Are computer models that meet the statutory requirements set out in the Pension Protection Act (PPA) an effective tool to use to provide investment advice to IRA owners and participants in 401(k) plans? The Securities Industry and Financial Markets Association’s (SIFMA) president and CEO, Marc Lackritz, told the Department of Labor (DOL) during a recent hearing that those computer models force individuals into a one-size-fits-all investing and advice approach that cannot offer the level of service provided by an investment advisor. The DOL is required to determine the feasibility of such computer models in the IRA marketplace and report its findings to Congress by year-end.
The PPA amended the Employee Retirement Income Security Act (ERISA) by adding a new prohibited transaction exemption that allows greater flexibility for investment advisors to give advice to participants in 401(k) plans and IRAs. Lackritz urged the DOL’s Employee Benefits Security Administration (EBSA) to issue a disclosure-based exemption for the provision of investment advice for IRAs. This means, in essence, says Liz Varley, managing director and retirement specialist at SIFMA, that an advisor “wouldn’t have to use a computer model at all.” SIFMA’s members, which include the more traditional wirehouse firms, “are using computer models,” but the model “is not the driver of what [solution] gets recommended,” she says. “That’s where the interaction with the advisor needs to come in.”
Computer models already exist for 401(k) plans. In 2002, DOL granted an advisory opinion to SunAmerica allowing the company to use a computer model created by a third-party provider for its 401(k) clients. It may be “feasible, but not very effective,” that a computer model could be used to help 401(k) participants, Varley says, because if a plan offers only 15 mutual funds, then “it’s not hard to have a model that takes into account those investment options.” However, when it comes to IRAs, owners can invest in anything–stocks, bonds, mutual funds, real estate, commodities, and so on.
An Argument That Doesn’t Hold Water