Saturday, September 29, 2007

“We’re from the Government, and We’re Here To Help”

Despite the variety of advisers, practices, business models, and broker-dealer affiliations at our recent PLANADVISER National Conference, there was a remarkable degree of convergence of purpose in evidence. That was perhaps to have been expected—after all, this was a group of some of the most successful retirement plan advisers in the country. There were, however, a couple of points where perspectives diverged—most intriguingly, IMHO, on the subject of participant advice.

Not on whether or not participant advice is needed, of course—mostly on whether or not they should provide advice as a fiduciary adviser. Both National Retirement Partners (NRP) and LPL have signed on with DALBAR’S Fiduciary Adviser Network (FAN), positioning their advisers to be classified as fiduciary advisers under the Pension Protection Act (see “The Future of the Independent Adviser” at ). Meanwhile, firms like Merrill Lynch, Raymond James, and Principal have taken a different stance; generally either finding the legislative structure around the fiduciary adviser role to be insufficiently clear, or perhaps even unnecessary to helping participants make sound investment decisions (under the Pension Protection Act, the fiduciary adviser role deals only with participant-level device).

Different “Strokes”

As things stand today, it seems to me that both perspectives have merit. Certainly, the PPA’s fiduciary adviser role seems to provide valuable protections for both the plan sponsor and the adviser, offers a structure for review and oversight of the adviser’s services by the plan fiduciary, and affords some additional flexibility in how an adviser may be compensated for those services. Consider that the dominant reason long proffered by plan sponsors for not offering advice is fiduciary concerns and one can quickly grasp the allure of being able to offer assurances on that count.

On the other hand, there are a variety of ways for advisers to offer impactful education, and even full-fledged advice, without running afoul of regulatory prohibitions or having to fulfill the obligations attendant with the assumption of a fiduciary adviser role (which, it should be noted, is quite a separate thing from being an adviser who is a fiduciary), most notably utilizing independent asset-allocation models or embracing a level-fee service approach.

Still, the current “debate” over how to offer advice (or, more accurately, IMHO, how to get paid for offering advice) misses a significant point: It’s not just advisers who think participants need advice, or plan sponsors, or even plan participants themselves. What is most interesting to me is just how eager the Department of Labor seems to be to facilitate that help.

“Far” Reaching?

One of the so-called great “lies” is “We’re from the government, and we’re here to help.” Yet, to this day, I am struck by just how far the government, specifically the DoL, was willing to extend the definition of education—and thus allow participants to get help without causing advisers to run afoul of the advice fee prohibitions in 1996 with Interpretive Bulletin 96-1 (see “How Far Can Education Go Without Crossing the Line?” ). In 2001, they saw yet another opportunity to encourage advice and issued Advisory Opinion 2001-09 , more commonly referred to as the SunAmerica opinion. While requested on behalf of a specific provider, the DoL took advantage of the opportunity to extend their response to include any comparable offering. This allowed the use of independent asset-allocation models without imposing a flat fee requirement, and has now been largely embodied in the computer model exception in the PPA’s fiduciary adviser definition. Just this year, the DoL issued FAB 2007-01, which “clarified” a point for enforcement officers in the field that I’m reasonably sure most plan sponsors weren’t (and perhaps still aren’t) aware of—their liability for the selection and monitoring of the adviser, not the advice (see “IMHO: A Little ‘Free’ Advice”).

But while I think the DoL has long and consistently been supportive of helping us offer advice to participants, there is one thing that they have been just as consistently—and rightly, IMHO—concerned about; advice biased by the compensation of the person making the recommendation. Participants need help, after all—but not in being betrayed by the interests of unscrupulous advisers.

- Nevin E. Adams, JD

Saturday, September 22, 2007

Certify Able

A year ago, I wrote a column titled “Alphabet Soup” about the challenges associated with getting—and keeping—professional designations that are meaningful to plan sponsors (see “Alphabet Soup,” PLANADVISER, Fall 2006). However, it’s not as though all certifications or designations are hard to come by—and, unfortunately, there are people out there who are willing to take advantage of people.

Concerns about unscrupulous financial advisers using faux designations to mislead individual investors have resulted in a number of state initiatives to crack down on how these designations are used. And while stories of unscrupulous advisers are not as hard to come by as one might hope, the designation issue has already garnered coverage in the New York Times. The focus of that story was a “Certified Senior Adviser” in the state of Massachusetts who had allegedly taken advantage of clients, notably senior citizens, in promoting inappropriate insurance investments—and who subsequently was sued by regulators in that state.

