The Fiduciary Blog

Plan Sponsors Really Need The PPA’S Safe Harbor!

The recently enacted Pension Protection Act of 2006 (the “PPA”) can radically reduce a plan sponsor’s risk. It contains clear compliance rules. The Department of Labor has announced its plan to enforce them. This article discusses how the need for greater protection surfaced and how plan sponsors may acquire it.

"It is most important for leaders to conceive and articulate goals that lift people out of their petty preoccupations and unite them in pursuit of objectives worthy of their best efforts." John Gardner

The Global Fiduciary Standard of Excellence seeks to lift the conduct of Investment Stewards (i.e., plan sponsors), Investment Advisors, Investment Managers, and Record Keepers in a way that encourages their best efforts. It shows the way to a prudent long-term governance approach for plan sponsors. It also strengthens the fiduciary identity of Investment Advisors and Investment Managers, while improving the fiduciary support competency of Record Keepers.

FiduciaryPLUS™, which is a pension governance system built by Roland|Criss for Investment Stewards, follows the Standard in every detail. Roland|Criss also certifies Investment Managers, Investment Advisors, and Record Keepers that conform to the Standard.

"The leading rule for the lawyer, as for the man of every other calling, is diligence. Leave nothing for tomorrow which can be done today." Abraham Lincoln

If there is one practice area in the Global Fiduciary Standard of Excellence that retirement plan sponsors should focus on right now, it is the safe harbor element. Why? Serious events over the last two years behoove plan sponsors to think long and hard about their oversight of investment issues—particularly if participants direct their own investments.

In 1992, the final 404(c) regulations were enacted. Plan sponsors saw this as automatic relief from their risk related to participants’ investment decisions. Wrong! Not surprisingly, most sponsors ceased taking funding oversight seriously.

ERISA 404(c) is not a get out of jail free card—it is not an exemption from the fiduciary rules of ERISA. Fiduciaries remain responsible for choosing investment options, monitoring performance, monitoring fees and certain other duties. Ultimately, plan sponsors are liable for everything.

Prior to 404(c) many wondered if litigation was a real threat. Individual claims were usually small and plaintiffs could only win small settlements. Plus, there were few awards of attorney fees and no real plaintiff’s bar. Eventually though, class action lawyers discovered an opportunity "bigger than tobacco" as one attorney put it. This emerged through sponsors’ indifference to 404(c) compliance.

Now, there are large numbers of plaintiffs, identical causes of action, large potential damages and generous awards of attorney fees. The results of these developments were predictable. Litigation has become widespread. But plan sponsors are just not ready for the onslaught. It is time for sponsors to wake up. They really need the PPA’s safe harbor.

"Habits are first cobwebs, then cables." Spanish proverb

The PPA’s safe harbor is activated through a sponsor’s offering of a specific investment advice program to its participants through a "Fiduciary Adviser." At the same time, the PPA raised the bar on plan sponsor duties in an effort to provide more robust investment education and tools to participants.

The PPA’s liability exemption might sound like a reworked 404(c), but not so. The spirit and specifications of the PPA are to transform 404(c) from a passive education scheme that few qualify for, to an active toolset that requires an annual independent audit for activation. The PPA spawned a term to describe its new safe harbor feature. It is called an eligible investment advice arrangement.

The key step needed to qualify for the PPA’s safe harbor is the annual independent audit of a sponsor’s eligible investment advice arrangement or the "Arrangement Audit." Roland|Criss Fiduciary Services is the first firm to perform qualified PPA Arrangement Audits and is the leading PPA audit firm in the U.S.

There is no longer any reason for people who manage defined contribution plans to endure the high personal risk of the pre-PPA period. Eliminating a major source of risk is as easy as making a call to a Roland|Criss PPA specialist at 1-800-440-3457.

"There are no secrets to success. It is the result of preparation, hard work and learning from failure." Colin Powell

Plan Sponsor's Challenges in Today's Environment

"In describing today’s accelerating changes, the media fire blips of unrelated information at us. Experts bury us under mountains of narrowly specialized monographs. Popular forecasters present lists of unrelated trends, without any model to show us their interconnections or the forces likely to reverse them. As a result, change itself comes to be seen as anarchic, even lunatic." Alvin Toffler

With the above in mind, I realized that most plan sponsors must be whipsawed by the current state of anarchy. The tsunami brought about by Enron has left in its wake Sarbanes-Oxley and more recently the Pension Protection Act of 2006 (PPA), FAS rules around accounting for pensions and the U.S. Department of Labor (DOL) regulations on Qualified Default Investment Alternatives (QDIAs).

Employers are evaluating their plans due to the rule changes and their own business environments. I read a recent Hewitt Associates’ survey revealing that about 50% of human resource professionals plan to change service providers during 2007 or at least seriously scrutinize their relationships with service providers. That’s startling if one thinks about it. At least half of the plan sponsors are willing to at least consider shaking things up radically because they aren’t happy with their present approach.

Several universal themes emerged from this survey. Virtually all of the plan sponsors that responded will seek to measure their retirement programs’ total costs, participant services, and plan design.

How Should Plan Sponsors Proceed In A Protected Manner? This survey indicates that employers recognize that fiduciary issues are now front and center and will not fade away any time soon. Both in the defined contribution world and in the defined benefit world, the basic questions are being asked by plan sponsors.

Some basic questions are presented below.

• How can sponsors determine if the plan is adequately funded if they have not recently calculated expected inflows and outflows?
• How can employees adequately save unless they also go through a similar type of analysis?
• Can proper monitoring be performed if sponsors and employees do not know what fees are being paid and what services are obtained for the various fees?
• Can investment performance be sufficiently measured if funds are not appropriately compared to the correct peer?
• How can plan sponsors conduct a provider search and selection process that will address their concerns?
• How can they evaluate the responses they receive so at the end of the day, the sponsors don’t have buyer’s remorse and, worse yet, significant liability for breach of fiduciary duty?

To handle these fiduciary landmines, plan sponsors need a coherent process and a framework to perform meaningful evaluation. If they don’t they’ll continue to spin their wheels and bear unwarranted exposure to personal liability. Did I mention that fiduciary liability bears a personal consequence?

The good news is that plan sponsors are paying attention. The challenge for the sponsors is whether they use a model that shows interconnections so they can reverse some potentially negative and anarchic forces that are already in play.

"The art of progress is to preserve order amid change and preserve change amid order." Alfred North Whitehead

Fiduciary Adviser Audit Specifications Released

Investment consultants, who intend to advise retirement plan particpants under the Pension Protection Act of 2006, will be able to obtain from CEFEX a "Fiduciary Adviser" certification.  The certification will attest to a consultant's conformity to the practices required by the PPA.  Click here and request a copy of the practices.