Friday, August 04, 2006

Pension Protection Act of 2006 Passes Senate

The US Senate approved the House version of the Pension Protection Act of 2006 by a vote of 93-5. Major provisions of the legislation are ssummarized by Plansponsor.

In addition to addressing defined benefit and cash balance plans, the Bill exempts the provision of investment advice to plan participants by potentially conflicted advisors from the ERISA prohibited transaction category provided;
  • fees for the advisory services are not directly correlated to the investment recommended or a computer model is used which meets certain general criteria,
  • the advice arrangement is specifically authroized by a plan fiduciary,
  • the advice arrangement is audited annually,
  • certain disclosure and presentation requirements are met, and
  • plan fiduciaries remain responsible for the prudent selection and review of the advice providers.

In some way this legislation may protect or at least provide legislative remedies for eggregiously biased or unsuitable advise. Unfortunately, the proprietary product bias for many DC plans is already build into the structure and scope of their plan investment lineup. Advice will always be limited to the short list of options available in each plan.

The industry motivation to provide plan advice is to leverage institutional relationships (ie with the plan sponsors) into individual relationships with the participants in hopes of capturing the explosive growth of assets that will undoubtedly be leaving (talked out of) DC plans as boomers retire. Once in an IRA , outside of ERISA, advice can better serve the needs of the advisor's shareholders.

It will be interesting to see how aggressively and most importantly how economically DC plan providers develop and solicit participant advice arrangements. While we agree that many DC plan participants would benefit from better core asset allocations, the cost of that improvement could easily be offset by the explict cost of advise and the implicit biases to active management and proprietary investment products.

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