Taking Fiduciary Responsibility – a Message for Plan Sponsors

Beginning in April 2017, a new Department of Labor (DOL) rule goes into effect, changing how a fiduciary is defined. The rule aims at ensuring advisors put their clients’ best interests first (instead of, for example, recommending products that generate higher commissions). 

For some brokerage and advisory firms, the changes mean little. But for others, the new regulation will require significant investments in technology and process changes in order to comply with the onerous compliance challenges created by this change. 

Nevertheless, the pending rule change has spurred a surprising uptick in industry marketing. Instead of seeing a contraction in the financial management market, we’re seeing more organizations out hawking their fiduciary services.

More options are great. We’re all for a competitive marketplace, unless those financial services are being packaged in confusing (or worse: intentionally misleading) ways. We’ve seen fiduciary services marketed at 0.02%, which can only mean the provider has whittled their services down to essentially nothing. It’s unlikely that any organization could take on any real fiduciary exposure at such a rate.  

We’ve even seen promotions offering free fiduciary services. If we were in a joking mood, we might call that an oxymoron, akin to “open secrets” or “original copies.” In all seriousness though, fiduciary services are, by definition, “for a fee.”   

Check Your Assumptions

As a retirement plan sponsor, you may assume your investment advisor will take fiduciary responsibility for your plan. But there’s a lot of confusion about what that entails. As a result, you may be assuming your investment manager is providing far more than they actually are. 

Traditionally, investment managers operating under ERISA section 3(38) have been viewed as “full scope” advisors. That means they’d take on sole fiduciary responsibility for selecting and monitoring investments. It offered plan sponsors the greatest protection and limited their liability to selecting and monitoring the investment manager.

But increasingly, these 3(38) investment management services are really being offered at “limited scope.” Under these arrangements, plan sponsors must take the lead on key decisions such as developing an investment policy or choosing the investment platform. 

Either one of those activities puts significant onus back on the plan sponsor and requires a reasonable measure of knowledge, experience, and follow-through. (If sued, you could be asked to prove that you knew enough about the industry and its products to be making these recommendations for your employees.)

Buyer Beware

Do the necessary due diligence and ensure your investment manager is clear and upfront about their roles and responsibilities. A few basic tips and warnings: 

  1. Read the advisory agreement. Pay attention to anything you will be responsible for as plan sponsor. (If you don’t understand the agreement, ask questions. If you are unclear and you sign it anyway, that alone could be a fiduciary breach.) 
  2. Lookout for red flags such as “free” or unusually low fees. Maybe someone gave their marketing team too long a leash, or maybe these firms are deliberately out to mislead you and take advantage of market confusion. 
  3. Note any plan sponsor responsibilities for directing investment manager actions. Whenever the sponsor tells an advisor how to act, the sponsor takes on responsibility for that instruction.
  4. Ask your lawyer to review. If you and your committee don’t have a strong grasp on the value you’ll be receiving, you need to seek additional expertise for contract review. 

The new DOL rule is shining a light on fiduciary responsibility for financial advisors, but it doesn’t alleviate your accountability, as a plan sponsor, for the selection and monitoring of fiduciaries who represent your plan. Make sure you know the impact of the pending DOL regulation on plan sponsors by asking questions about your fiduciary responsibility role now. Let’s start a meaningful conversation about CoPilot and the future today. Contact us online or call 800.236.7400.

Mark Nicholas, CPC - Chief Compliance Officer at eRIA - msnicholas@pai.com - 800-236-7400 x3423

Mark is the subject matter expert on 401(k) regulations, DOL fiduciary rule, investments, participant advice, audits and compliance.