At this writing, Massachusetts seems to be out in front on the issue—but similar initiatives are percolating in a number of other states. In April, the Secretary of State proposed regulations that became effective June 1, 2007. That new regulation prohibits financial advisers practicing in the state from “using a purported credential or professional designation that indicates or implies that an investment adviser representative has special certification or training in advising or servicing senior investor, unless such credential or professional designation has been accredited by an accreditation organization recognized by the Secretary by rule or order.” The regulation goes on to note that the term ‘senior investor’ shall include a person 65 years of age or older.”

Clearly, the focus of the new regulation is on protecting seniors. Less clearly, but nonetheless based on conversations we’ve had with Massachusetts officials, the regulations aren’t focused on employer-sponsored/workplace plans. Still, there are two issues that have to be of concern for advisers who work with retirement plans with ties to the Bay State. First, there are a growing number of retirement plan participants who are, in fact, older than age 65, and thus “senior investors” under the provisions of the Massachusetts regulation. Second, despite comments on the proposed regulations from a number of retirement plan providers asking that Massachusetts provide a specific exemption for work with retirement plans(1), the final regulations contained no such exemption.

Ultimately, of course, protecting individuals from unscrupulous practices is laudable and well within the mandate of these state officials. Advisers who have worked hard to attain—and retain—professional designations can certainly benefit from the elimination of designation “clutter.” Still, as the various states make their invariably individualized determinations as to how to structure these mandates (and compliance departments struggle to determine how those determinations are to be applied), it seems likely—in the short run at least—that retirement plan advisers, and their plan sponsor clients, will lack some clarity.

- Nevin E. Adams, JD

(1)In comments provided on the proposed regulations, The Life Insurance Association of Massachusetts suggested a new subsection to the law that would read: "This subsection shall not apply to the use of credentials or designations in the context of retirement planning provided or sponsored by an individual's current or former employer."

Saturday, September 15, 2007

“Rising” Tied?

"In inflation, everything gets more valuable except money."

This week, the eyes of the stock market (and thus the eyes of those of us with 401(k) investments in that stock market) will turn to the meeting of the Federal Open Market Committee—that special subset of the Federal Reserve that determines short-term monetary policy for the nation. The Fed has long—and understandably—been on the alert for signs that inflation might rear its ugly head. Those of us who lived through the 1970s can remember all too well the relentless pressure of wages unable to keep up with prices—and can appreciate the vigilance of the Fed in seeking to keep inflation under control.

In fact, for some time now, the Fed has moved preemptively to head off inflation, or so it claims. But anyone who has actually gone out and bought such basic household necessities as food or gasoline is well aware that the costs of living are climbing rapidly. We may well enjoy a sense of growing wealth as we watch housing prices soar (or did until recently)—but there’s a greater likelihood that you’ve paid dearly for those paper gains in terms of higher property taxes than that you have been able to capitalize on those trends.

Of course the Fed—which is, after all, seeking stability in monetary policy as well as economic growth—deliberately ignores some of the more volatile costs in its evaluation of inflation; notably food and energy.

Still, for those of us who pay to live in the real world, it certainly feels as though inflation—defined by the American Heritage Dictionary as “a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services”—is alive and well. Little wonder that Social Security recipients wait anxiously each year to find out how much their annual stipend will be adjusted for a “cost-of-living” increase.

However, unlike Social Security, there is no annual cost-of-living “adjustment” for retirement savings—no systematic means by which those accumulated savings are increased to offset the increased costs of things like heating fuel, food, and medicine. Ironically, should the Fed detect the insidious signs of inflation, their response would likely be to increase short-term interest rates—a move that, in all likelihood, would result in a drop in stock prices (and retirement savings accounts).

It’s an issue of more than passing significance for retirement savers, of course. After all, managing to replace a targeted amount of preretirement income is of little consequence if, 10 years on, that amount isn’t sufficient to provide for life’s necessities. To their credit, most retirement savings calculators retain an inflation assumption that can help those future projections reflect potential realities. Those cost-of-living numbers probably understate the increase in things like health care and fuel oil (they may, of course, overstate the rate of increase in other items). Worse, those adjustments frequently serve to project a certain annual rate of pay (and deferral) increase that, for a growing number of American workers, is no more than a quaint anachronism.

