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The Pension Protection Act (PPA) of 2006 is considered the most monumental pension legislation since Gerald Ford signed ERISA into law back in the 1970s. After all, the PPA is good for everyone: The automatic enrollment will get more employees to save and may help lower the employers' cost of offering plans. Financial-services companies like it since it means more business a reason for financial advisors

The Pension Protection Act (PPA) of 2006 is considered the most monumental pension legislation since Gerald Ford signed ERISA into law back in the 1970s. After all, the PPA is good for everyone: The automatic enrollment will get more employees to save and may help lower the employers' cost of offering plans. Financial-services companies like it since it means more business — a reason for financial advisors to love the PPA, too.

Just think: Companies can now automatically enroll their employees into default investments and, even better, boost their contributions each year. How happy is the financial community? Very, that is, most of the time. But when financial services executives ponder the 401(k) fiduciary advice provisions contained in Title VI of the PPA, their enthusiasm is replaced with caution. That's because Title VI contains the “F” word — fiduciary; and that is a vexing concept for 401(k) brokerage platforms.

Indeed, the fallout from this portion of the act should prove as interesting as the legislation itself. Joe Ready, director of Wachovia's retirement services, and Kevin Crain, director of institutional sales and products at Merrill Lynch's retirement group, for example, appear quite pleased with their pre-PPA advice program — computer model-driven advice for 401(k) participants. Ready and Crain did not seem eager to start adhering to the fiduciary model. “I think there will be an increased use of investment consultants or investment advisors playing a consultative role,” Ready acknowledged. But, he added, “I'm not sure those firms playing that role will sign up for fiduciary responsibility.” For his part, Crain offered this observation, “I can't say at this point we are getting a lot of pressure that the advice has to be fiduciary [in nature] and that's because we have a service already working well.”

A Fiduciary Groundswell?

Of course, those in the fiduciary wing of the business say that resistance to a fiduciary standard will prove futile. The momentum for fiduciary advice is too great, they argue. “In a couple of years, if you aren't a fiduciary, it wouldn't surprise me that you won't get work,” suggests Donald Trone, chief executive officer of Fiduciary360, a fiduciary advisory firm in Sewickley, Pa., which has been on the forefront of investment fiduciary education. To his point, in fact, unofficially, some wirehouse reps are being allowed to test the fiduciary waters.

A great deal of the pressure for change is coming from plan sponsors who are anxious about their own legal liabilities (under the PPA, if an advisor agrees to take on a fiduciary status in writing, some of that liability is lifted). Litigators, for instance, recently filed lawsuits against major corporations, alleging that workers were charged millions of dollars in excessive 401(k) fees. Companies are obviously eager to insulate themselves from this sort of legal grief. Many companies are also now aware that the consultants serving their 401(k) accounts only appear to be fiduciaries. As a result, ERISA attorneys are now advising their corporate clients to stick with the real fiduciaries, says one wirehouse executive.

Many rank-and-file registered reps agree with Trone and are also agitating for change. Quite simply it's harder for them to win business when they must compete against savvy registered investment advisors, who will happily acknowledge fiduciary responsibility in writing. This roadblock is frequently frustrating reps, says Steff Chalk, who is president of Chalk 401(k) Advisory Board in Cincinnati. “I speak with brokers who have been eliminated from competition even though what they provide is extraordinary service and reporting that is second to none, and education that I would put at the top of the industry,” Chalk says. “But, they responded in the negative to that fiduciary question.”

Rank-and-file dissatisfaction isn't the only reason why industry observers believe it's going to be difficult to buck the fiduciary trend. “The issue is: Can they control a rep when he's not sitting in Merrill Lynch's home office being supervised?” says Brad Arends, CEO of Alliance Benefit Group Financial Service Corp. in Albert Lea, Minn., which is a registered investment advisory firm and a 401(k) recordkeeper. “That's the real issue. These guys are out there trying to make a sale.” In fact, despite what's being parroted in the home offices, plenty of guys in the trenches are already passing out personalized advice.

Are DC Plans Worth the Trouble?

If and when reps are free to use the “F” word with plan sponsors, what will the advice landscape look like? Experts generally agree that earning a comfortable living by counseling 401(k) participants can be challenging. Of course, advising a corporate investment committee is more profitable — and requires less manpower — but it's also expected to become a very crowded 401(k) space, which could drive down the fees.

While consultants might prefer advising plans sponsors, companies could harbor other ideas. They could insist that a consultant advise those in the boardroom, as well as on the factory floor. Clearly working with employees would require a different mindset and business model for professionals, who have typically tailored their careers toward serving high-net-worth clients. Shepherding employees through the 401(k) decision-making process, however, can attract rollovers and other assets. “Advisors should look at 401(k) plans as a Trojan horse to get in and get access to participants' assets outside the plan,” says Fred Barstein, who is president and chief executive officer of 401kExchange in Greenacres, Fla.

