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PPA spells big opportunity for qualified advisors

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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.

What’s more, the fiduciary’s compensation can’t depend on which fund family, fund, share class and/or asset mix is recommended.

PPA also imposes an auditing requirement on the computer-driven advice model and on the service arrangement between the fiduciary advisor and the plan sponsor. Fiduciary360, a consulting and training organization for fiduciaries, says the audit likely will cover the advisor’s asset allocation and optimization procedures, due diligence procedures for selecting and monitoring investment options, investment-related fees and expenses, overall prudence, and awareness of the plan sponsor’s procedural prudence.

Still interested in providing investment advice in the workplace? Then consider learning more about the roles and responsibilities of fiduciaries. Educational programs are available from the Center for Fiduciary Studies, Dalbar, Roland Criss Fiduciary Services, and the Centre for Fiduciary Excellence.

What “red flags” are affecting your business? Send your comments to the National Ethics Bureau at [email protected].


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