The EBSA's testimony to amend the rules on investment advice, while valid, could have a limited impact.
Have a comment, insight, or burning opinion on this article? Make your feelings known in the comments section at the end of the article.
The week before last, I received a phone call from a congressional staffer who invited me to testify at a subcommittee hearing July 26. "Why pick on me," I asked. Well, it seemed that my June Morningstar column had garnered some attention in Washington and at least some solons wanted to hear about it from the horse's--uh, mouth. Would I like to come to Washington and testify? Let me see now: leave my home north of San Diego where it was sunny and in the high 70s with no humidity to fly clear across the country to a city where the forecast was 116 degrees on the day of my testimony with the kind of humidity that would make that seem like 250 degrees. Having lived through two Washington summers, it took me less than two seconds to decline the invitation politely.
Among those who did testify before the House subcommittee on health, employment, labor and pensions at that July 26 hearing was Phyllis Borzi, the assistant secretary of labor for the Employee Benefits Security Administration. It's worthwhile to go through some of her written testimony to get a better handle on the great ongoing wrestling match over whether the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 will, in fact, be changed.
The ERISA Fiduciary Structure and How It Bears on the Wrestling Match
Borzi (who, by the way, I believe is earnest in her efforts, unlike many others in this great wrestling match, to protect plan participants and their beneficiaries) notes at the outset of her testimony that ERISA "expressly provides that a person paid to provide investment advice with respect to assets of a private-sector employee benefit plan is a plan fiduciary."
Furthermore she states, "ERISA and the [Internal Revenue Code] prohibit . employee benefit plan . fiduciaries from engaging in a variety of transactions, including self-dealing--when a fiduciary puts his or her own financial interests first--unless the relevant transaction is authorized by an 'exemption' contained in law or issued administratively by the Department of Labor."
Borzi's testimony here reflects the underlying historical anomaly of ERISA's fiduciary structure: Unlike all other countries in the world, only the United States allows an employer/plan sponsor to be a fiduciary of a qualified retirement plan. In all other countries, only independent fiduciaries can run a plan. In Europe, for example, employers can't get involved with their retirement plans at all.
But America's employers made it clear during ERISA's drafting stage in the early 1970s that, whatever final form ERISA eventually took, they wanted to be actively involved in running their retirement plans. That made sense since the contributions made by employers on behalf of participants in defined benefit plans (no glimmer of a 401(k) plan was in anyone's eye in those days) was employer money--at least before it was plopped into the plan--so they wanted some control over it. But this stance created an obvious problem: allowing employers to run their own retirement plans would result in lots of conflicts of interest, many related to whether an employer was acting as a fiduciary to the participants (and their beneficiaries) in its plan or acting as a fiduciary to its shareholders. (For additional information on this subject, please see my interview with Jeffrey Mamorsky, one of the drafters of ERISA, in my October column.)