Fiduciary Responsibility – The Year in Review

As 2011 comes to an end, I would like to reflect on all the changes being implemented or proposed to the retirement plan industry, addressing what concerns me most and a question I have been stuck on lately: Are plan sponsors ready?

Speaking with an ERISA attorney recently I asked, “Have you come into contact with a retirement plan committee that was doing everything right?” His answer: “Well, no.” We both reflected on how much misinformation is out there and how many plan sponsors just don’t know what they don’t know. The Pension Protection Act of 2006 was supposed to give plan sponsors clarity on their fiduciary responsibility and the potential liability of not adhering to it. But given his answer of “no,” and it being more than 5 years later, is fiduciary mitigation a bigger problem than we are currently aware? Are the regulations implemented already or proposed in 2012 really the right answers to all of these questions? In my opinion, some are and some are not.

Regulation 408(b) 2: Participant and Provider Fee Disclosure

Regulations on Fee Disclosure were long overdue. This change, requiring covered providers (parties in interest) to fully disclose what they receive for fees is a great thing. 408(b) 2 will allow plan sponsors and participants the ability to conduct an apples-to-apples comparison of the fees associated with their investment options, recordkeeping services and retirement advisory relationships. This regulation ensures the fees being paid are reasonable (currently there is not a definition of reasonable) and the liability fiduciaries face can be mitigated by properly documenting a Fee and Investment Benchmarking report. If you haven’t done so by now, I would hurry up and do so before 408(b) 2 comes into effect on April 1, 2012. The last thing you need is for your employees to receive a disclosure notice only to find out they have been paying fees that are excessive.

401(k) Advice Regulation

Effective yesterday, December 27, 2011, the 401(k) advice regulation comes into effect. This is something all plan sponsors and participants should take advantage of. It ends an interesting dilemma that most plan fiduciaries were not even aware of. Before yesterday, the DOL maintained that financial advisors, mutual fund company employees, TPAs and/or record keepers were conflicted and excluded from providing financial advice to plan participants. Now they can, and each plan sponsor’s due diligence process should include inquiring about and identifying what types of educational services and advice are available to all plan participants. I am a firm believer the confused mind does nothing and that any help Americans can receive on becoming more financially literate is a great thing. Plan sponsors should see some enhanced educational models being introduced to the marketplace by the fall of 2012. But it all depends on a certain upcoming regulation …

Fiduciary Redefinition

The DOL’s newly proposed definition of a fiduciary, if implemented, would stipulate that if a financial institution (or one of its employees) gives financial advice, that might mean they themselves become a plan fiduciary and carry the liability that goes along with it. The DOL had made some strong statements as to how far and wide this regulation could reach, not only including corporate retirement plan assets but also advisors that manage Individual Retirement Accounts (IRAs). On paper we felt this was another great thing for Americans. To require a financial advisor to take on fiduciary liability for the advice they were rendering to plan sponsors and individual retirement accounts was a huge shot across the financial service industries bow. What is so bad about a financial advisor putting clients’ needs ahead of his/her own? Wall Street and Congress consistently had hearings and submitted petitions about this during the past 12 months and the DOL postponed the final regulation change for a later date.

Looking Forward

We have seen more ERISA regulation changes made in the past 5 years than we did for the previous 3 decades combined. As more and more Americans rely on their own savings for financial freedom, our retirement accounts are playing a larger role in meeting our retirement income needs – placing more responsibility and emphasis on the decisions being made to ensure we all live out our lives comfortably.

The good news is that once you have your fiduciary house in order, the retirement plan committee can turn their attention to what really matters most: making your retirement plan the best it can possibly be and a true benefit for your employees.

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Recent Comments:

pat
December 29, 2011 - 10:59:32 AM

"One would think that a strict interpretation of the common law of anyone who has custody of someone else's money or assets has fiduciary obligations to that person either under the law of agency, or under the law of trusts, and therefore, is not free to act otherwise without being a default Advisor or custodian, or under the law of bailment, a n actor in possession. That seems to be common sense. "

Scott
January 4, 2012 - 11:45:32 AM

"Agreed, you would think that would be common sense and in regards to holding the assets in a custodial or trustee account they are. The regulation change is whether the investments are appropriate for the client’s needs. Currently, in a retirement account it is buyer beware. The fiduciary regulation change will enforce financial advisors to prove they acted in their client’s best interest. The burden of proof is what is causing so many financial services companies to cringe. It’s like high school math, you have to show your work and the extra steps to do so will cause those organization to be less efficient. Their argument is around costs. My thought is if you were doing the work in the beginning this wouldn’t be such a huge task, and what is so wrong with showing your work. "