Thanksgiving Feast or Famine? - DOL Withdraws its Investment-Advice Regulation

The DOL has withdrawn its investment-advice regulation, culminating a process that began with a firestorm of objection regarding the DOL's attempt to implement the PPA's new investment-advice exemptions. The PPA's exemptions were controversial when passed, and became more controversial when the Department interpreted certain fee-leveling requirements in a manner that was perceived to be narrow. Then, in the final regulations, the Department added a new administrative exemption that narrowed the requirements still further, touching off congressional accusations that questioned the regulatory process itself.

The shrillness of some of the rhetoric was, to me (see my prior post on this), unfortunate, as efforts over a long and arduous regulatory process by dedicated public officials became characterized and impugned as special-interest gifts bestowed on the eve of a change in administrations. In an interesting rhetorical twist, which had the intended public-relations consequences, what I would have more neutrally called "inside" advice came to be referred to pejoratively as "conflicted" advice.

With the change in administrations, those upset with the regulations became empowered, and their influence within the DOL increased dramatically, as one might expect. The Department's actions now indicate that there will be some narrowing of the rules, but it remains to be seen whether a reproprosed rule will so narrowly interpret the statutory exemption that it will essentially marginialize it altogether. That could happen if, for example, the level-fee requirements were to be interpreted so as to require structures that are so sanitized that the structures don't involve self-dealing at all, in which case no exemption would be necessary. (I would expect the prior work done regarding the computer-model exemption to be relatively less controversial, and would be surprised if the Department would propose dramatically reversing that aspect of the regulations; we'll have to wait and see.)

To me, what amounts to a regulatory repeal of the statutory exemption would be unfortunate. The PPA struck a legislative balance given the legitimate and crying need that participants have for this advice, on the one hand, and conflicts that may arise, on the other. The Department's new proposals will hopefully not, by fiat, effectively repeal the fee-leveling exemption.

I think it is critically important that a wide range of professional advice be made available to 401(k) participants, who are in desperate need of professional advice. I think that one of the great deficiencies in current retirement policy is that, with the move to a focus on participant-directed defined contribution plans, which is the result of a confluence of events over time, what may be among the most important of investment assets - retirement assets - are left under the management of those (like me) often utterly untrained in how to invest those assets.

The PPA struck a balance that would have facilitated the provision of additional types of advice. Was the balance struck in the statute the precisely correct one? That, of course, is always open to discussion, but Congress did act. There now are proposals in Congress that would recut the rules, in effect eschewing any effort to balance the competing considerations and deciding that no conflict is tolerable, and the approach taken in those proposals is extreme. I think it would be unfortunate if Congress were altogether to take away from employers the ability to arrange for reasonably crafted inside advice delivered with proper safeguards (what I've called "conflict-safe," as opposed to "conflict-free," advice). In any event, though, the Department should credibly implement the rules that have passed, unless and until Congress reverses those rules.

And to what point does that bring us? At a minimum, I would expect the DOL to cut back or reverse the administrative exemption that goes beyond the statute; but we'll have to see how much farther they go in trying to narrow the statutory rules that are already there. At the end of the day, wherever it all lands, I hope that we wind up with a system that permits participants and beneficiaries to have a reasonable shot at accessing a wide range of professional advice to help them through the investment of their retirement nest eggs.