that may require covered service providers to supply plan fiduciaries with a guide or similar tool to assist fiduciaries in quickly locating the required disclosures on March 12, 2014. The comment period closed on June 10, 2014. DOL is working with a contractor to recruit focus group participants and plans to conduct eight focus group sessions with approximately 70 to 100 responsible plan fiduciaries (RPFs), primarily focusing on RPFs to small pension plans (those with less than 100 participants). DOL intends to use the information collected from focus groups to evaluate whether, and how, a guide, summary, or similar tool would help fiduciaries understand the disclosures. Results will be used to inform and support DOL's notice of final rulemaking for the guide requirement. GAO supports Labor's effort to conduct outreach with plan fiduciaries, such as focus groups, to determine how best to revise the proposed amendment to the 408(b)(2) regulation in order to provide information on service provider compensation in a consistent and summary format. The Department of Labor implemented this recommendation in its proposed revision to the definition of a fiduciary. In April 2015, Labor re-proposed its rule that redefines an ERISA fiduciary with regards to advice. The rule includes a model disclosure form for service providers to use to clearly and consistently communicate the compensation they receive, both on a transactional and ongoing basis. The disclosure includes information on compensation both to the advisor and to the firm as well as identifying charges to the investor. In addition, the new Best Interest Contract exemption, which is a key part of the new definition of fiduciary, includes a requirement that the written contract disclose fiduciary status. The proposed rule has undergone intense scrutiny and consideration and is expected to be issued as a final rule in FY2016.

The Department of Labor (DOL) is continuing to review if, and to what extent, the Interpretative Bulletin should be modified. DOL also said it will re-consider the provisions currently in Interpretative Bulletin 96-1 (29 CFR section 2509.96-1) that seek to limit the potential for abuse where specific investment options are used to populate an investment education tool. In April 2015, DOL re-proposed the conflict of interest rule to replace the interpretive bulletin on investment education. Specifically, paragraph (b)(6) would supersede IB-96-1. The changes reflect considerable evaluation and revision of policy contained in IB-96-1. The proposed rule is a departure from IB-96-1 because of a new condition of investment education that, as recommended by GAO, "the information and materials not include advice or recommendations as to specific investment products" and alternatives available under the plan. This rule clarifies that presenting or highlighting materials which identify specific investment options, proprietary or not, is advice and thus may trigger fiduciary status. Labor held public hearings on this rule in August 2015 and expects it will soon be issued in FY2016.

In April 2015, after multiple rounds of public comments, Labor re-proposed a rule to mitigate the effects of conflicted investment advice on participants in retirement savings programs. In a statement on July 13, 2015, President Obama affirmed the importance of this re-proposed regulation and stated they will push for finalization. This rule addresses our recommendation by clarifying that anyone providing advice that is individualized or specifically directed to a participant pertaining to a decision to take a distribution from the plan, to rollover from a plan to an IRA, or where to invest the money after it is distributed from the plan, is a fiduciary. As a fiduciary, the adviser must provide impartial advice in their clients' best interest. Advisers operating under the new Best Interest Contract exemption are required, as a part of that written contract, to disclose to clients any financial interests that they may have in the outcomes of their investment transactions and to identify themselves as an ERISA fiduciary. Labor held public hearings on this rule in August 2015 and expected it to soon be issued in FY2016.

In consultation with Treasury, in April 2015, after multiple rounds of public comments, Labor re-proposed a rule to mitigate the effects of conflicted investment advice on participants in retirement savings programs. In a statement on July 13, 2015, President Obama affirmed the importance of this re-proposed regulation and stated they will push for finalization. The rule addressed this recommendation by clarifying that service providers who give advice to participants regarding rollovers of plan assets into IRAs are acting as a fiduciary. As a fiduciary, the provider must provide impartial advice in their clients best interest. Labor held public hearings on this rule in August 2015 and the rule is expected to be issued in FY2016.