Proposed 401(k) Rules Could Cut Fees, Advice

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WASHINGTON (TheStreet) — Government officials call proposed restrictions on retirement-plan advice a strike against unreasonable fees and a necessary protection for consumers. But detractors say the rules would limit investors' choices and potentially hurt thousands of financial firms.

On Friday, the U.S. Department of Labor announced its pursuit of new rules "designed to enhance retirement security and transparency" for those covered by 401(k), pension and other retirement arrangements. The proposed reforms came from the White House's year-long Middle Class Task Force.

The regulations would prevent investment advisers from slanting their advice for their own financial benefit. Advisers would be required to disclose their fees, and computer models used to offer advice would have to be certified by the government as "objective and unbiased." Advisers allowed to provide guidance would receive flat fees that don't vary based on the securities the participant picks.

The Labor Department estimates that 2 million workers and 13 million owners of individual retirement accounts, or IRAs, would benefit from the rules, which would save $6 billion a year in reduced fees and other costs.

Public comments on the changes are being accepted until May 5.

"These rules will strengthen America's private retirement system by ensuring workers get good, objective information," Deputy Labor Secretary Seth Harris said in a statement. "When that happens, workers make the kind of decisions that are good for their families and the nation as the whole."

That enthusiasm isn't shared by everyone in the investment community.

"The proposed regulation, if approved, will do little to expand American's access to investment advice," said Elizabeth Varley, managing director of government affairs for the Securities Industry and Financial Markets Association. "Americans are seeking the best paths to saving and investing for their retirement and deserve rules that allow them to do so. This move by the Department of Labor will hurt participants and investors, not help."

The Labor Department estimates the proposed regulations would affect 16,000 investment advisory firms.

The new rules could cause retirement plans to offer more index funds, which charge lower fees than actively managed mutual funds (averaging about 0.3% compared to 1.6% for many managed funds). Unlike index funds, which passively track benchmarks, active funds rely on the investment decisions of portfolio managers. Index funds account for 10% of 401(k) holdings, so expanding this market share could boost industry leader Vanguard.

Exchange traded funds that track indices could get a toehold in the retirement market if the regulations pass. That would be good news for BlackRock's iShares ETFs.

Investment advice has become more common at companies, which have been dumping pension plans for 401(k) accounts to cut costs. Half of all companies offer employees some type of 401(k) investment assistance, compared to 17% a decade ago, says Hewitt Associates. The arrangement helps money managers attract new clients and boost sales of investment products.

A recent study by Hewitt and Financial Engines suggests that workers also benefit. Among 400,000 401(k) participants surveyed, those who used investment help had median returns that were 2 percentage points higher, on average, than those who did not. Based on that data, a 45-year-old investor who uses professional advice could save 47% more by age 65 than one who doesn't.

Hewitt says the average participant enrolled in a target-date fund was 38 years old and had a plan balance of $6,295. The average age of managed account holders was 49 and the average balance was $45,816. Target-date funds automatically shift to more conservative investments as the holder nears retirement, while managed accounts rely on the oversight of an adviser.

"Enrollment in managed accounts increases as workers near retirement because these employees have more complex and individualized needs," says Pamela Hess, Hewitt's director of retirement research. "It's important for employers to offer a wide range of professional investment help to meet the retirement needs of their diverse workforce."

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