Regardless of what happens with the Department of Labor’s
There has been “explosive growth in the number of suits filed against fiduciaries and growth in the number of allegations and the number of dollars at stake in notable settlements that have happened,” says Shelby George, senior vice president, advisor services, for Manning & Napier.
George says that all fiduciaries can learn some lessons from recent litigation so they don’t find themselves on the other end of a class action lawsuit.
“The mandate of fiduciaries hasn’t changed since 1974,” he says. “There are really three principles that fiduciaries must live by and that’s to act in the best interest of plan participants, to make decisions with a prudent process and ensure that participants pay no more than reasonable fees. And while those principles have been the same since 1974, the definition of who is a fiduciary and even how they should execute on these principles has changed a lot since that time.”
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The fiduciary rule changed who is considered a fiduciary when it comes to investment advice, including advisers who work with IRA clients. The Trump administration has made it a priority to repeal the fiduciary rule — many expect the DOL to release the final delay rule this week — but in the meantime, “despite the uncertainty, it seems that financial institutions have begun to respond to that rule, which was pretty dramatic in terms of the change it brought to the marketplace,” George says.
Plan sponsors need to take to heart lessons learned from recent retirement plan litigation, George says. For instance, they need to have a documented process, not just for the most important decisions like making investment recommendations or providing advice to clients but even in areas that are seemingly minor like vehicle recommendations or share class recommendations, she says. Processes should be determined before big decisions are made and they should be “both systematic and repeatable so you can use that process with all of your plans or all of your IRA clients.”
It is the fiduciary’s responsibility to assess each investor’s needs. On the 401(k) side, Manning & Napier says it puts a lot of effort into specific demographics or plan design characteristics that are helpful for fiduciaries in evaluating which asset classes will be included in the investment menu. Some employees don’t want to make investment decisions, so it makes sense to offer target date fund or managed account options, George says. There are also those who want to be more actively engaged with their retirement plans, so they would benefit from a more diversified menu. For IRA investors, asset allocation is one of the biggest areas where investors struggle and an area where financial professionals can provide help in developing an appropriate asset allocation that is rooted in the unique needs of the investor and how they change over time, she says.
Based on the needs of plan participants, plan providers should check with a variety of service providers and get estimates on the pricing and what types of services they provide in a 401(k) setting. Services vary from record keeper to recordkeeper.
“Look not only at fees but capabilities plan participants can benefit from,” George says. “Use your purchasing power. You, as a fiduciary, must review the terms of all service providers working with your clients and make sure those decisions you’ve made are in the best interest of plan participants and are revisited periodically.” Any changes need to be documented with an explanation about why the final decision was made. Pricing should always be negotiated.
George says she expects more litigation in the IRA arena in the future. The bulk of litigation so far has been in the qualified plan retirement space but she has seen a growing number of cases in the 403(b) space and those are not always with ERISA plans.
“That is an interesting development to watch,” George says.
