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AdvisorNews - December 2015

DOL's fiduciary proposal: significance for plan sponsors

August 18, 2015

We have posted three articles on Department of Labor's proposal to re-define who is an ERISA advice ‘fiduciary,’ reviewing the proposal generally and the seller's carve-out, the Best Interest PTE and the participant education carve out.

As we discussed in those articles, the DOL proposal may affect plan sponsors in three ways. First, sponsors and sponsor staff may be directly affected, that is, they may themselves in some cases be advice fiduciaries under the proposed rule. Second, sponsors may be affected as direct consumers of advice, when, for instance, they retain a consultant to advise them about which funds to put in a fund menu. Third, sponsors may be affected as indirect consumers of advice, when, for instance, they retain persons (educators, investment advisors or call center operators) to advise their participants.

In this article we review these issues in more detail. As we'll see, treatment of the first two issues under the proposal is relatively straightforward and non-problematic. The third issue – the effect of the proposal on advice (and education) provided to participants – is more complex.

Effect on sponsor employees

Under the new proposal, an employee who renders advice would not be a fiduciary so long as the employee "provides the advice to a plan fiduciary, and he or she receives no fee or other compensation, direct or indirect, in connection with the advice beyond the employee's normal compensation for work performed for the employer or employee organization." This ‘carve-out’ addresses an issue of some controversy in the original proposal, which some viewed as imposing fiduciary status on, e.g., lower level plan committee staff.

Some view this carve-out language as limited; it would not cover, for instance, ‘advice’ given to participants. If the provision is finalized as proposed, sponsors will want to review procedures for, e.g., staff responses to participant questions about plan investments and distributions.

Effect on sponsor advice – the seller's carve-out

As we discussed in our first article, for sponsors with at least 100 participants, while the proposal would add some additional process requirements, the seller's carve-out should permit continuation of most current adviser-sponsor relationships. Thus, the effect of the new rule on advice given to sponsors would be minimal.

Effect on participant education and advice

The proposal would generally make recommendations to participants about (i) plan investments and (ii) distributions ‘advice.’ In one of the more controversial changes to the original proposal, the seller's carve-out is not available for advice to participants. As we discussed in our article The DOL fiduciary proposal: investment education vs. advice, the proposal would also supersede current investment education rules (Interpretive Bulletin 96-1), replacing them with a much narrower carve-out.

As a result of these proposed changes, conflicted ‘educators’ (which would include more or less anyone affiliated with a firm offering investment products or services) would be limited – more limited than they are currently – in what they would be able to say to participants. That is because, generally, if their recommendations were considered ‘advice,’ they would risk ERISA self dealing and prohibited transaction violations. As we discussed in our article DOL proposed redefinition of ERISA fiduciary – Best Interest PTE, the exemption that DOL is offering for conflicted advisers is, at least as it is currently proposed, of limited utility.

Bottom line: DOL's proposed rule would change who can say what sorts of things to participants. Different sponsors will have different views on that result. Sponsors who currently rely on conflicted advisers would be most affected: the kind of ‘education’ (and other communications directed at participants) those advisers provide may change. As we understand it, some sponsors – frustrated with their ability to control what conflicted advisers say to their participants – would be happy with that result. Moreover, for sponsors concerned about unauthorized ‘advisers’ soliciting their participants, the new rule would generally be viewed as positive – bringing more transparency and ending some problematic practices.

Does participant education/advice matter?

With respect to plan asset allocation decisions (that is, participant decisions about how to invest money that is inside the plan), many would argue that defaults – e.g., to a target date fund – have done much more than education or advice to improve participant investment outcomes. In the context of widespread use of such defaults, advice is mainly used (and useful) to more sophisticated participants with higher balances, comfortable with making asset allocation decisions for themselves. Thus, for many sponsors, any disruption of the adviser-participant relationship that the proposal may cause may not matter that much, so long as the participant remains in the plan and thus has the advantage of plan defaults.

The significance of rollovers

In that context, it's understandable why DOL has been so focused on rollovers – on the decisions a participant makes as she exits the plan. Perhaps the biggest change in the proposal affecting qualified plan sponsors is the ‘fiduciary-ization’ of the rollover process. Recommendations about whether to take a rollover and how to invest money rolled over would under the proposal generally be advice, often triggering fiduciary status. That fiduciary status would, in many cases, make it illegal – a violation of ERISA's anti-self dealing and prohibited transaction rules – for a conflicted adviser to do anything but provide generic information.

