The Department of Labor says it wants to expand the number of consultants and advisers it can hold legally responsible for the advice they give retirement plan providers.
Proposed new rules would impose stricter regulations on consultants, advisers and appraisers who offer investment related advice to companies that provide 401(k) plans to workers.
Currently, some of these professionals provide advice on investment options and products offered in a retirement plan while receiving compensation from the investment companies whose products they recommend.
Yet, under current regulations they cannot be held legally responsible if the advice turns out to be faulty.
The department will accept comments on the proposed rule until Jan. 20. After that the rule likely will be finalized and could be enacted as early as the middle of next year.
Many consultants and advisers are not defined under current law as fiduciaries. That means they are not held legally responsible to offer advice solely for the benefit of the plan provider and workers who participate.
Advisers and consultants who are not fiduciaries may operate with conflicts of interest without being required to disclose those conflicts to clients who believe they are getting impartial advise, the DOL said.
The Government Accountability Office in a report released last year found that consultants and other advisers who provide advice on investment options and products offered in a retirement plan often received compensation from the investment companies whose products they recommended. This could lead the consultants to steer the plans toward products for which they receive additional compensation.
In a May 2005 study, the Securities and Exchange Commission found that 13 out of 24 pension consultants it examined provided products and services to pension plan advisory clients, money managers, and mutual funds on an ongoing basis without adequately disclosing conflicts.
The DOL estimates that about 5,300 service providers offering investment- and valuation-related services would be pulled into the new regulation.
Some in the industry likely will oppose the proposal, claiming it will chill the desire to give advice out of fear of litigation if an investment goes awry.
"If it dries up schlocky advice fiduciaries are getting, I don't have a problem with that," said Assistant Secretary of Labor Phyllis Borzi. "People giving solid advice have nothing to worry about because they're fulfilling their fiduciary duties."
The new regulations could create headaches for smaller retirement plan providers whose profitability depends on being able to offer a full suite of services including the plan platform and investment management services, said Douglas Dannemiller, senior analyst with Aite Group, a Boston-based research advisory firm.
"If there's a significant disruption in how those relationships work, that might take the industry a little bit of time to retool to offer those products appropriately and still make money at it," he said.
He said most service providers will go along with the changes as long as they don't disrupt those who do business honestly.
"I tend to think that the majority of the industry operates on a very aboveboard fashion, so a fiduciary standard will not upset them," he said.