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April 18, 2008 at 08:00 PM
The $7 trillion defined-contribution retirement plan market got a serious shot in the arm when Congress recently passed – and President Bush signed – the Pension Protection Act.
Under the new law, employers will be allowed to enroll employees in retirement plans automatically, which should attract huge asset flows. They also can hire so-called “fiduciary advisors” to provide investment advice to employees. Prior to PPA, employers could only provide limited investment education to employees.
The law also imposes a fiduciary standard on investment advisors working with employees. This may be an eye-opener to practitioners operating under a lesser standard. According to a new survey conducted by Fidelity Investments Institutional Services, nearly 90 percent of advisors said they planned on giving investment advice to employees. However, two-thirds of the 329 advisors polled didn’t understand the fiduciary responsibilities involved.
Obviously, serving as a fiduciary imposes an obligation to act in the best interest of employees and to avoid conflicts of interest.
The PPA only allows investment advice to be delivered through a computer-driven advice model and/or on a fee-neutral basis. The computer model must not be biased in favor of the investments offered by the advisor; must take into account all of the investments offered under the plan; must take into account the participant’s age, life expectancy, risk tolerance and other assets; must be certified by an independent investment expert; and applies generally accepted investment advice theories.
