Plan Sponsors Really Need The PPA’S Safe Harbor!

By Lynne McAuley, West Region Director

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