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Shedding More Light on the PPA

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Aside from guidance issued by the Department of Labor (DOL) earlier this year, which specified that as per the requirements of the 2006 Pension Protection Act

(PPA), an advisor to a 401(k) plan has a fiduciary responsibility toward that plan, there has not been much by way of explanation of the different elements embodied by the PPA, and one year after its release, financial professionals are still trying to get a handle on it.

Since the PPA went into effect, advisors have been doing their level best to follow best practices, says Dennis Long, VP of Retirement and Investor Services at Des Moines-based The Principal Financial Group, getting their houses in order, and making sure that they are complying with the requirements of the PPA. Indeed, the new law can mean either new business opportunities for those who are complying with it, or potential litigation for those who aren’t, so any piece of information that sheds better light on the PPA is vital at this stage, Long says.

To this end, The Principal recently published a white paper entitled “Pension Protection Act of 2006: Is An Expanded Fiduciary Role The Right Choice For Financial Professionals?” which seeks to help financial advisors better understand their fiduciary responsibilities in the post-PPA era.

“The PPA validates the fact that advice is very valuable to, and wanted by, plan participants, and that employers who are sponsoring plans must do so in the appropriate way,” Long says. “However, there has been some confusion on what the fiduciary responsibility of advisors entails, so financial advisors who work in qualified retirement plans need to step back and assess their own business plans and make sure they are abiding with the new PPA rules.”

The white paper is aimed at helping advisors assess their plans, Long says. It addresses, among others, the newly created role of the fiduciary advisor and duties of a fiduciary; compensation and fee guidelines; disclosure and audit requirements; requirements related to the use of computer modeling in providing investment advice, and the implications of defensive strategies (aimed at protecting the adviser from liability) and offensive strategies (geared toward expanding business).

The Principal has also created a “Pension Protection Act Guide,” as well as a number of issue papers that provide insight into specific topics at

“We’ve had a very good response thus far and our financial partners who work in this area really look to The Principal to be a partner and help them navigate the complexities of the PPA,” Long says. “We are committed to this role. However, until we get official guidance, there does need to be more information sharing from other parties, too.”

While there is little doubt that the PPA is complex and it is going to take some time to figure out who is complying and who isn’t, which advisors can get ahead of the curve and which will be left behind, there is no doubt that the notion of a fiduciary advisor has created a far more competitive landscape for financial professionals. Indeed, this is a time for those who are really serious about the business to show their commitment to it, Long says. As per the PPA, advisors will have to enter into agreements with employers, and this means they are going to have to compete for endorsements. They will also have to decide on their method of delivery, be that a flat-fee based model or a computer-driven advice model, Long says, and prove both the quality of their advice, the efficiency of their business, and their commitment to the law.

Some, without fully knowing it, might already be complying with both the fiduciary responsibilities and the fees requirements of the new law, and this will get them a head start in business, says Fred Reish, managing director and partner at the Los Angeles-based law firm Reish Luftman Reicher & Cohen. Large mutual fund companies that are also 401(k) plan providers, for instance, are surely going to get ahead of the pack because they can set up a new company as a registered investment advisor to give level fee advice, he says.

But since there is still uncertainty surrounding the PPA, it would be very difficult for any advisor to say that they are disclosing information or giving advice as required by the law, Reish says.

“There is still a lot of misinformation in the market and any paper like the one put out by The Principal is good,” Reish says. “As is, the PPA is unworkable, and there will be further guidance coming out, but right now, the DOL is overwhelmed, so any piece of information that helps navigate the complexities is vital.”


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