Tuesday, October 10, 2006

Putting the Conflict Back into Advice

Beginning in 2007 the Pension Protection Act (PPA) provides a prohibited transaction exemption for fiduciaries to provide investment advice to plan participants. Historically, sponsors have not wanted to take on the fiduciary exposure related to advice provision. Money managers have preferred to maintain their investment arrangements with plan sponsors rather than focus on plan investment advice, since the potential conflicts inherent in providing both of these services created a prohibited transaction under ERISA.

The PPA advice provisions, presumably cognizant of the self dealing potential associated with money management firms providing advice covering their own products, allows only 2 kinds of investment advice arrangements; those incorporating a level fee structure or those generated by an objective computer model. Both these exemptions have been recognized in a case specific way by the DOL prior to the PPA. The SunAmerica letter dealt with computer generated advice models while the Country Trust Letter dealt with fee leveling.

The flat or level fee model requires that the fees received by the fiduciary advisor are not dependent on the investment selections made. What is not specified in the PPA is whether the fee leveling relates specifically to the individual providing advice or also to the advisor's employer or a member of a controlled business group. Consistent with the old ERISA advice exemptions, the PPA legislation may have been drafted to prohibit any advisor from qualifying under this exemption should either they or any member of their employer or controlled group benefit from differential fees. On the other hand, there is opinion that this was not the intent of the legislation. From our perspective, the most critical piece of the PPA advice provision remains subject to interpretation or subsequent technical correction.

The large insurance and investment firms are lobbying for a technical correction to the langauge which would clearly contain the fee leveling requirement to the individual or registered rep level. Should they prevail, this would be a major directional change in ERISA. It would also represent a monumental business opportunity for the large money manager/retirement plan providers to capture individual account relationships, profit from them while in a qualified plan and retain them as they rollover post retirement.

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