Over two days of hearings in March, the Department of Labor heard from almost 40 retirement industry players on its proposed rule to update the definition of the term "fiduciary" under the Employee Retirement Income Security Act. The agency also has received over 200 public comments on the proposal.
"There's a lot of marketplace confusion over the issue," said Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries, at ASPPA's 401(k) Summit in March. "This regulation has come under a great deal of criticism."
Greg Dean, chief counsel for the Senate Committee on Health, Education, Labor & Pensions, speaking with Graff at the summit's opening session, said that "what the DOL has done is take 35 years of testing and turned it on its head. What they've got now is a regulatory proposal that [says that] everyone should be considered a fiduciary unless you meet certain requirements."
Currently, to be considered a fiduciary under ERISA, an individual has to meet all five of the following criteria:
1. The advice regarding plan investments is rendered on a regular basis.
2. The advice serves as the primary basis for plan investment decisions.
3. The recommendations are individualized for the plan.
4. The party making the recommendation receives a fee for such advice.
5. The advice is pursuant to a mutual understanding of the parties.
"It's a pretty stringent test, and firms or individuals were often able to skirt the issue of being in a fiduciary role because they didn't meet all five parts," says Rich Lynch, chief operating officer of fi360, an investment fiduciary education firm. "The underlying theme here from the DOL is that we need to change this definition so it's easier to pin fiduciary status on someone."
Under the new proposal, the advice would not have to be on a regular basis, nor would it have to serve as a primary basis for plan investment decisions. Moreover, there would not have to be a mutual agreement or understanding between the adviser and plan or participant.
"We believe it's a good thing for plan sponsors because if a professional is helping plan sponsors, the fiduciary standard is a higher standard," says Lynch. "It's not just a nice thing to do, it's a legal requirement that you have to put their interests first."
But ultimate fiduciary responsibility for the retirement plan lies with plan sponsors. "Hiring professionals to help them will mitigate that responsibility to a degree but ultimately, the responsibility is theirs," says Lynch. "They're not expected to be a financial services expert, but ultimately they're responsible and they can't forget that."
Lynch notes that, often, plan sponsors think the broker is in a fiduciary role when, in fact, they're not. "Most brokerage firms currently, based on their business model, will not assume a fiduciary role in writing, and most plan sponsors probably believe [brokers] are in that type of role," he says.
Lynch recommends plan sponsors ask their brokers and investment advisers three questions:
1. As my adviser, are you assuming a fiduciary role for the advice you're providing me?
Is that in the written agreement? "The plan sponsor may feel comfortable not having it in writing or they may want to have it in writing because in their minds, that will hold more weight if something goes wrong," says Lynch.
2. Are you disclosing all forms of compensation, both direct and indirect?
Tell me how you're being compensated, and how anyone you're affiliated with is being compensated, through your engagement with us. "That gets everything on the table as far as where the money's going," Lynch says. "A lot of plan sponsors now are not aware of where a lot of compensation that is coming out of plan assets is going."
3. Are there any inherent conflicts of interest I should be aware of?
While a more relaxed definition of the term "fiduciary" may be in the best interests of plan sponsors, many service providers have come out against it. Charlie Nelson, president of Great-West Retirement Services, said in his testimony that while he is not defending the status quo and that it is appropriate to review a standard established more than 35 years ago, he is concerned that some provisions in the proposed rule will "set the retirement industry back 25 years by dramatically increasing costs to 401(k) participants and plan sponsors, eliminating advancements that provide DC plans with greater efficiencies and cost-savings through open architecture and investment platforms, and substantially curtailing plan distribution communication, education and counseling, reducing the availability of information participants need to make informed decisions about their distribution options."
Others cautioned DOL against unintended potential harm. "Under the proposal, service providers will be forced to discontinue providing certain services or charge substantially higher fees to account for being a fiduciary," said Larry Goldbrum, general counsel of The SPARK Institute. "Additionally, service providers will be subject to the significant risk that an arrangement to provide nonfiduciary products and services will be treated, after the fact, as a fiduciary services arrangement."
The American Benefits Council, in its written submission, maintains "that the retirement community would benefit from rules that establish clear lines between fiduciary advice, on the one hand, and non-fiduciary education, marketing, and selling, on the other hand. However, we believe that the proposed regulations create too broad a definition ... we are very concerned that an overly broad definition would actually have a very adverse effect on retirement savings by raising costs, inhibiting investment education and guidance for plans and participants, and significantly shrinking the pool of service providers willing to provide such investment education and guidance."