Many reps are already on the attack. For instance, Independent Retirement Advisors in Getzville, N.Y., who affiliated with American Portfolios Financial Services, has been serving plan sponsors and their employees for seven years. The firm, which manages roughly $250 million, with about 80 percent coming from 401(k) plans, has found that offering comprehensive service to employees has been a great way to compete against the big boys. “We've picked off plans because the wirehouses didn't serve them,” says David Bangert, the firm's president. In addition to the 401(k) assets, 15 percent of the firm's assets can be traced to rollovers within those workplace accounts. The firm provides fee transparency, investment due diligence, client compliance and participant advice.

While some reps worry about the prospects of being inundated with worker queries, Bangert says that typically only 10 percent to 15 percent of 401(k) participants will take advantage of quarterly on-site meetings with advisors. In his experience, about 5 percent to 10 percent of workers show up every quarter, while the rest surface when they have questions. With two reps visiting a work site, the advice sessions can last for a couple of hours for a small firm and two days for larger firms with 500 to 1,000 people.

One of the keys to a successful 401(k) practice is making sure the pricing is optimal. The fees will vary depending upon the type of businesses involved, the number of participants, the location of these workers and the assets in the plans, says Arends, whose firm, Alliance Benefit Group, has served as an advisor to plans and participants for about 15 years. An advisor, for instance, might decide to charge 25 basis points for a $20 million plan that belongs to 100 physicians. But the pricing would need to be higher if the employer with the $20 million plan was a manufacturer, who employs 600 workers with small accounts. In this case, the rep could decide to bump up the fee to 40 basis points.

Advisors will also want to adjust their charges based on whether they work with the plan sponsor and/or the participants. You should be able to charge a percentage of the assets to strictly serve a plan sponsor, but larger plans would require assessing a flat fee. Arends observes that an advisor would be lucky if he or she could get more than $40,000 a year for advising an investment committee with $50 million in assets.

It's not financially realistic to charge for participant advice based on individual account balances. If you're providing advice on the plan level and to workers, you'd have to charge a certain percentage of the total assets. Advisors, however, could encounter resistance from plan sponsors, who balk at paying fees for services that traditionally have been covered through soft-dollar arrangements, says Chris Bidwell, a corporate client group director within the 401(k) Group at Smith Barney, which manages more than $18.5 billion in retirement plans. “This is a learning curve for the plan sponsor and the sales consultant to explain it,” he says. “Historically, larger plans will go the hard-dollar route and smaller plans go for the soft-dollar route.”

One of the hurdles in providing advice is making sure it conforms to the new PPA rules. For instance, fiduciary advisors, who aren't relying solely on computer models, must be paid through level compensation, which could be a project-based or asset-based fee. The law forbids advisors from taking compensation that vary depending upon the asset classes, the share classes and the fund families chosen. Industry observers believe that the market will develop investment choices that will satisfy this requirement. Brokerage firms, however, are concerned that these restrictions might extend beyond the individual rep. The wirehouses would like assurance from the Department of Labor, which oversees pensions, or Congress that the PPA doesn't require that firms themselves observe the level compensation requirement. “If that is the case, that would change dramatically how we have to do business,” Crain observed.


Experts suggest that reps who ultimately become fiduciaries will require additional training. Simply holding various series licenses is probably not going to cut it. There are now more options than just a few years ago.

A respected source of fiduciary training is Fiduciary360's Center for Fiduciary Studies. Financial professionals can receive training online or by attending classes in various locations across the country, including Fiduciary360's headquarters in Sewickley, Pa., as well as the University of Washington in Seattle, Stetson University in Celebration, Fla., and Rice University in Houston. The Accredited Investment Fiduciary is the designation for reps who want to either advise plans, participants or both. Professionals interested in auditing 401(k) plans would seek an Accredited Investment Fiduciary Analyst designation.

Fiduciary360 publishes Prudent Practices for Investment Advisors where one can get a sense of what is being a fiduciary is all about. You should also obtain the firm's Self-Assessment of Fiduciary Excellence (SAFE), which is a checklist that aims to help investment advisors analyze whether their practices, procedures and executions meet the fiduciary standards.

While Trone's organization used to be the only game in town, others have moved into the field. Dalbar and PLANSPONSOR are rolling out a program called Fiduciary Advisor Network that aims to ensure that professionals, including registered reps, registered investment advisors and insurance agents, are certified to act as fiduciary advisors. The online course focuses strictly on what a professional needs to provide participant advice and doesn't address the fiduciary issues involved at the plan sponsor level, such as investment due diligence. Louis Harvey, Dalbar's president, says interest has been “extremely high” since the new program was announced in December. Harvey says his firm has had conversations with 10 of the top 20 brokerage firms in the country about providing instruction.

While becoming a fiduciary may seem daunting, Donald Trone, CEO of Fiduciary360, says the leap will be more like a puddle jump for reps, who are already practicing a higher standard of care without that official fiduciary acknowledgment. “There are broker consultants,” he says, “who will have less difficulty passing fiduciary audits than organizations that hold themselves out as fiduciaries.”

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