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Why Are We All Waiting for PPA Advice Legislation?

Jan. 18, 2011 12:57 PM ET
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Smart401k's Blog
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Everyone seems to be sitting on pins and needles awaiting the final language surrounding investment advice within PPA. There have been delays, and a comment period caused uproar in the investment community about the proposed language - particularly the language pertaining to the evaluation of investment products.

I view PPA investment advice a little differently. I don’t see the big deal.

Purely by definition, investment advice through PPA provisions are meant only to mitigate potential conflicts of interest existing because the party providing the advice has more to gain or lose than merely the fees associated with the advice service offering. The adviser may offer investment products within the plan or accept unlevel payments from fund companies in the form of 12-b1 revenue sharing. Regardless of the type of conflict, the language is designed to protect participants and ensure that the advice participants receive is solely in their best interest - not in their advisers’. Without regulation, what would prevent an adviser from recommending only funds that generate more revenue for themselves or their firm?

I understand why advisers and companies offering investment products may be concerned, as it may impact their bottom line or cause them to re-evaluate their business models. But, in my opinion, plan sponsors should be pleased with the direction the PPA language is heading. The government is trying to put specific guidelines to protect 401(k) participants.

With all of the publicity about the proposed language, I’m afraid many people are focusing on PPA with the assumption that it is the ONLY way to provide advice to employees – which is not the case. PPA is simply one way advice can be offered within a qualified plan. The Department of Labor has previously issued two private letter rulings (SunAmerica and Frost Bank) that indicated advice could be offered by a party with a potential conflict of interest – as long as risks are mitigated so that the advice solely benefits the employee. The SunAmerica case mitigated the risk by hiring an independent third party to create the advice recommendations, and Frost Bank mitigated the risks by leveling the fees of the adviser. Under both models the participant is the only benefactor of the advice recommendations.

In addition, advice can be offered by an independent third party. In this scenario, the adviser making the recommendations does not have a conflict of interest… no related investment products…. no unlevel fees. Pure independent advice given to participants based on their personal situation means there is no conflict to mitigate.

Numerous companies offer independent investment advice in this manner. Some are what I would call “black-boxes” which deliver advice primarily through a web application. A participant enters their information, time horizon, risk tolerance and other account information, and a computer model displays a recommendation based on the individual’s facts and circumstances. Other business models include service enhancements like education materials and/or access to investment advisers to work one-on-one with participants. 

All of these models provide plan sponsors with THE SAME LEVEL OF FIDUCIARY PROTECTION as the proposed PPA Advice model. In fact, after the original passage of PPA, the DOL issued a field assistance bulletin indicating that “the passage of PPA does not impact the previous guidance and legislation around other ways in which participant advice can be offered.”

So if you are a plan sponsor, and you want to offer investment advice to your employees, your fiduciary obligation is to ensure that it is done in the sole interest of your plan’s participants. The proposed legislation will help you because it will provide guidelines to establish and manage a program. It is important to note that, as a plan fiduciary, it is incumbent upon you to ensure that advice offered under PPA complies with the regulations.

For plan sponsors that don’t want to wait on final language and programs that meet the requirements, there are choices available today. There are choices that offer conflict-free or conflict mitigated advice that will provide your employees with the help they need and provide you with the same level of fiduciary protections.

Scott Swezy
Vice President, Smart401k

About Smart401k
Smart401k is a Web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans. Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at Smart401k.com.

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