Obama proposal aims to curb conflicts of interest in 401(k) investment advice

The Obama administration offered a long-awaited road map Friday for companies that want to perform potentially conflicting roles: managing retirement funds such as 401(k) plans for employers and advising employees as to which funds they should choose.

The proposal could open the door to new business for money managers and would try to control conflicts of interest.

As traditional pensions have given way to 401(k) plans, forcing millions of people to assume responsibility for their retirement investments, the government and big employers have faced a quandary: how to offer workers professional investment advice that is not skewed by advisers' hidden interests.

The Obama administration offered a two-part solution.

First, investment advisers could base their recommendations on computer models that experts certify as objective. Alternatively, they could give the advice if it does not affect their compensation.

In other words, when helping workers choose among funds or types of investments, advisers could not reap higher fees, commissions or compensation for steering people toward particular options.

"The concern is that we don't want [workers] steered in a direction that may not be best for them simply because that's the way the adviser can make more money," Labor Department Assistant Secretary Phyllis C. Borzi said.

The administration announced the proposal at a briefing on Vice President Biden's Middle Class Task Force, and it billed the measure as a way to make the retirement system safer.

Key aspects of the plan remained unclear: for example, how the government would treat bonuses based on the amount of assets an investment firm has under management, said Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America.

The Bush administration had taken a crack at the issue, but the Obama administration froze that proposal when it took office.

Mercer E. Bullard, who teaches securities law at the University of Mississippi and founded Fund Democracy, an advocacy group for mutual fund shareholders, said the Obama proposal "is clearly less permissive" than the Bush administration's because it applies the compensation test to the advisory firm, not just the individual person giving the advice.

But, as dictated by federal law, the rule would still allow conflicts of interest, because advisers would have a bias in favor of the funds sold by their firms, he said.

The rule is open for public comment until May 5.