The headlines of late have nearly all been about the impact on pension plan funding, but legislation affecting investment advice has also managed to piggyback its way back into two of the most recent bills – one sponsored by Congressman John Boehner (R-Ohio), who chairs the House Education and the Workforce Committee, and the other crafted by Senator Max Baucus (D-North Dakota) and Senator Chuck Grassley (R-Iowa), who heads the Senate Finance Committee. Both have cleared their respective committees, and while their future is not yet certain – both are dominated by complicated funding considerations for defined benefit pension plans, and neither is exactly in sync with reforms already put forth by the Bush Administration – it is interesting (IMHO) that both contain provisions regarding investment advice.
For years I have watched providers struggle to offer only education and not advice, watched employers try desperately not to take on additional fiduciary responsibilities, and witnessed any number of financial advisors (and/or the firms they were associated with) trying to make sure that nobody confused their role in serving the plan with serving the plan as a fiduciary. For the most part, the losers in such machinations were participants, who couldn’t care less about whether someone was a fiduciary or not, much less whether what they were offering was education or advice. All those participants wanted – and every financial advisor worth his or her salt knows this – was to glean some idea of “what they should do” with that complicated investment menu.
Not that all these parties didn’t want to help participants with that decision, quite the contrary. But ERISA, in its attempt to protect participants from the unscrupulous designs of conflicted advice, has made it nearly impossible for the systems that compensate advisors to work. Simply stated, it is a prohibited transaction to offer advice (more accurately to offer advice that is paid for) on investments from which you are compensated differently – not just situations where fund complex A offers a more lucrative revenue-sharing arrangement than fund complex B, but where an equity fund in complex A offers a more lucrative arrangement than a money market fund in the same complex (there are ways to deal with this, of course – “fee leveling” and/or the use of a “fee only” model for these services are two fairly common structures).
What we do know is this: Participants generally like the idea of getting investment advice, and advisors are (for the very most part) well-positioned and inclined to fill this need. Moreover, plan sponsors are increasingly predisposed to make these services available, for a variety of reasons. In PLANSPONSOR’s 2004 Defined Contribution Survey, nearly half of the respondents had already embraced some form of participant-level advice - a number that seems likely to increase over time, regardless of pending legislation. Still, reservations remain – and for many, the decision to offer investment advice remains both an extra expense, and an additional risk, for the employer.
Legislation that offers some much-needed clarity for a much-needed service would be much-welcomed.