GuidePost - Vol. 4, Issue 6 2008

The GRABot BAG
by Sherrie E. Grabot, CEO

October 2008
Guest Author: A Higher Authority

Bringing Advice to the Masses

It's hard to believe that anyone in Washington has continued with "business as usual" during the financial crisis -- or that despite the campaign rhetoric, that routine business can do considerable good. But somewhere within the depths of the DOL, the Department has been working on two proposed rule changes that continue the recent momentum of participant-centric regulatory improvements.

In the words of the proposal, the new rules represent "an increasing recognition of the importance of investment advice to participants and beneficiaries in such plans." It also notes that individual investors, on their own, often jeopardize their own financial security through "flawed information or reasoning... overconfidence, myopia, or simple inertia." It's gratifying to see that this awareness has made it from industry newsletters and white papers to the Federal Register.

The text then describes at length some key portfolio- killing mistakes that investors typically make: paying too much in fees, trading too much or too little, failing to diversify, investing too conservatively or too aggressively for their needs, and not maximizing their tax efficiency. The resulting losses due to investment mistakes are estimated at $109 billion or more annually -- and that was written before the worst of this year's market disaster. Moreover, it doesn't count the inestimable damage done by not saving enough, or not participating at all.

The new regulations are part of the ongoing implementation of the Pension Protection Act of 2006. They are intended to clarify the ways in which fiduciaries or affiliated providers can give investment advice to participants, and can get paid for it, without running into legal trouble. ("Clarify" is used only in a technical sense, as you can see from the massive full text of the proposal.) Specifically, they offer guidance on interpreting an exemption from certain prohibited transaction provisions in the ERISA law, and provide a detailed set of guidelines for working within the scope of the exemption.

The details of the changes fill many pages. A level fees requirement
-- ensuring that fees charged for advice do not vary depending on the recommended investments -- is rather intuitive. A requirement for independent certification of any computer model used for generating advice is less so, but seems to allow for a fair amount of flexibility. Following any computer- generated advice, participants can also be given individualized advice or interpretation. The rules for disclosure are predictably lengthy, but helpfully include a generic sample disclosure form.

Taken together, the rule changes should help achieve their goal of increasing plan participants' access to usable, quality investment advice. As the proposal itself points out, it remains to be seen how much effect they will actually have, given the myriad uncertainties of both institutional practice and participant behavior. But it is another step in the right direction: from a reactive, 1970's-era regulatory regime, to an environment that recognizes the complex risks and challenges facing retirement investors.

After all, when we started not so long ago, offering automated advice within a retirement plan was pretty much science fiction according to the prevailing legal standards. Now that's old news. It may make for tough bedtime reading, but I'm glad that someone, somewhere is ironing out all that fine print. With luck, we'll soon be a little closer to sound investment advice for everyone, everywhere.

~~ Sherrie