Qualified Pension Plan Participants Should Look Forward to Receiving Specific Investment Advice
By James Eccleston
he Pension Protection Act of 2006 (the "PPA") should benefit plan participants (and beneficiaries) by providing participant education. Under the PPA, qualified "Fiduciary Advisers" will help plan participants navigate through their investment selection and allocation decisions. Although we await the issuance of regulations by the Department of Labor to amplify the provisions of the PPA, let's review the PPA and what plan participants may expect to receive by way of guidance.
First, the PPA has introduced a "safe harbor" that allows plan sponsors to provide specific investment advice to plan participants who have self-directed accounts without thereby making the plan sponsor or other ERISA fiduciaries liable for the actual advice given. To take advantage of that safe harbor, plan sponsors must delegate the personalized investment advice function to a Fiduciary Adviser and must adhere to the other requirements of the PPA. Plan participants should be delighted to learn that Fiduciary Advisers, as the name implies, must agree to act as a fiduciary and must adhere to the same broad fiduciary duties of other fiduciaries. Importantly, these fiduciaries assume a fiduciary duty only in providing investment advice to the client. Thus, they do not assume a fiduciary duty in, for example, revisiting the prudence of the investment options that the plan sponsor has made available. Nor do these Fiduciary Advisers assume discretion over the plan participant's account.
Second, the Fiduciary Adviser can hail from a number of different professional backgrounds, such as a brokerage firm, a registered investment advisory firm, a trust department of a bank or an insurance company. Some Fiduciary Advisers may receive fees or compensation that varies depending upon the investment options selected by the plan participant, hence creating an incentive to promote investments from their companies or affiliates which would increase their compensation. To avoid that conflict of interest, the PPA forbids such a Fiduciary Adviser from doing anything other than presenting and discussing a certified computer model. Nonetheless, this computer model will: (1) provide historic returns of different asset classes over defined periods of time; (2) utilize relevant information about the participant, such as age, life expectancy, retirement age, risk tolerance, other assets and sources of income, and investment preferences; and (3) employ prescribed objective criteria to provide asset allocation portfolios comprised of investment options available under the plan. The PPA does, however, allow a plan participant to request additional investment advice, so long as the Fiduciary Adviser, or "any person connected with carrying out the arrangement", has not "solicited" the request.
Third, when the Fiduciary Adviser's fees or compensation does not vary depending upon the investment options selected, plan participants can expect to receive personalized advice beyond that conveyed through the computer model discussed above. This personalized advice will be used to allocate assets and select investments among the plan offerings.
Fourth, under the PPA, plan participants should expect to receive a great deal of disclosure, "in connection with the sale, acquisition, or holding of the security or other property". To begin with, the PPA requires such disclosure "in accordance with all securities laws." That means, for example, that SEC-registered investment advisers will have to comply with the disclosure provisions of the Investment Advisers Act (such as providing a copy of the adviser's Form ADV Part II to plan participants to whom they are providing investment advice). In addition, the PPA itself has a laundry list of specific items that must be disclosed, in writing, "before the initial provision of the investment advice." Such disclosure items include:
The role of any party that has a material affiliation or contractual relationship with the Fiduciary Adviser in the development of the investment advice program and in the selection of investment options available under the plan;
The past performance and historical rates of return of the investment options available under the plan;
The fees and other compensation relating to the advice that the Fiduciary Adviser or any affiliate is to receive; and
The right of the participant or beneficiary to arrange separately for the provision of advice by another adviser who has no material affiliation with and receives no fees or other compensation in connection with the security or other property offered as an investment option.
As one can see, the fiduciary provisions of the PPA are broad and deep. That should be welcome news to the millions of qualified plan participants (and beneficiaries) who, to date, have had little or no investment guidance.
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James Eccleston, an attorney specializing in adviser and broker-dealer issues, is a partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston in Chicago.
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