The biggest impact here would probably be on call center operators affiliated with funds offered under the plan (or, more to the point, affiliated with funds offering rollover IRA products) and on terminating participants calling the call center with questions about "what to do with my 401(k) distribution." Under the proposal, those call center operators would be significantly restricted in what they could say (relative to what they can say today). Participants (particularly those with smaller balances) would get less coaching. As we have said before, DOL does not think that is necessarily a bad thing: according to the Council of Economic Advisers (CEA) such ‘conflicted’ advice costs participants 100 basis point per year.

Economic impact

Much of the concern with respect to this issue has focused on the question of whether it will be economically viable for advisers to provide un-conflicted advice to participants with smaller balances. In this regard, CEA argues that:

First, advisers can provide the same quality of advice while receiving non-conflict-based payments as they can when receiving a payment of equal amount based in conflict.

Second, the prevalence of conflicted payments today may actually interfere with low-balance savers' ability to get advice.

Finally, savers with modest balances today tend to become savers with larger balances tomorrow.

It is possible, however, to tell a different economic story: Mutual fund operators provide certain services (custody, record keeping, participant education/advice and call centers) as part of an ‘asset gathering’ strategy. As DOL reins in the fund companies' ability to gather assets via participant education and call centers, the incentive for the fund companies to offer those services (often at reduced prices) will go down. Theoretically that should drive the cost of participant education/advice and call centers up – that is, current asset gathering represents, in effect, a discount on the cost of those services.

That story is one reading of what CEA means when it says: "Ongoing developments in the financial industry are sharply reducing the cost of advice, but it may be difficult for new entrants providing quality, unconflicted, low-cost advice to compete on price when other advice erroneously appears to be free." Translation: unconflicted advisers cannot currently ‘compete on price’ = the ‘natural’ price of unconflicted advice is higher than the current price of advice generally. And, pursuing this logic, if you get rid of ‘cheap’ conflicted advice (and eliminate the competition it represents), the cost of advice (for everybody) is likely to go up.

None of the foregoing is, from the sponsor's point of view, necessarily a bad thing. In a sense, it is an example of the issue at stake in the discussion of the virtues of bundling/revenue sharing vs. explicit pricing of trust and record keeping services. DOL is (in effect and in CEA's view) simply proposing that educators, advisers and call centers charge explicitly for the real cost of their services, in a way that does not affect (and is not dependent on) participant asset allocation and rollover decisions.

Sponsors can decide for themselves which of the two models – ‘bundled services’ and possibly conflicted-and-compromised advice or explicit charges for advice services – they prefer. We would note that, currently, sponsors generally have the option to choose either approach. DOL would, in effect, take away that choice.

Improving outcomes

DOL and CEA believe that by purging the retirement investment world of conflicted participant advice they will dramatically improve participant outcomes. That is the gist of CEA's argument in its report – this policy innovation will save participants 100 basis points a year. We discuss CEA's report in our article Administration support for new conflict of interest rule; we discuss a counter-analysis provided by National Economic Research Associates in our article Response to Administration conflicted advice proposal. Before the DOL proposal is finalized there will be further analyses. There will be numerous comments from proponents and opponents. And there will be hearings.

If DOL's proposal is finalized it will change how advice-providers communicate and interact with participants. Sponsors will want to understand, based on the competing analyses, comments and testimony how those changes will affect their participants.

We will continue to follow this issue.






Impact of the 401(k) Court Ruling on Advisor

By Roger Wohlner AAA | 

The recent unanimous decision by the Supreme Court in Tibble vs. Edison International has been called a game changer for retirement plan sponsors and for the financial advisors they utilize for advice. The case centered around the utility’s decision to offer the more expensive retail share classes of three funds in its 401(k) plan and the decision to continue to do so many years later. The Supreme Court overturned rulings made by lower courts that the plan sponsor’s liability had passed a six year statute of limitations. They essentially asserted that plan sponsors, and by default their investment advisors, have an ongoing duty to monitor the investment options offered to participants.

