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DOL Releases New Investment Advice Rule: More (or Less?) Trouble for the 401k Fiduciary

February 26
16:26 2010

Today the Department of Labor released its proposed new Investment Advice Rule (Fact Sheet: Proposed Regulation to Increase Workers’ Access to High Quality Investment Advice, U.S. Department of Labor, February 26, 2010). The question now US_Department_of_Labor_300on the mind of every 401k fiduciary:  Will the DOL’s new rule increase my personal fiduciary liability?

In a pre-release issued prior to this afternoon’s press conference, U.S. Deputy Secretary of Labor Seth Harris said, “These rules will strengthen America’s private retirement system by ensuring workers get good, objective information. When that happens, workers make the kind of decisions that are good for their families and the nation as the whole.” The release focused on three primary safeguards the DOL will put in place to prevent investment advisers from engaging in any conflict-of interest.

First, the investment adviser cannot benefit financially from any recommended investments. Will this prevent advisers from any form of self-dealing, even if it’s disclosed and even if it’s revenue neutral? At a press conference on this issue, Phyllis C. Borzi, assistant secretary of the Employee Benefits Security Administration, a unit of the Labor Department, told reporters the proposed rule contains a fee level provision that says a person giving advice cannot be compensated directly or indirectly. This exclusion pertains to advisers, their employees and their firms. Borzi explains the rule is designed to eliminate conflicts of interest. She said the DOL wants to make sure advisers can’t steer participants towards “higher fee investment options.”

Second, advisers would be required to disclose their fees. According to the DOL’s Fact Sheet, advice given must be on a “level-fee” basis (i.e., “fees do not vary based on investments selected by the participant”). However, in text of its actual Investment Advice Rule, the DOL acknowledges “several of these commenters argued that the class exemption contained in the final rule permits financial interests that would cause a fiduciary adviser, and individuals providing investment advice on behalf of a fiduciary adviser, to have conflicts of interest, but does not contain conditions that would adequately mitigate such conflicts.”

Third, if an adviser uses a computer model to offer advice, those computer models would have to be certified as objective and unbiased. Borzi says this is one area where the new rule differs from the original Bush rules issued a little more than a year ago. She said the earlier rule permitted a lot more flexibility for advisers and, in addition to not having a level fee rule, allowed for using a computer model in a different manner which failed to prevent advisers from steering participants to more lucrative investments.

The new rule does not address whether the investment adviser will act as a fiduciary or be judged by the fiduciary standard. In addition, the current wording of the rule suggests any certification of a computer model emphasize fee and avoid historic performance. When asked about this and the possibility the DOL might be inadvertently giving index funds an advantage over actively managed funds, (see Does the “Lost Decade” Signal the End of Passive Investing? Fiduciary News, January 5, 2010) Borzi agreed there’s a difference of opinion on this issue. She also said the DOL does not want to offer investment advice. She encourages people to comment on it if the rule appears to do that.

Still, the rule does bring up many fiduciary questions. If you’re a 401k plan sponsor, you might want to revisit the November, 19, 2009 Fiduciary News article 3 Pointed Questions Determine If New DOL Decision on the 401k Investment-Advice Rule Increases Your Fiduciary Liability to find out if your most important questions are answered.

The department estimates that 2 million workers and 13 million IRA holders would benefit from this rule to the tune of $6 billion. According to the DOL Fact Sheet, the Department will publish the proposed regulation in the Federal Register on March 2, 2010. The Notice of Proposed Rulemaking (NPRM) invites public comments from interested persons on the proposed regulation’s conditions applicable to investment advice arrangements. Public comments can be submitted electronically by email to or by using the Federal eRulemaking portal at All comments will be available to the public, without charge, online at and, and at the EBSA Public Disclosure Room.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Chad Griffeth
    Chad Griffeth February 26, 19:32

    Great summation, especially pointing out the potential pitfalls. Hopefully the comments and media attention this receives will influence them to reconsider some of the concerns if they are in fact conflicted in nature.

  2. socially responsible investing
    socially responsible investing January 26, 13:46

    We stumbled over here by a different web page and thought I may as well
    check things out. I like what I see so now i’m following you. Look forward to looking over your web page again.

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