Compliance February 11, 2011

Groups Offer Fiduciary Change Suggestions

Two trade groups have applauded the U.S. Department of Labor’s proposed redefinition of a fiduciary, but suggested a handful of improvements.
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The input came in a public comment letter from The Pension Rights Center and the National Employment Lawyers Association (NELA).

“The proposed regulations are much-needed and long-overdue,” the two groups wrote in their comment letter. “…this is a much needed regulatory change that will better protect plans and participants and facilitate more effective enforcement when misconduct is uncovered. The Pension Rights Center and NELA applaud the Department for pursuing this initiative that will benefit both retirement plans and their participants and beneficiaries.”

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The groups also said:

  • A provision labeling as a fiduciary someone who issues “individualized” investment advice, might have an unintended effect.  “This aspect of the regulation might provide a perverse incentive to some providers of investment advice to not tailor the advice to the particular needs of the individual in order to avoid fiduciary status.” 
  • The provision making a person offering conflicted advice not be labeled a fiduciary if the person getting the advice knows about the conflict might present participants with a distinction many can’t appreciate. “While we believe that this limitation may be appropriate when such advice is provided to a sophisticated plan fiduciary, it is not appropriate when the advice is given to individual participants or their beneficiaries,” the groups wrote. “The Center and NELA have worked with participants for 35 and 26 years respectively, and it is our experience that most plan participants will not be able to discern when advice is impartial or conflicted.”
  • Regarding a DoL request for comment on to what extent the person providing advice regarding a plan distribution should be a fiduciary, the groups commented: “We are especially concerned about the problem of advice given by plan custodians and nonfiduciary administrators. We are aware of participants and beneficiaries who call plans to arrange for or inquire about a distribution who are then solicited to invest in products offered by the plan service provider. At a minimum the regulations should address this concern by making the entities that provide this ‘advice’ fiduciaries.”

The full comment letter is here. 

In Practice February 11, 2011

Start with Plan Design for Small-Business Owners

Small-business owners are slowly starting to realize that they can’t handle retirement planning on their own, according toE. Thomas Foster Jr., Vice President and National Spokesperson of The Hartford's Retirement Plans Group.
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Speaking at the Virtual PLANADVISER National Conference, Foster said small businesses can be a great market for financial advisers. They need a lot of help; taxes are a major concern for them, as is healthcare. And while many do have plans, it is far from a saturated market.

One topic that is elusive to many small-business owners, said Foster, is the benefit of Roth conversions.  Many sponsors and participants were scrambling to make the conversion before 2010 was out, but the conversion is still possible since the tax rate won’t change in 2011 or 2012.  It’s a matter of education, he said–once small-business owners understand the benefits, they will be more likely to take action.

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Plan design is where advisers can make the most difference for small-business owners, suggested Foster. Many may be under the impression that the only type of retirement plan available to them is a 401(k).  Advisers need to broach the idea of profit-sharing or cash-balance plans.  Foster gave the example of a 63-year-old doctor he had recently spoken with. This doctor had chosen to take care of his own 401(k) for years–but after the recession, he told Foster it looked more like a “201(k)” than a 401(k).  He realized that since time was no longer on his side, he needed a professional to help get him back on track.

Foster said the “beauty” of a profit-sharing plan is that you’re not locked into anything, which is a strong selling point. If the demographics of the business change, the adviser can sit down with the third-party administrator (TPA) and reassess the asset allocation. Suggesting an option other than a 401(k) plan will also prove to a small-business owner your creativity, Foster asserted.

Cross-testing is an effective tool to demonstrate hypothetical profit sharing designs that maximize the percentage of an employer's retirement plan contribution that is allocated to the employer, Foster said. He cited examples of three types of tests: integrated allocation, age-weighted allocation, and new comparability allocation. Integrated allocation takes unequal treatment into account. These cross-testing scenarios may appear to be discriminatory, but they’re not, said Foster–they’re making up for factors that need to be balanced.   

Why haven’t more small-business owners adopted this kind of plan design, Foster questioned. His answer is that many think it is just too complicated.  And in fact, for many it is. He cited a recent report from the Department of Labor that said 77% of all plans require some sort of corrective action. There are lots of opportunities for advisers to help with; it’s not about selling products, but finding solutions.  Advisers can discuss things like safe harbor 401(k)s and the Saver’s Credit.

Lastly, Foster said when working with a small-business retirement plan, advisers should focus on plan design before investment choices–he referred to this strategy as having a full “DEC.” The D being for documents–if the IRS comes knocking for an audit, a complete set of plan documents is the first thing they’ll ask for. The E is for education, and the C is for communication. Taking care of those three elements will prove your services invaluable to a small-business owner, Foster concluded.

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