IRA, 401(k) Sponsors Can Offer Investment Advice

The Department of Labor issued new regulations last week that allow fiduciaries of 401(k) plans and IRAs to offer investment advice under some circumstances. The law prohibits such advice, but the DOL carved out some exceptions. Fiduciaries may offer advice, beginning Dec. 27, if their compensation doesn’t depend on the investment recommendations or they use a computerized investment system from a certified third party. The first exception means the fiduciary is paid the same amount for the advice regardless of the investment that is recommended, such as receiving a flat fee or a flat percentage of the account’s value. Many fiduciaries already offer advice based on separate exemptions they received from DOL.

These regs don’t resolve a very hot issue that’s been debated in Washington. The DOL issued proposed regulations not long ago that essentially provided that anyone who offered investment advice or had almost any role with a retirement plan would be a fiduciary. The regulations were withdrawn after a lot of complaints from financial services companies and members of Congress. The DOL still is working on those regulations. The financial services industry argued that if the proposed regulations stood, then many firms would decide not to provide advice to retirement plan members. Currently, brokers and investment advisors can offer paid advice to participants without being considered fiduciaries. Fiduciaries have a higher level of legal scrutiny than non-fiduciaries.