Retail vs. Institutional

The movement towards offering the best share classes available in 401(k) plans has accelerated in recent years with the new reporting requirements for plan sponsors to their participants regarding plan investment costs. Frankly, there is no excuse not to offer the lowest cost share class available to a given plan other than the need for advisors or other service providers to be compensated. (For more, see: 401(k) Risks Advisors Should Know About.)

Certainly not every 401(k) plan has access to institutional shares. Some funds may not even offer them. However many funds offer multiple share classes where often the difference lies in the expense ratio. Included in the expense ratio are 12b-1 fees and other forms of revenue sharing that might be offered. Advisors who bury their fees in the plan costs paid by participants may want to rethink their compensation structure and perhaps look to move to a more transparent method such as fixed fees.

The Advisor’s Role

An investment advisor's role in a plan is a fiduciary. Most advisors serve as co-fiduciaries in that they provide advice to the plan sponsor’s investment committee with the sponsor making the final decisions regarding investment changes, provider changes and the like. As a co-fiduciary advisors have an obligation to ensure that they make the plan sponsor aware as to whether the plan offers the lowest cost share class of a given fund available to the plan. Factors might include the size of the plan, average account balance per participant and other factors. Cost can also be a factor in the decision to terminate a fund in favor of a lower cost option within the same asset class. (For more, see: What the DoL’s Fiduciary Policy Means for Advisors.)

Process, Process, Process

The financial advisor should help the plan sponsor to institute a process to run the plan. In fact, having an ongoing process to monitor the plan’s investments and related issues would seem to be at the heart of this ruling. A documented process for managing the plan and following that process has long been touted as one of the top things a plan sponsor can do to mitigate their fiduciary liability. Instituting and managing this process is a key reason why sponsors hire an advisor in the first place. (For more, see: Meeting Your Fiduciary Responsibility.)

An Investment Policy Statement (IPS) that serves as a business plan for the plan is a vital first step. The IPS should specify items such as:

  • The plan’s overall investment philosophy and objectives.
  • Who is responsible for selecting and monitoring the plan’s investments.
  • The asset classes that will be offered and why those asset classes were selected.
  • The process and criteria for monitoring the investments offered by the plan including the criteria that would result in the replacement of an investment option.
  • The frequency of formal plan reviews and investment committee meetings.

Duty to Monitor

The crux of the Supreme Court decision is that plan sponsors have an ongoing duty to monitor investment options offered to plan participants regardless of how long the options have been included in the plan. At the very least this underscores the value of a financial advisor who is experienced in working with 401(k) plan sponsors. (For more, see: New 2015 Contribution Limits: Advisors Take Heed.)

Those plan sponsors who have not yet engaged the services of an investment consultant should certainly be motivated to do so in the wake of this decision and the Department of Labor's (DOL) emphasis on transparency and disclosure for plans. Plan sponsors would rather spend their time doing what they do best, running their company or their professional practice. While the benefits departments of larger organizations may have the in-house expertise, many smaller and mid-sized organizations do not and the services of a qualified advisor to retirement plans is especially vital to them.

Monitoring Service Providers

In addition to monitoring investment performance and expenses it is the responsibility of the plan sponsor to monitor the quality and costs of all service providers such as the plan administrator, the custodian or the bundled provider platform if the plan uses one. (For more, see: Ways to Cut 401(k) Expenses.)

A knowledgeable advisor can be instrumental in assisting the plan sponsor in performing this due diligence and in conducting a search for a replacement if needed. In fact many investment consultants to retirement plans routinely prepare requests for proposals (RFPs) for their plan sponsor clients in connection with these provider searches as needed. Additionally, a knowledgeable advisor will have the capability to benchmark these service providers and help the plan sponsor seek cost reductions. These might take the form of moving the plan to lower cost share classes or perhaps in asking for reductions in the amount of revenue sharing that accrues to the plan provider.

Advisor vs. Sales Person

Many brokers and registered reps will sell 401(k) plans offered by insurance companies or brokers. While they do generally offer services to the plan sponsors these reps often do not serve in a fiduciary capacity. The recent Supreme Court decision underscores the need for plans sponsors to engage with advisors who truly provide advice and who can help them meet their fiduciary obligations to their employees. (For more, see: How to Include ETFs in a Client's 401(k).)

Opportunity for Advisors

Financial advisors who serve 401(k) plan sponsors should see even more demand for their services as the pressure to offer top-notch, low cost investment choices to plan participants increases in the wake of this decision and others. This is not, however, an area for dabblers. If you are looking to enter this arena it is best to be sure that you know what you are doing.

