What Does the Pension Protection Act Say About 401k Investment Advice?
This article will focus on the issue of 401k investment advice within the framework of the Pension Protection Act of 2006 which took effect in January 2008.
It is not to be viewed as legal advice as the author is not a lawyer.
Given the gap that so clearly exists between plan participants that are and are not able and willing to manage their 401k investments, the Act opens the door for employer sponsored as well as independent advisers to fill the space.
The key here is that the Act offers conditional provisions designed to protect the employer from being sued by employees unhappy with the outcomes achieved as a result.
Prior to the Act, this was certainly a gray area for fiduciaries ~ both employers and independent advisers.
Of note, however, is the standard of being a fiduciary with all of the potential liability that comes with that designation in law.
Remember, corporate America pressed for relief from this liability when they began to terminate the old pension system, called a Defined Benefit Plan, which promised a lifetime pension to qualified, former employees.
This was the retirement plan of our parents.
Corporations took responsibility for saving and investing to fund this benefit.
In the face of poor investment performance and dramatically extended life expectancy of beneficiaries of these plans, a massive unfunded liability did not escape the notice of companies or their auditors.
Defined Benefit Plans became slated for termination.
The 401k Plan was created to fill the void and was specifically designed to shed corporate fiduciary liability by shifting the burden to the individual employee.
So how will Pension Protection Act help plan participants? Basically, the protections include the following: Investment recommendations must be made by unbiased computer programs; Fees for advisers must not be linked to specific investments; and, advisory fees and other sources of income must be transparent.
For the plan participant unable to manage this important asset on their own this provision has the potential for great benefit.
In the studies I have reviewed, time and again the portfolio construction errors common to many participants needlessly elevates the risk that these participants may not achieving successful outcomes.
Access to personalized, one-on-one investment advisers at least would help participants focus on how they can manage investment risks.
From this writer's perspective this is progress not perfection; but, progress nonetheless.
It is not to be viewed as legal advice as the author is not a lawyer.
Given the gap that so clearly exists between plan participants that are and are not able and willing to manage their 401k investments, the Act opens the door for employer sponsored as well as independent advisers to fill the space.
The key here is that the Act offers conditional provisions designed to protect the employer from being sued by employees unhappy with the outcomes achieved as a result.
Prior to the Act, this was certainly a gray area for fiduciaries ~ both employers and independent advisers.
Of note, however, is the standard of being a fiduciary with all of the potential liability that comes with that designation in law.
Remember, corporate America pressed for relief from this liability when they began to terminate the old pension system, called a Defined Benefit Plan, which promised a lifetime pension to qualified, former employees.
This was the retirement plan of our parents.
Corporations took responsibility for saving and investing to fund this benefit.
In the face of poor investment performance and dramatically extended life expectancy of beneficiaries of these plans, a massive unfunded liability did not escape the notice of companies or their auditors.
Defined Benefit Plans became slated for termination.
The 401k Plan was created to fill the void and was specifically designed to shed corporate fiduciary liability by shifting the burden to the individual employee.
So how will Pension Protection Act help plan participants? Basically, the protections include the following: Investment recommendations must be made by unbiased computer programs; Fees for advisers must not be linked to specific investments; and, advisory fees and other sources of income must be transparent.
For the plan participant unable to manage this important asset on their own this provision has the potential for great benefit.
In the studies I have reviewed, time and again the portfolio construction errors common to many participants needlessly elevates the risk that these participants may not achieving successful outcomes.
Access to personalized, one-on-one investment advisers at least would help participants focus on how they can manage investment risks.
From this writer's perspective this is progress not perfection; but, progress nonetheless.
