One term used in the investment advice section (Section 601) of the new Pension Protection Act of 2006 is worth some consideration.
It is “generally accepted investment theories.” Let’s call it GAIT.
The term appears in the section of the act that allows pre-certified computer models to provide personalized investment advice to plan participants and IRA holders. According to the law, such models must apply such theories.
Did you ever hear of this term?
You may have, if you are a benefits expert conversant with ERISA and various Department of Labor missives. You also may have heard the term if you are an investment professional steeped in modern portfolio theory or modern investment theory, to which the term is often linked, or if you are affiliated with an advisory firm or broker-dealer that keeps staff up to speed on such things.
However, the non-financial people I know have never heard the term. They can’t learn much about it on the Web, either.
To be sure, there are several Web references to the term from the Department of Labor, which has used the term elsewhere. Other websites tie the term to ERISA’s prudent man rule regarding investing, or they link it to modern portfolio (investment) theory.
A few sites even offer fuzzy definitions. And one website lays out some standards for “generally accepted investment principles,” not theories. (These principles at least give some good pointers, such as: have an emergency fund, put retirement investments in stocks and long-term fixed income securities, reduce the stock exposure with your age, etc.).
But that is it.
A similar search of financial books yielded even less information.
This is a problem for consumers, and also for the financial industry. Here’s why:
Chances are strong that the term “generally accepted investment theories” will find its way into 401(k) consumer education and marketing materials that describe the plan’s “pre-certified” computer model.
Chances are also strong that other financial professionals will use GAIT terminology as well, just to show they are up with the times, if nothing else.