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Feds Want To Know About Investment Advice Systems

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Federal officials are asking for help with implementing a new law that could let investment advisors who work with retirement plan participants collect different levels of compensation based on the products that the plan participants select. The Employee Benefits Security Administration, an arm of the U.S. Department of Labor, has put out requests for information about how it should go about implementing provisions of the new federal Pension Protection Act that will make it easier for 401(k) plans and other retirement plans to supply investment advice.

One of the requests for information applies specifically to advisors who work with holders of individual retirement accounts, and the other applies to advisors who work with participants in 401(k) plans and other defined contribution retirement plans.

EBSA officials are asking what kinds of investment advice computer models exist today, what kinds of models could exist, and how to handle matters such as fee disclosure and determining whether a model meets PPA requirements.

“What economic costs and benefits are associated with the use of the computer model/program for providing investment advice, including changes in investment performance and in retirement wealth due to the provision of such advice?” EBSA officials ask. “What are the indirect costs and benefits, such as impact on markets for financial services, including investment advice services, and impact on financial markets, including demand for and pricing of securities?”

Comments are due Jan. 30, 2007.

EBSA officials are interested in investment advice computer models because the PPA lets advisors offer plan members advice under 2 conditions: if the advisors’ compensation does not depend on either the initial amount of assets or on the investment options that the plan members choose, or if the advice program uses a “computer model” that meets PPA requirements.

If the Labor Department decides that a financial services company is using an investment advice computer model that meets PPA requirements, the advisor may be able to collect levels of compensation tied to the investment options that plan participants select.


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