From the July 2007 issue of Wealth Manager Web • Subscribe!

The PPA Effect

In the months since the Pension Protection Act of 2006 was passed, it has seemed strangely quiet on the retirement front. The silence has surprised some of the experts who had prepared for an avalanche of inquiries about one of the more contentious and challenging provisions of the 900-page act: Title VI, describing new regulations for the provision of professional investment advice to retirement plans and participants. The lull, however, is probably deceptive. Industry insiders expect corporations will soon actively seek out investment professionals who can provide fiduciary advice to 401(k) investment committees, as well as to their participating employees.

The PPA provides a major motivator for shaking up the status quo of workplace retirement plans. Trial attorneys, who have already filed some high-profile lawsuits against corporations and their 401(k) providers, are scaring companies into re-examining their retirement plans. This fear, says ERISA attorney and benefits consultant Brooks Hamilton of Brooks Hamilton & Partners in Santa Fe, N.M, is completely justified. "One day we will see a flurry of 401(k) litigation that will dwarf tobacco lawsuits," predicts Hamilton, who suggests that workers' attorneys will argue that undisclosed 401(k) fees and expenses as well as menus of mediocre funds have destroyed the average worker's ability to retire with dignity.

Most press coverage of the ambitious pension legislation has focused on the more easily digestible aspects of the act. What should capture the attention of advisors, however, is Title VI, which spells out how personalized advice can be dispensed to the millions of workers who desperately need a helping hand. Under certain circumstances, the act provides a safe harbor for plan sponsors who voluntarily decide to provide workers with investment advice. Some experts are suggesting that the looming changes will ultimately roil far more than the 401(k) market. "We are beginning to see Congress telegraphing its intent to have all retirement assets safeguarded under a fiduciary standard of care, including IRA rollovers, which now top $3.7 trillion," says Donald B. Trone, founder and chief executive officer of Fiduciary360, a fiduciary advisory firm in Sewickley, Pa. "Advisors," he adds, "will have to start ramping up to provide fiduciary services."

If you have any aspirations of getting into the 401(k) market, or you want to hold onto or increase your current qualified plan business, you need to quickly become acquainted with the PPA and the avenues it has opened up. "The PPA, together with lawsuits out there, is definitely creating broad opportunities for registered investment advisors," says Brad Arends, CEO of Alliance Benefit Group Financial Service Corp. in Albert Lea, Minn., an RIA firm and 401(k) record keeper. "I think it's a big opportunity, but it will become a crowded space fast."

Ted Benna, chief operating officer of Malvern Benefits Corp. in Williamsport, Pa. and creator of the nation's first 401(k) plan, agrees: "This act, in my opinion, provides the biggest opportunity for advisors since ERISA. Advisors will have to put some effort into this to drill down and understand the implications," Benna says.

Depending upon the size of their firms and their objectives, investment advisors, can pursue three different business opportunities. First, companies will be looking for so-called fiduciary advisors to counsel individual workers. Going well beyond the traditional educational brochures and pie charts, fiduciary advisors will be able to provide these employees with specific investment recommendations. Of course, there is a caveat. Fiduciary advisors can do this only if their compensation remains level, which means the amount they receive will be the same regardless of what the advice is and how participants invest their 401(k)s, explains Fred Reish, an ERISA attorney at Reish Luftman Reicher & Cohen in Los Angeles. If the advice is delivered through a computer model, however, the compensation does not have to be level. Experts predict that wirehouses, broker/dealers, insurers, banks and fund companies will be offering many, many business models that advisors can use to carry out this service.

Another potential source of advisor income derives from the PPA's requirement of annual audits of the advice that 401(k) participants receive. These reviews must be conducted--regardless of whether the advice is delivered in face-to-face meetings with participants, by phone or through computer models. But the requirement begs the questions of what exactly will be audited and who would be qualified to conduct them.

Some industry insiders suggest that Congress intends the audits to be of a compliance nature, where boxes simply need to be checked off. Others, however, believe that the government will expect the auditor to verify that the advice arrangement provided by the fiduciary advisor serves the best interest of participants. "If you look at the audit from that perspective, it's going to require something more comprehensive and broader in scope than a compliance audit," Trone says.

Meanwhile, there is considerable speculation about what type of professional could assume this [auditing] task. Right now, Reish points out, "There is no such thing as an advice auditor in America. It just doesn't exist."

Another launching spot into the 401(k) universe is advising plan sponsor investment committees. While the PPA didn't cover fiduciary duties for professionals counseling plan sponsors, industry insiders observe that corporations will be increasingly seeking professionals to help write investment policy statements, assist with manager searches and monitor performance. It's possible for professionals to serve as an advisor to plans and their participants.

Each of these 401(k) niches poses challenges. The act's provisions, for instance, have created plenty of potentially ticklish dilemmas for fiduciary advisors, as well as for those who are unenthusiastic about climbing out on that limb. While the willingness of companies to provide their workers with fiduciary advice will be a bonus for some advisors, it poses a hurdle for registered representatives, who have long sold packaged 401(k) products. To provide advice, a professional must acknowledge in writing that he or she is a fiduciary. These 401(k) fiduciaries must reveal all their potential conflicts of interest, as well as how they are compensated. This is yet another blow to registered reps who recently ended up on the losing end of the wirehouses' battle to legitimize the so-called Merrill Lynch rule.

