Retirement Plan Advisors Must Adapt to Changing Industry
UPDATE (July 6, 2020): The SEC’s Regulation Best Interest (Reg BI) standard took effect on June 30, 2020. In addition to Reg BI, the Department of Labor (DOL) has issued a proposal for a new fiduciary rule that would effectively mirror the requirements set forth in Reg BI.
Although the proposed DOL rule would represent a watered-down version of the previous fiduciary rule, we believe it moves the industry in the right direction by increasing the standards to which brokers and broker-dealers must maintain. However, if implemented, the rule would fall short of creating a standard equal to that of the regulation detailed in the Investment Advisers Act of 1940, the same standard to which Brighton Jones, a fee-only Registered Investment Adviser, has been held since our founding two decades ago.
Moreover, Reg BI and the DOL’s new fiduciary rule proposal only apply to “retail investors,” which can only be defined as individuals, not retirement plans. We serve as an ERISA 3(38) fiduciary for retirement plans. This is a standard and level of scrutiny that most brokers and broker-dealers cannot or will not take on.
Now is the best time to review your retirement plan to be sure that it has low costs, strong investments, an efficient design, and is ultimately helping employees achieve their goals.
The regulatory environment in the retirement plan management space is ever-changing, from fee disclosure changes to the recently vacated “fiduciary rule” to the newly proposed SEC “Regulation Best Interest” rule. Although these developments have created much confusion and uncertainty, both the core fiduciary duties and the liabilities plan sponsors expose themselves to in failing to fulfill those duties remain clear.
Many retirement plan sponsors believe that by outsourcing the administrative and investment recommendation functions, they have adequately protected themselves against any and all liability. However, ERISA dictates that the plan sponsor is ultimately responsible for making sure that the plan meets all the required fiduciary standards.
The result has been more responsibility, accountability, liability, and litigation for companies and plan sponsors.
The best way to limit your risk is to make sure your retirement plan advisor is willing to meet the changing requirements of the industry and the changing needs of your business and your employees. The harsh truth is that many plan advisors servicing a 401(k) plan are resistant to change. They shirk fiduciary duties and merely want to do the bare minimum (meet with you 1-2 times per year, recommend fund changes, etc.) on their way to collecting their fee. Does this sound like your plan advisor?
As a plan sponsor, you should be asking your plan advisor for more. Your plan advisor should be a value-added part of your retirement benefits, a true partner to your benefits team, an extension of your committee/plan sponsor, and a proactive resource for your employees. In addition to making sure your advisor is conflict-free (not tied to a fund company, a bank, a brokerage, or an insurance company)—not to mention objective, transparent, and willing to work with your employees—we recommend you have an advisor who is willing to help you limit your liability, manage the plan, and help you meet your fiduciary obligations.
Reducing Your Liability
Everyone calls themselves an advisor, but the truth is not all advisors are the same. There are brokers, insurance providers, banks, independent consultants, and Registered Investment Advisors who all label themselves as retirement plan “advisors.” Some will operate as a fiduciary, some will operate as a partial fiduciary, and some won’t take a fiduciary stance at all. Understanding your agreement with your advisor is really the only way to tell if they are taking a fiduciary stance and, if so, at what level. The reality is, only a contractually named 3(38) investment manager gives plan sponsors the ability to reduce the risk associated with selecting, monitoring, and replacing investments.
Plan Consulting and Management
Doing your full-time job while also meeting your fiduciary obligations as a plan sponsor can be challenging, to say the least. Your plan advisor should be helping you manage the plan to stay in compliance, provide plan consulting to maximize the benefit, and educate and support your employees. Plan sponsors should be asking their advisors for services like:
- Plan design
- Plan document review or creation
- Vendor selection
- Vendor management support
- Benchmarking vendors
- Fiduciary document organization
- Regular review meetings
- Plan health scorecard and plan goal setting
- Employee surveys
- Employee financial education
- Direct employee support
- Ongoing fiduciary education
- Regulatory updates
These services should no longer be discretionary, but a part of every plan sponsor’s requirements of their retirement plan advisor.
Is your plan advisor helping you meet your fiduciary obligations or are they just collecting a fee?
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