Pension Protection Act Opens New Door to Advice

August 15, 2006 ( - While the Pension Protection Act passed covers a wide range of issues, perhaps none is of as immediate concern to defined contribution plan sponsors and retirement plan advisors as the provisions on investment advice.

“I am particularly pleased the bill includes a key issue I’ve been working on for some seven years:   increasing worker access to sound investment advice,” noted House Majority Leader John Boehner (R-Ohio) after the bill’s passage by a 279-131 vote.   “Long before the Enron crisis exposed the glaring lack of professional investment advice available to employees in the workplace, we conducted hearings that demonstrated the need for this type of advice.”

Under the bill, only qualified “fiduciary advisers” fully regulated by applicable banking, insurance, and securities laws may offer investment advice, and that advice must be prudent, objective, and for the exclusive purpose of providing benefits to the plan’s participants and beneficiaries.

Liability Limits

Plan sponsors will remain responsible for prudently selecting and reviewing advice providers, while the advisers themselves will be personally liable for the advice they give.   Regarding specific advice, the bill requires that any purchase or sale occur solely at the direction of the advice recipient; that the compensation received by the fiduciary advisor and affiliates in connection with the sale, acquisition, or holding of the security or other property be reasonable; and that the terms of any purchase or sale of a security are at least as favorable to the plan as an arm’s length transaction would be.

Additionally, under the agreement, fiduciaries for employer-sponsored plans that provide investment advice may tailor their recommendations to an individual’s own unique needs based on a proprietary computer model that takes into account the personal and subjective criteria about their financial and family circumstances.   However, that model must be certified and audited by an independent party, and the advice must be provided in a manner that is “not biased in favor of investments offered by the fiduciary advisor or a person with a material affiliation or contractual relationship to the fiduciary.”  

If the participant first receives recommendations from the computer model but then wishes to seek advice directly from the adviser, he or she can request specific advice from the adviser without the use of the computer model.

Investment advisers who breach their fiduciary duty will be:

  • Personally liable for any failure to act solely in the interest of the worker;
  • Subject to civil and criminal penalties by the Labor Department;
  • Subject to civil lawsuit from the worker;
  • Subject to additional excise tax from Internal Revenue Service.

However, protections under federal and state laws regulating individual industries still apply.

Qualified advice providers must disclose in plain, easy-to-understand language any fees or potential conflicts.   That disclosure must be made when advice is first given, and at least annually thereafter.   It must also be made whenever the worker requests the information, and whenever there is a material change to the adviser’s fees or affiliations.

The bill also notes that employers are not obligated to offer advisory services, nor is any employee under any obligation to accept or follow any advice.