The next generation of
participant advice begins
In the lexicon of ERISA, perhaps only "404c"
is more often misapplied and misunderstood than
"advice." Still, in the decade since the
Department of Labor (DoL) famously attempted to craft a
workable line between education and advice, regulators,
legislators, and the industry itself have done much to
transform the ways in which participants are given help
making decisions involving their retirement accounts
(including no decisions at all—see "
Taking It up a
Notch
").
The most recent clarity came in the form of Field
Assistance Bulletin 2007-01, which, in early February,
noted the DoL's position that "a plan sponsor or other
fiduciary that prudently selects and monitors an investment
advice provider will not be liable for the advice furnished
by such provider to the plan's participants and
beneficiaries." The FAB also expanded on how that
prudent selection and monitoring should be carried out, as
well as its applicability to the new fiduciary adviser
provisions in the Pension Protection Act (PPA).
"By clarifying the rules, the DoL has opened the door
finally to those that currently offer ERISA participant
investment education and advice, albeit with a very
conservative tilt, more often than not having little to do
with the participants' risk tolerance," observes Stuart
Simchowitz, Managing Director at White Plains, New
York-based Avenir Equity LLC. Indeed, one of the
unexpected—and still most controversial—aspects of the PPA
were provisions under which a "fiduciary adviser" could
provide investment advice for a fee, subject to certain
specific criteria. Jim O'Shaughnessy, founder of
Northbrook, Illinois-based Sheridan Financial, says, "The
PPA legislation and DoL guidance on advice finally give us
[advisers] the basic framework and legal backing to provide
advice to plan participants, while giving plan sponsors the
fiduciary protection they need."
"[Still,] small-plan sponsors are mostly unaware of the
consequence of the new advice legislation," notes Bill
Heestand, President of the Heestand Company in Portland,
Oregon. "Many have been buying from their non-fiduciary
broker who has been delivering 'advice' to their
participants—ERISA be damned," he cautions.
Advice is, in fact, offered through a variety of
overlapping mediums, and what participants see may largely
be a function of the size company they work for.
PLANSPONSOR's 2006
Defined Contribution Survey
(taken prior to the PPA's enactment) found that more
than half (58%) of plan sponsor respondents currently offer
financial/investment advice to participants. However, large
employers were less likely to do so, and to do so via a
third-party advice provider or DC recordkeeping provider,
rather than via a financial adviser.
The PPA's fiduciary adviser provisions seem certain to
expand on current trends, even if some financial services
firms have yet to figure out how to navigate the law's
restrictions on affiliate compensation. "Advisers are
struggling on what the fiduciary adviser 'best practices'
model looks like, trying to work through the structure of
the review process, services provided, pricing, and models
to use," acknowledges Sheridan. Still, he believes, "In the
end, through supply and demand, these issues will work
their way out efficiently, and the fiduciary adviser role
will become integral to a successful retirement plan."
Heestand notes: "The number of providers and advisers
who acknowledge their fiduciary status is so large that
there is simply no good reason for a sponsor to 'stand
naked on the fiduciary liability freeway' any longer!" In
the meantime, the DoL's 2001 SunAmerica decision, which has
provided many financial services firms with the ability to
provide advice on their own funds for a fee (so long as the
advice comes from an independent financial modeling entity)
has meant that participants increasingly have access to
what they really want, whatever we call it:
help in making investment decisions.
What To Watch/Watch Out
For
1. The impact of automatic plan designs on the need for
advice
2. Broad-based use of target-date funds versus a more
ÂÂindividualistic approach
3. A more holistic approach to advice, including
non-plan assets
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