IMHO: Reform Forms

Nonetheless, it seems reasonable to anticipate some kind of action on the legislative front, at least by April.

Most of the focus has been on reforms targeted at defined benefit plans, and that’s reasonable in view of the very serious issues regarding pension funding and the apparently precarious funding situation of the Pension Benefit Guaranty Corporation (PBGC, which insures those precariously funded programs (as well as the not-so-precariously funded ones).   Additionally, there are several items in bills pending in both the House and Senate that could have a tremendous impact on defined contribution plans, including new rules regarding company stock (in the Senate bill), participant education (Senate), automatic enrollment safe harbor (House and Senate), and advice (House and Senate).   Among these, the advice component has, for obvious reasons, garnered much interest in both the provider and advisor community.

Different Strokes

At the moment, the advice provisions in the two bills, S1783 in the Senate and HR2830 in the House, are quite different.   The House version is that crafted by Congressman John Boehner (R-Ohio) and, in most respects, is the same version he has been championing (and championing successfully in the House) for several years (by my rough recollection, this is the fourth time he has gotten his bill approved by the House).   The Senate version is also largely recycled, albeit from previous efforts by Senator Jeff Bingaman (D-New Mexico).   Both purport to provide plan sponsors with some protections against being sued for advice given to participants, so long as the financial advisor meets certain qualification and, under the House version, disclosure, requirements.

Boehner’s bill is, and has always been, controversial because it would essentially allow advisors who have a financial interest in the funds they recommend to be paid for that advice.   It attempts to deal with the potential conflicts of interest by imposing a series of qualification (including the requirement that they be a fiduciary) and disclosure requirements for the advisor, requiring that the fees paid to the advisor be “reasonable,” and also that the participant makes the actual investment decision.   Needless to say, most fund providers are generally supportive of Boehner’s bill – and many advisors (particularly independents) are opposed, to put it mildly.

The Senate version avoids the potential conflict issues by stipulating that the advisor not be affiliated with the funds offered by the plan.   Thereafter it imposes many of the same qualification requirements contained in the House version and provides that, if a plan sponsor prudently chooses someone who meets those criteria (and a few others), they will be deemed to have satisfied the duty to prudently appoint/review the advisor, and will be relieved of any primary or co-fiduciary liability for the advice provided.

What May Emerge

Now, what’s on the table at present may not be what emerges from Committee (the House and Senate bills have to be reconciled), and given the current acrimony in Congress, there is little guarantee that what emerges from that reconciliation process will pass the full Congress, or that whatever emerges from that process will be signed into law by President Bush.   It is also less than certain that the defined contribution measures will survive the process, since the real focus has been on defined benefit funding and reporting.

What’s also less than certain to me is what difference any of this will make to plan participants or plan sponsors.   There was a time when advice was touted as a silver bullet of sorts.   It was going to cure problems with participation (overcoming people’s inertia around that initial investment decision), deferral rates (helping people understand how much they needed to save to achieve their goals) and, of course, help keep a watchful eye on their asset allocation.   However, the big reason cited by plan sponsors at the time for not offering advice was their justifiable concern about being sued as a fiduciary for the advice.   To their credit, both the House and Senate version make some attempt to address that concern.

Things Have Changed

Things have changed, of course.   When the Boehner bill first emerged, only a distinct minority of primarily larger plans offered advice – now more than 60% of the plans responding to our annual DC survey do, and that number moves relentlessly (if slowly) higher every year (due in no small part to the growing influence of advisors).   In December 2001, the SunAmerica decision gave a thumbs up to a new way for potentially conflicted firms to offer advice via the interposition of an independent asset allocation model, and this has greatly broadened the field of offerings as well.

I’m not saying that additional fiduciary protections wouldn’t be helpful for plan sponsors, and it might well encourage some small number to go where they have been previously hesitant to tread.   However, IMHO, the fiduciary issue that looms largest for most plan sponsors still remains in both bills – their obligations in selecting and monitoring the advice giver (a responsibility they should retain, as with any plan provider, IMHO).   The good news is that we haven’t stood still waiting for legislative clarity.   The industry (and here let’s also give credit to the Department of Labor) has continued to develop alternatives, and plan sponsors have just as clearly responded to both the need and the opportunity to take advantage of these alternatives.

Consequently, to me, the biggest question about the pending advice legislation is will it give us more, and perhaps better, more objective advice – or will it simply give us more advice providers?

For more on the House bill:   http://www.plansponsor.com/pi_type10/?RECORD_ID=31821

For more on the Senate bill:   http://www.plansponsor.com/pi_type11/?RECORD_ID=31519

For more on the SunAmerica decision: http://www.plansponsor.com/pi_type10/?RECORD_ID=16119