If broker/dealers are going to permit their reps to advise workers enrolled in qualified plans, they will have to formally define a fiduciary standard of care, just as the recent U.S. Court of Appeals ruling now requires them to do outside the qualified plan arena.

Many more questions have been triggered by the requirement of level compensation and what it actually means. Meanwhile, what is a fiduciary advisor to the participants supposed to do if the plan sponsor's 401(k) lineup is dogged with exorbitantly priced funds that have generated dreadful investment returns? This could happen all too easily, thanks to the act's failure to address the fiduciary responsibilities of plan consultants. Originally, the legislation did cover advisors to the plan sponsors, but that item was left out of the final version, says Lisa Van Fleet, an ERISA attorney and practice leader for the employee benefits group at Bryan Cave LLP in St. Louis. Van Fleet says the fiduciary advisor's role is limited to suggesting appropriate allocations among the funds in a menu, but other experts are not so sure.

To prevent these sorts of conflicts from occurring, Trone says it's critical that investment advisors be selective when asked to serve as a fiduciary advisor. "When an advisor gets a phone call asking, 'Will you serve as fiduciary advisor?' advisors should not say 'yes' until they have done an assessment of the procedural prudence of the plan sponsor," he says.

In fact, the advisor can assess the situation very quickly by asking for a copy of the plan sponsor's investment policy statement--beware if it can't produce one--and obtaining a list of the investment options. A cheap resource to quickly evaluate a sponsor's 401(k) plan is a publication produced by Trone's organization entitled "Self-Assessment of Fiduciary Excellence (SAFE)," which asks 38 questions that evaluate whether investment committee members are acting as stewards of their retirement plans. "If there is no investment policy statement and [there are] poor investment options," Trone says, "I would walk away unless the plan sponsor says, 'We know we are in trouble and ...we want to clear it up.' "

Thomas Grzymala, the principal of Forensic Analytics LLC of Keswick, Va., points out another potential conundrum for fiduciary advisors. Perhaps you're advising an executive with a sizable amount in his 401(k) plan, and who has considerably more in outside brokerage accounts. Should the 401(k) advisor consider those other assets when making recommendations? "Certainly you should be considering the total portfolio, but you haven't been hired to do that," he says. That leads to the question of whether or not a fiduciary advisor could try to establish a relationship for the other assets. "It's not clear," Grzymala says, "whether you could solicit this business."

Firms that are interested in serving as consultants to plan sponsors need to do their own calculations. Advising plan sponsors rather than targeting the participant level will obviously require less support staff. If you're going to focus on the plan level, Arends suggests looking for plans where you can generate an annual billing of at least $20,000. It's not necessary, however, to choose between the two levels. "I think you will have some advisors who say that they will focus on plan level," Arends says, "but then they may partner with somebody like Morningstar to do participant level advice with a computer model that's supported by Morningstar's bank of operators."

To acquaint yourself with the type of questions plan sponsors may be directing to fiduciary candidates, you can find a due diligence questionnaire posted on the Web site of VERUS Advisors LLC, a fiduciary advisory firm in Galloway Township, N.J. ( The 10-page document includes questions on the processes for evaluating a plan's investment options and for providing individual advice, along with information on compensation--including revenue sharing--and conflicts of interest.

Advisors, interested in picking up fiduciary work can receive training from Fiduciary360, which provides two different fiduciary audit designations: accredited investment fiduciary analyst and accredited investment fiduciary. The AIFA is designed for senior investment consultants, accountants and attorneys who want to be able to evaluate the fiduciary practices of outside organizations. In contrast, the AIF program was developed to help attendees incorporate fiduciary practices in their own firms. Those seeking the AIF designation typically include investment advisors, investment committee members, trustees and money managers.

Regardless of what piece of the 401(k) pie appeals to you, what is going to matter to employers in the future is not necessarily whether you work for an industry giant, but whether you can walk and talk like a fiduciary, say Ronald E. Hagan, chief executive officer at Roland/Criss Fiduciary Services in Arlington, Texas, which provides fiduciary services to the retirement planning industry. "The logo on the business card will have no impact when an investment committee finally gets it," Hagan says. "When they realize they have been misled in the past, the size of the firm serving them will matter little." What will count is the ability of an advisory firm to show a plan sponsor that it is operating according to fiduciary best practices.

Going through Fiduciary360's programs or reading its best practices materials, available through its Web site, is an excellent place to start. Hagan also suggests that advisors with a large retirement business may want to consider aiming even higher by earning a fiduciary certification through Centre for Fiduciary Excellence (CEFEX) in Canada, which is working in conjunction with Fiduciary360. So far, only a handful of firms have obtained the certification.

It also makes sense to keep up with the latest developments from the Department of Labor, which is wrestling with many of the unresolved questions in an act that, Reish suggests, was hastily written. "The act in itself was so monumental in terms of the impact it can have that I'm sure the Department of Labor wants to resolve these issues as soon as possible," says Bertram Schaeffer, managing principal of VERUS Advisors.

While not all the answers are in yet, this is clearly the time to be proactive. Many companies, says Van Fleet, "are waiting for service providers to come to them and say, 'This is what we have; this is what we can do for you.' The plan sponsors aren't going out to create this; they are waiting for people to sell it to them."

Lynn O'Shaughnessy ( is a financial journalist and former reporter for the Los Angeles Times. She is the author of the Retirement Bible and the Investment Bible (both Wiley).

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