Whatever the Fed manages to say about inflation this week, retirement savers should be mindful of the reality that the future frequently costs more than the past—but we only have the present to prepare.

Nevin E. Adams, JD

Saturday, September 08, 2007

Just Another Day?

This week, I’m going to do something I never thought I would do again.

I’m going to fly on September 11.

OK, so, in the overall scheme of things, it’s perhaps not that big a deal. I know that it’s been six years, that part of our not letting the terrorists win is to go on about our normal lives. I don’t even know anyone personally who died in the attacks, though I know people who do. At the time of the attacks, I wasn’t living in the parts of our nation targeted (although we relocated to the Northeast soon afterward). It’s not like I plan to spend some significant part of the day in prayer or contemplation—and it’s certainly not that I believe for one second that there will be a recurrence of those horrific events just because it’s the sixth anniversary.

I was, however, traveling by air on that fateful day, only to be grounded hundreds of miles away from friends and family (see Never Forget). I know that others were stranded farther away from their loved ones—and perhaps for longer. But it was a time when I wanted—more than I could possibly have imagined at the time—to be with my family. It was a time when people who love each other should have been able to comfort and reassure each other.

Somehow, the notion of once again being hundreds of miles away from my family on that day just seems wrong. Not as wrong as missing a birthday or graduation (I’m still batting 1.000 there)—but wrong, nonetheless. Whatever else we try to make of it, for this generation anyway, September 11 will always be “different.”

Like you, I’ll always have my memories of that day. I’ll never approach getting on an airplane the same way again, for one thing. I doubt that I’ll ever feel as “safe” as I once did, but I also appreciate in a very special way, every day, the love of my family, the support of friends, the joy of being alive—and the responsibility to remember always that there are those whose reunion with their loved ones still lies ahead.

I may be traveling this September 11. But it is not—and should never become—“just another day.”


Sunday, September 02, 2007

Impact Full

In a business notorious for change, it nonetheless seems fair to say that the past twelve months have been extraordinary ones indeed.

In short order, we have had to absorb and assimilate the mandates of the Pension Protection Act, grapple with the portents of qualified default investment alternatives, gird ourselves for the impact of final regulations on deferred compensation plans and 403(b)s—and all this at a time when revenue-sharing practices are drawing an unprecedented level of scrutiny from all quarters.

There is nothing like tumultuous times to highlight the value of, and reinforce the need for, expert help for plan fiduciaries. It is also the kind of challenging environment that tends to separate the chaff from the wheat—that sorts out the committed from the merely intrigued. And, yes, it surely plays to the advantage of a profession dedicated to helping plan sponsors construct the right programs, and participants make the best of them.

That is why, in 2005, we launched our Retirement Plan Adviser of the Year award; to acknowledge "the contributions of the nation's best financial advisers in helping make retirement security a reality for workers across the nation." Today, it is both my honor and privilege to launch the nomination process for our fourth annual campaign to acknowledge the contributions of the very best financial advisers in the nation, both individuals and teams.

Impact Statement

The criteria that underlie the award are simple but impactful; we want to recognize advisers who make a difference through increasing participation, boosting deferral rates, enhancing asset allocation, and/or providing better programs through expanded service or expense management. It is no accident that those criteria also underlie the Pension Protection Act's designs for defined contribution plans, for only by getting more workers saving in these programs at effective rates, and invested in prudent ways, can they have any real prospects for retirement security.

We will acknowledge the finalists in the December issue of PLANSPONSOR as well as the Winter issue of PLANADVISER, and profile the winners in the March issue of PLANSPONSOR and Spring issue of PLANADVISER. The finalists also will be recognized at PLANSPONSOR’s Annual Awards for Excellence celebration in New York City in March.

While these awards are designed to recognize financial adviser excellence, we trust the standards they embody will continue to provide a source of inspiration for those who make a difference every day. If your plan has been a beneficiary of that kind of excellence, I hope you will take the opportunity to nominate your retirement plan adviser for this year's award.

- Nevin E. Adams, JD

You can nominate your adviser for the PLANSPONSOR Retirement Plan Adviser or Adviser Team of the Year HERE