From the February 2007 issue of Investment Advisor • Subscribe!

February 1, 2007

Taking Advantage of the Pension Protection Act

The Pension Protection Act (PPA) signed into law last August is among the most important and comprehensive pieces of legislation in several decades, and a recent survey conducted by Fidelity Investments has shown that it has important implications for financial advisors, too.

The PPA centers around the 401(k) plan--undeniably the most important facet of retirement saving from here on--and as such, plan sponsors will increasingly be interested in how the Act will affect them and what decisions they need to make for retirement plans as a result of the Act, says Dave Liebrock, executive VP of Fidelity Investments Institutional Services in Boston. Because many plan sponsors do not have the knowledge or the time to explore the nuances of the PPA, they will rely more and more upon advisors to do the work for them, Liebrock says.

"Plan sponsors, for example, will want to know whether implementing automatic enrollment makes sense or not for their company, and this is the kind of work they will want advisors to do for them," he says.

The Internet-based survey, conducted between September 18 and October 2, 2006, was taken by 329 financial advisors across the U.S. who sell 401(k) plans. Fidelity decided to conduct it because "we wanted to get an understanding of what advisors thought about the implications of the PPA for their business," Liebrock says. "Not surprisingly, many think it will be positive and that their businesses will grow by between 10% and 40%" due to the new law.

However, while this may indeed be true, advisors need to understand fully what the PPA means and how it pertains to their business. "There is no doubt that the PPA is going to do a lot of good for many because it is designed to help people get into defined contribution plans," Liebrock says, "but advisors actually stand to benefit the most because plan sponsors are going to need a lot of help, and so advisors really need to understand their fiduciary responsibilities and how these relate to the kind of advice they will be giving."

Nearly nine in 10 (87%) advisors reported in the survey that with the new legislation in place, they plan to offer investment advice to 401(k) plan participants or IRA shareholders. Yet only one-third of these advisors believe they understand the fiduciary responsibilities related to offering advice. A number of advisors are embracing the advice provisions of the PPA, but many are probably not going to understand the associated liability and administrative requirements that go with offering advice, something that could have an impact upon their capacity and business model, Liebrock says.

It is interesting to note that even though advisors should wait for the details of the law to be spelled out to figure out how it will impact the nature of their businesses, about 45% of those surveyed say they would prefer to offer advice using a level compensation model rather than a computer model.

Yet it is extremely important for advisors to wait for and understand the specifics of the law because there is no cookie-cutter model for advice: While some advisors are likely to offer a third-party, computer-based advice model, others may have the resources to offer individualized investment advice. Yet more might choose to impart advice only to people with 401(k) balances above a certain amount. It is therefore important for advisors to understand what it means under the Act to offer different kinds of advice, Liebrock says, including what it means to become a fiduciary to a retirement plan.

The greatest onus is upon plan sponsors, Liebrock says, but the PPA will allow advisors to offer advice and help their clients take advantage of new saving strategies, opening up new avenues of business. One such area is income planning, for people who want to retire early or are getting close to their official retirement. Income planning is something that advisors will have to incorporate into their businesses, as income planning is becoming an increasingly pressing need for many retirees.

"As people save for retirement and want to retire at age 55 or 60, they will have to determine how to pay for it, and this aspect of retirement planning is going to be another business practice for advisors," Liebrock says.

The Fidelity survey also showed that advisors expect an increase in automatic enrollment as a result of the PPA. While only 12% of the 401(k) clients of the advisors surveyed currently implement auto features, that number should rise significantly with the passage of the Act.

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