The Bottom Line

The recent unanimous Supreme Court ruling in Tibble vs. Edison underscores the responsibilities of 401(k) plan sponsors to monitor the investment choices offered in their organization’s retirement plan. This responsibility is generally one that is met with the help of a qualified financial advisor to the plan. (For more, see: The Impact of 401(k) Outflows on Advisors.)





What are the benefits of managed accounts?

Sep 14, 2015 | By Marlene Y. Satter

Managed accounts offer a variety of benefits to the majority of plan participants, with more benefiting from some features than from others.

That’s according to a Vanguard study, “The Value of Managed Account Advice,” that found that 60 percent of retirement plan participants were better off for taking advantage of managed account advice.

Those participants’ projected 10-year retirement wealth increased by an average of 30 percent, net of investment and advice fees.

The study said that the increase could “be attributed to two factors: higher expected returns because of increased equity exposure and, among a subset of participants, increased savings rates.”

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Another beneficial feature of managed accounts is a reduction in portfolio risk, which paid off for 30 percent of participants.

It’s a mixed blessing, though, since “[w]hile participants’ portfolios are better diversified, that risk reduction leads to lower expected returns and retirement wealth because of reduced equity exposure.”

Then there’s the effect a managed account can have on savings rates.

Four out of 10 participants, the study said, “made an active savings decision at the time they adopted managed account advice. One-third of participants chose to increase their savings rate by an average of three percentage points.”

On the flip side, however, “7 percent of participants reduced their contribution rate when choosing an advice service.”

Another aspect of participants’ plans where managed accounts can prove beneficial is one that sponsor companies may not be all that thrilled with, since it involves company stock.

“For participants with concentrated single-stock positions of 20 percent or more of their account balance, company stock risk was substantially reduced by using a managed account service. The average allocation to company stock fell from 46 percent to 4 percent as a result of managed account advice.”

While the study pointed out that “[t]he benefit depends on the fee charged for the service relative to improvements in investment allocations and savings behavior,” it added that managed account providers should also consider boosting efforts to get employees to increase their savings rates and that plan sponsors should consider “offering professional advice programs as a complement to other professionally managed vehicles, such as target-date funds.”







A sizable majority of 401(k) plan participants want their financial advisers to be legally required to act in their best interest, according to results of a survey by Financial Engines Inc., an independent investment advice firm.

Almost nine out of 10 retirement investors said it's very important (69 percent) or somewhat important (18 percent) to work with a financial adviser who is legally required to take on fiduciary responsibility, according to the survey report, “The Human Touch: The Role of Financial Advisors in a Changing Advice Landscape,” released Oct. 13.

Financial Engines said in its report on the survey results that the Department of Labor's proposed fiduciary rule (RIN 1210-AB32), with its focus on requiring advisers to accept a fiduciary standard of care when handling clients' investments, “dovetails” with the survey's findings.  

The Sunnyvale, Calif., company offers retirement plan investment management and advice to more than 600 companies nationwide, including 143 of the Fortune 500, and states that it's a fiduciary in this role. Its fees are based on a percentage of a client's account assets, and not commissions.

Among the more prominent companies on Financial Engine's list of clients are Alcoa Inc., Comcast-NBCUniversal, Delta Air Lines Inc., Ford Motor Co., IBM Corp., J.C. Penney Co., Kellogg Co., Kraft Foods Inc., Microsoft Corp. and Xerox Corp.

“The rule is not only workable, but we're proof that it's workable,” Mike Jurs, director of public relations and social media for Financial Engines, told Bloomberg BNA. “And we've been doing it now for almost 20 years. And we would also say it's the right thing to do for our 401(k) participants, who need that extra level of protection.” 

The survey was conducted in August with more than 1,000 employees who participate in their employers’ defined contribution plan.

“While we do not yet know the outcome of the proposed new regulation as of the publication date of this report, we know that many companies like ours will continue to embrace our fiduciary role and provide investment advice in the best interest of their clients,” the survey report said. “We hope that a new fiduciary rule will encourage more financial advisors to find ways to also serve as fiduciaries.”

In its July 21 comment letter to the DOL, the company embraced the proposal, but not without making a few recommendations.

