DOL Issues Rule On Personalized Advice For 401(k)s, IRAs

In yesterday’s Blog I was pointing out the lack of education that 401(k) sponsors (especially small employers) are giving their employees. Today The U.S. Department of Labor (“DOL”) issued a rule to expand access to personalized investment advice for workers in retirement savings plans, Assistant Secretary of Labor Phyllis Borzi said. This is a big step in the right direction.

The DOL now makes it easier for providers to 401(k) plans such as Charles Schwab, Vanguard, and Principal Financial to offer their own individual account advice and bundle it with other retirement services. Currently an employer might offer a Vanguard 401(k), for example, but in order to offer advice, it’s required to contract with a separate independent investment adviser to comply with regulations against conflicts of interest. The regulation applies to those who are fiduciary investment advisors as of Dec. 27, according to the Labor Department.

Advisors to 401(k)-type plans or IRAs will be able to recommend investments and receive fees from investment companies that offer funds in two cases: if they earn the same level of compensation no matter what products they select or if they use a computer model to pick the investments that has been certified by an independent third party, the department said. In both cases, the advisor also must satisfy other conditions such as disclosing fees and having an annual audit.

The Labor Department estimated that 401(k) plans covering 17 million participants will begin to offer investment advice under the new rule. It expects about 3.5 million of these participants and beneficiaries to seek advice. The department also estimates that 17 million IRA beneficiaries will seek advice under the new rule. Also, about 16,000 investment advisory firms will provide advice.

“Retirement security increasingly depends on the kinds of decisions that an individual makes,” said Borzi. “This type of advice can help workers avoid costly investment errors.”