Art by Tim BowerAs this issue celebrates the 10th anniversary of
PLANADVISER, I thought it would be interesting to highlight some of the
developments and milestones we have seen in the retirement plan industry since
that first issue went to print.
The rise of target-date funds (TDFs) as the predominant
investment vehicle in participant-directed 401(k) plans is remarkable.
According to the Investment Company Institute (ICI), at the end of 2014, TDFs
accounted for 18% of 401(k) plan assets, a sharp rise from only 5% at the end
of 2006. The increase in the popularity of the funds is in large part due to
Congress’s enactment of the Pension Protection Act of 2006 (PPA), which created
a fiduciary safe harbor for default investments of participant account balances.
The Department of Labor (DOL)’s implementing
regulation—known as the “qualified default investment alternative,” or “QDIA,”
regulation—made it clear that the department favored TDFs and similar
investment vehicles over investments that protect principal. As a result, the
last 10 years have seen an evolution in products and services such as lifecycle
funds, collective investment trusts (CITs) and managed accounts.
The last decade has also seen a rise in class action
lawsuits under the Employee Retirement Income Security Act (ERISA), which have
left widespread implications, especially for 401(k) plan sponsors. Of
particular note are lawsuits focusing on the inclusion of employer stock as an
investment option under a participant-directed 401(k) plan—what are now known
as “stock drop” suits.
In the past, stock drop cases had been largely unsuccessful
due to the application by most courts of a presumption of prudence, which
generally protects the inclusion of employer stock in all but exceptional
cases, such as those involving fraud or other criminality—e.g., Enron and
Worldcom. However, in a landmark decision, the Supreme Court eliminated the
presumption of prudence in Fifth Third Bancorp v. Dudenhoeffer, and, as a
result, fiduciaries and their advisers must now balance additional
considerations in deciding whether to include employer stock in their plans. To
make matters even more challenging, at the same time that plan sponsors are
adjusting to a post-Dudenhoeffer world, litigation continues to hit court dockets
with novel claims and theories regarding employer stock.
The last decade has also witnessed a pandemic of fee
litigation. Such cases generally target plan fiduciaries with allegations that
the company’s plan, or plans, pays improper or excessive fees to service
providers. In response, plan fiduciaries, with the help of their advisers, have
taken steps to gain a better understanding of direct and indirect plan fees. As
a result, plan fiduciaries have generally become better equipped to negotiate
lower fees with service providers. And, on a technical level, plan fiduciaries
have a much better understanding of the difference between a retail class share
and an institutional class share, how to use an ERISA budget account, and what
12b-1, shareholder servicing and sub-transfer-agent fees are.
In more recent years, the use of technology as a means to
provide investment advice or to help advisers provide advice has grown
substantially. The use of the phrase “financial technology” or “fintech” has
now become part of the industry vernacular. Additionally, fiduciaries are
looking to “robo-advisers” to provide investment advice to plan participants
and individual retirement account (IRA) owners.
Of course, as with innovations anywhere, technology in the
retirement industry brings both new opportunities and challenges. In
particular, regulators, including the Securities and Exchange Commission (SEC),
Financial Industry Regulatory Authority (FINRA) and the DOL must now grapple
with the challenge of applying their rules and regulations to advisory services
that are increasingly provided by a computer or an app. Similarly, traditional
“brick and mortar” advisers will need to consider how to adapt, and perhaps
even compete, with the new technology shaping the industry.
Lastly, the DOL has been particularly influential in areas
such as fee disclosure. As a result of new regulations, lengthy disclosures of
fees have become a regular feature of the industry. Moreover, notwithstanding
all of the dramatic changes over the past 10 years, the release of the agency’s
final fiduciary rule in April reshaped the industry in a way unseen since the
passage of ERISA itself. With its redefinition of “investment advice” and
introduction of the Best Interest Contract (BIC) exemption, the DOL has
ventured into regulation of the retail advisory business in a completely
Clearly, it has been a revolutionary 10 years for our
industry. With the continually evolving landscape, it will be interesting to
see where we are 10 years from now.
David Kaleda is a principal in the Fiduciary Responsibility
practice group at the Groom Law Group in Washington, D.C. He has an extensive
background in the financial services sector. His range of experience includes
handling fiduciary matters affecting investment managers, advisers,
broker/dealers, insurers, banks and service providers. He served on the DOL’s
ERISA Advisory Council from 2012 through 2014.