The Changing Landscape of Investment Advice

For Retirement Plan Participants

Prepared by: Amy S. Johnston, CFP

Palmer & Cay Investment Services, Inc.

Atlanta, GA

Recent legislative activity has made offering retirement plan participants investment advice a reality. Two pieces of legislation, particularly, (one sponsored by Representative John Boehner, R-OH, and another sponsored by Senator Jeff Bingaman, D-NM) have moved to clarify the fiduciary responsibility of a plan sponsor (employer) as it relates to offering participants the ability to access investment advisory services. Additionally, Boehner’s legislation increased the universe of advice providers to include some previously excluded. For example, service providers currently offering other record-keeping services or which already offer the investment platform and options from a plan’s participants allocate their assets may now begin offering investment advisory services in addition to pure education and communication.

Under ERISA, distinctions are made between education, advice and investment management.

• Education – For most participants, the educational experience begins with their employer-sponsored retirement plan enrollment kit, a collection of printed or electronic materials designed to give a general overview of the plan, the benefits of participation and risk management through asset allocation. These kits are usually designed to be “off-the-shelf” and for the most part, focus on the general nature of the differing risks and rewards associated with various asset classes and the investment options offered by their company’s plan. Participants with complex financial situations or special life considerations or expensive plans for their retirement years may find a need for more detailed advice and planning than these initial materials can provide.

• Advice – The category is more customized for participants, offering tools that guide them through some of the more complex investment planning issues. Several high profile companies have dominated this space over the past few years, companies such as Financial Engines, Mpower and Morningstar. For a fee, these companies offer internet-based access to financial planning platforms that can take into account all potential sources of cash inflow before and during retirement (e.g., Social Security) as well as the amount and uses of cash outflows during retirement. This leads a participant to a much more customized asset allocation strategy, which they must then implement, monitor and change as time passes. Additionally, these services have not typically provided specific advice about which investments to buy or sell in pursuit of the investment plan and the success of a participant’s retirement planning still rests solely with them and their ability to pick investments and implement and monitor their overall strategy.

• Investment Management – Here, an investment manager—who knows the participant individually, and their unique objectives and goals—determines and executes portfolio investments and strategies on behalf of that participant. Discretion in making these investment decisions is usually, but not always, part of the services offered for the fee paid by the participant. Because of the recent changes in legislation, the ability of money managers to provide this type of discretionary service to a retirement plan’s participants has become possible. As a result, new companies are springing up and current plan providers are implementing new services, all of which offer their own version of discretionary management for either a flat or a percentage fee paid by the individual participant. This new territory is still unexplored in some significant aspects, such as what is the plan sponsors fiduciary responsibility for choosing which companies have access to their employee populations and what is going to be the “safe harbor” process by which those management companies are monitored and retained by the employer.

With an election year that began on Labor Day weekend and with the ever evolving nature of investments and financial planning, it seems clear that the dust has not yet settled around the topic of offering investment advice and management to retirement plan participants. Nor is it clear what final form these important services will take as banks, investment management firms, brokerage houses and plan vendors all compete for their share of the new investment advisory landscape. What is clear is that, the past three years of economic and investment performance have convinced many retirement plan participants they need much more assistance to successfully plan for their financial futures and it’s their demand for help that will be the catalyst for innovation and change.

Return to the Legislative Updates page.