The new Pension Protection Act offers opportunities
for advisors, if you know where to dig.

President Bush signed into law the Pension Protection Act of 2006 (PPA) last August. This legislation is the most comprehensive reform to the retirement system since 1974's Employee Retirement Income Security Act (ERISA).
The PPA, at least as it concerns defined contribution plans (401(k)s, profit sharing plans, etc.), is based on the premise that America's workers need help and encouragement to save more for retirement. The provisions of ERISA were based on the premise that "smarter and more educated" investors will better handle their own retirement planning responsibilities.
The PPA abandons this methodology by adopting safe harbors for employers and plan sponsors that provide acceptable "default" savings rates and "default" investment options beyond money market or guaranteed income investments. In order for employers and plan sponsors to benefit from these safe harbor provisions, the new investment options offered to employees must be approved life cycle, asset allocation or balanced funds. In essence, once the provisions are implemented within plans, employees will be required to opt out of the contribution and investment plans provided by their employers as part of the plan itself.
A key component of the default participation rules is that the employee must be given the right to opt out within 90 days without any penalty, and be entitled to a refund of all contributions made on his/her behalf, subject to income tax. It should be noted that these provisions are optional to plan sponsors, and do not become effective until plan years beginning after December 31, 2007. The Department of Labor (DOL) is in the process of issuing implementing regulations regarding the qualifications for the default investment options, but it is expected that these new rules will not be overly restrictive in terms of meeting the definitions.

The Employer Stock Issue
For plans with employer stock, participants must be given the option to diversify out of the stock and the plan must offer at least three materially different investment alternatives. For existing plans with employer stock, there is a three-year phase-in for these provisions. Employees must also be given more liberal time periods in which to sell employer stock and diversify into other investment alternatives.

The Opportunity
The act also provides new opportunities and safeguards for employers or plan sponsors who provide investment advice to 401(k) or other plan participants. In light of the philosophical change concerning overall plans, the offering of financial advice is now encouraged and can be provided by employers and plan sponsors with "safe harbor" protection.
In order to qualify for safe harbor protections, the advice must be provided either by a fiduciary advisor or a fiduciary-compliant "computer modeling" program offered by investment managers, broker dealers, insurance companies or other select financial service entities, including banks. In essence, qualified financial advisors employed by these various entities, or independent advisors, will be eligible to provide individual advice to plan participants for a fee (paid by the plan or the participant) if the advisors acknowledge their fiduciary status in writing, charge only a level fee (no difference in fee levels based on investment selection) and fully disclose their compensation arrangements as well as conflicts of interest.

Important Consideration
Under prior interpretations, 12b-1 payments-even though different among various mutual funds offered within the plan-qualify as a level compensation plan since they are all asset-based fees incorporated within the funds themselves. Plan sponsors and employers also are protected from liability when they provide approved computer modeling or portfolio planning programs to their employees, provided the programs are created by an independent and objective asset advisory firm (Ibbotson, Morningstar, Financial Engines, etc).
The act introduces a new requirement for annual audits of the computer-driven advice model mentioned earlier, and of the services arrangement between the fiduciary advisor and the plan sponsor. The details of the audits have yet to be defined, but they likely will resemble the procedures an independent expert would use to assess a fiduciary advisor 's asset allocation and optimization procedures, and due diligence procedures for selecting investment options, as well as investment-related fees and expense and monitoring.
It is anticipated that many of the broker-dealer and plan sponsors of 401(k) plans will be offering these types of programs bundled with their 401(k) plan offerings. It is interesting to note that the PPA addresses the issue of providing advice to IRA participants, but also states that the DOL is responsible for writing new rules and regulations as to the applicability of the computer modeling provisions to IRAs.

Permanent Limits
Additional important provisions of the PPA include making permanent the contribution limits for various retirement plans, including the catch-up provisions for those over 50, Roth provisions for both IRAs and 401(k)s, as well as making permanent section 529 college saving plans. This provides certainty going forward and removes a disincentive to adopt these beneficial plans in the future. It is expected that many current 401(k) plans will now be adding permanent Roth features to their plans, enhancing the opportunities for greater estate and income tax savings in the future. A significant added benefit of the PPA is the ability to roll over proceeds directly from a qualified retirement plan to a Roth IRA (without going through a traditional IRA).
This simplifies overall administration of retirement plans and, with $3 trillion expected to be distributed from 401(k) plans over the next 15 years, provides opportunities for financial advisors. In addition, charitable contributions now can be made directly from IRAs without first passing out of the IRA and through an individual's adjusted gross income. This will have the result of enabling more participants to qualify for a full charitable contribution benefit since the adjusted gross income limits will no longer apply. These contributions will also satisfy minimum withdrawal requirements to the extent they apply for those IRA owners over the age of 701/2.
PPA also deals directly and comprehensively with defined benefit plans and the current funding challenges of those plans, outlining time frames and procedures for companies and sponsors to bring those plans up to funding compliance. Dues to the Pension Benefit Guaranty Corporation (PBGC) are raised. New rules for conversions to cash balance plans are also included in the legislation.
The law is new and far-reaching. It still is being interpreted by commentators, and opportunities are still being explored. Many of the implementing and interpreting regulations have yet to be written, although some were due as early as December 31, 2006. More will be forthcoming later in 2007. For the time being, it is worthwhile to monitor the promulgation of the rules and regulations by the DOL and other administrative bodies, and consider how your service offerings can be expanded. Stay tuned.

Quick-Read Summary Of The PPA
Providers can give you investment advice.
Preserves today's high savings limits in 401(k)s and IRAs.
Simplifies estate planning and helps you prevent overloading on company stock.
Employers can offer Roth 401(k) plans.
Makes tax-free withdrawals from 529 plans permanent.

Ken Ziesenheim, JD, LLM, CFP, is a managing director of Thornburg Investment Management, president of Thornburg Securities and a past chairman of the National Endowment for Financial Education (NEFE). He also served as chairman of NEFE's investment committee. He is the author of Understanding ERISA-A Compact Guide to the Landmark Act, Marketplace Books, 2002.