Art by Tim BowerADVISER QUESTION: In light of the new Department of Labor
(DOL) rule on fiduciary status, how has advice to retirement plans changed over
the past 10 years?
ANSWER: Retirement plan advice has changed to respond to:
plan sponsors’ desire for assistance in satisfying their fiduciary duties; the
increased pressure on reducing costs; and the needs of aging Baby Boomers.
Here’s our list of some of the most significant changes.
• Transition from sales-based to advice-based services for
small to mid-market plans. With the increase in fiduciary breach claims,
Employee Retirement Income Security Act (ERISA) plan sponsors of small to
mid-market plans have increasingly looked to advisers to assist them in
satisfying their fiduciary responsibilities. To respond to this need, over the
past decade, more advisers have been accepting fiduciary status and offering
investment advisory services.
This shift will be even more pronounced after the DOL
fiduciary rule becomes applicable because the new requirements will lead to
more advisers being considered fiduciaries. And a fiduciary adviser who
receives compensation that varies based on the investment advice given, such as
in the case of sales-based compensation, commits a prohibited transaction. To
avoid this result, more advisers will likely offer advice-based services for a
level fee—i.e., asset-based or dollar amount.
• Movement from actively managed mutual funds to passive
index funds. The common complaint by participants in lawsuits during this
decade has been that they pay unreasonably high expenses, which reduce their
returns. This has put increased pressure on investment fiduciaries to explore
lower-cost investment alternatives. In undertaking this evaluation, more
investment fiduciaries have found that lower-cost, passively managed index
funds are prudent investment choices for inclusion on the plan investment
lineup—rather than actively managed funds, which have higher costs.
• More retirement plan advisers provide consulting services.
Plan sponsors increasingly look to advisers to provide consulting, as well as
investment advisory, services. For example, automatic features are growing in
popularity, and advisers now regularly consult with plan sponsors about automatic enrollment, automatic
deferral increases and automatic re-enrollment. Educating plan sponsors about
their fiduciary responsibilities is another common consulting service offered
by advisers. Some advisers assist plan sponsors in selecting and monitoring
service providers, and in transitioning from one service provider to another. We
expect this trend to continue and more advisers to regularly offer these
• Greater knowledge and expertise regarding target-date
funds (TDFs). Target-date funds are now one of the most popular 401(k) plan
investment options. Recognizing this, the DOL published guidance for
fiduciaries on the prudent selection and monitoring of the funds. These
circumstances have caused advisers to become more knowledgeable about TDFs and
more skilled at advising plan sponsors about the prudent selection and
monitoring of them.
• Benchmarking services are regularly used. The ERISA
408(b)(2) disclosure requirement resulted in increased transparency in service
provider fees to enable plan sponsors to assess the fees’ reasonableness. The
determination of reasonableness requires considering the fees in relation to
the quality of the services provided. Benchmarking is now regularly used by
knowledgeable advisers to aid in this process.
• Emphasis on achievement of benefit adequacy and other plan
Plan sponsors are increasingly interested in ensuring that
participants are provided with adequate benefits at retirement. To address this
need, experienced advisers are working with plan sponsors to target an
appropriate retirement benefit goal for aiding their participants and to assist
in developing a process that achieves it.
• Increased concern
about adequacy of plan distribution options for aging participants. Retirement
income planning also concerns plan sponsors in regard to aging Baby Boomers. Advisers
are helping by exploring retirement plan distribution options for plan sponsors
to potentially consider.
• Increased scrutiny of plan expenses and conflicts of
interest in individual retirement accounts (IRAs). Once the fiduciary rule is
applicable, IRA investors may be making claims about unreasonably high expenses
and service provider conflicts of interest, like 401(k) participants are doing.
Advisers should anticipate this and make appropriate changes to their business
model to avoid such claims.
Fred Reish is chair of the Financial Services ERISA practice
at the law firm Drinker, Biddle & Reath. A nationally recognized expert in
employee benefits law, Reish has written four books and many articles on the
Employee Retirement Income Security Act (ERISA), Internal Revenue Service (IRS)
and Department of Labor (DOL) audits, as well as pension plan disputes. Joan
Neri, who has been associated with the firm since 1988, is counsel on the
Employee Benefits and Executive Compensation Practice Group. Her practice
focuses on all aspects of employee benefits counseling.