It asked the department to clarify when an adviser's conversation with a client about fiduciary advisory services can be construed as a recommendation, which would trigger fiduciary responsibilities. It also asked for changes to clarify that advisers that intend to offer fiduciary services wouldn't prematurely become fiduciaries simply because they used phrases that attempted to convey the meaning of fiduciary duty and responsibility.

Access to Financial Advisers 

A major part of the survey explored participants' interest in access to financial advisers and online financial advice.

While 60 percent of respondents expressed interest in an online advisory service alone, 68 percent were interested in such a service that includes access to a financial adviser.

“When it comes to important financial decisions, there's a large emotional component,” Jurs said. “And we found in our business people really do want to talk with an expert.”

Financial Engines was founded in 1996 as the first robo-advice company, but also offers an advisory center, he said. The company doesn't require a minimum balance on 401(k) accounts or individual retirement accounts, he said.

Thomas E. Perez, secretary of the Department of Labor, has touted robo-advisers such as Financial Engines, Betterment and Rebalance IRA as examples of advisory companies that offer low-cost services to smaller investors when he has promoted the DOL's proposed conflict-of-interest rule.

Industry opponents, and lawmakers such as Rep. Peter Roskam (R-Ill.) and Rep. Sean P. Duffy (R-Wis.), have claimed that the rule would force advisers to drop small investors, who would then have to resort to robo-advisers, which they claim won't be able to meet customers' needs.

“We consider that argument to be baseless,” Jurs said. “What we would say is that the solution is not either/or, not robo-advisers or high-touch human advisers. It's really that combination.”

Excerpted from a story that ran in Pension& Benefits Daily (10/14/2015).



Leading Questions to Discover Sales Opportunities

Annemarie Keehn, ERPA, QPA, QKA | Plan Design | July 10, 2015

We recently met with a local Human Resources outsourcing firm to discuss a partnership to provide mutual clients with full human resource and retirement plan consulting services.  The Human Resources firm we were meeting with asked us for a checklist of items that could be used during a client’s annual HR review to gauge whether the client would be a good candidate for referral to our firm for retirement plan services.  The idea of the checklist was to ask questions that would uncover concerns or frustrations with the plan for which our firm could provide a solution.

I thought I would share this list for others who market to retirement plans, as a helpful tool for sparking a conversation with a business owner or HR manager and identifying potential business opportunities.  This short list of questions seeks to inquire about all aspects of the plan’s administration and current providers, from the financial advisor to the investment platform.

  • What is the goal of your company’s retirement plan (to primarily benefit the owners, to provide retirement income for employees, to provide a tax shelter for the business, as a means to recruit and retain employees, etc.)? 
  • Is the current retirement program meeting that goal?  What changes or improvements do you think are needed to achieve the plan’s goal?
  • Do you know your current employee participation rate and average savings rate?  (Many advisers are now suggesting a goal based on economist Shlomo Benartzi’s suggestions of 90% employee participation and an average employee savings rate of 10% or higher).
  • Do you have a financial advisor?  Does that individual stay regularly engaged with the plan via enrollment meetings, educational services to plan participants, and strategic and investment consulting with the company’s plan decision makers?
  • Do you have any difficulties in the day-to-day administration of the plan – sending in contributions, processing distributions, getting questions answered, timeliness of reports? 
  • What is your overall impression of the customer service being provided for the plan?
  • If you have access to a plan sponsor website, are you able to easily locate on the website the reports you need to maintain and monitor the plan?
  • Do you feel like the personnel and resources your company regularly commits to maintaining the plan is ___ reasonable   ____ too much.
  • Does the Form 5500 get filed on time each year? 
  • Has the plan ever been audited by the Department Of Labor or Internal Revenue Service and, if so, were there problems discovered on audit?
  • Are participants receiving plan account statements on a regular timely basis? 
  • Are participants happy with the plan website functionality (if applicable)? 
  • For a 401k plan, do you fail your annual nondiscrimination testing (requiring refunds to the Highly Paid employees)?
  • Does the company typically have discretionary funds in the budget each year that it could contribute to the plan as profit sharing, if you were given projections that demonstrated a tax-effective way to benefit certain targeted employees or owners of the company?
  • Are there other plan features that you are aware of that you would like to have in your plan – like automatic enrollment, paperless processing, daily valuation, self-directed brokerage accounts or other plan features that you would like to change or enhance?