Client Service October 1, 2015

PANC 2015: The Flavors of Fiduciary Service

Plan advisers should consider which fiduciary role they want to take.
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Advisers can take on a variety of fiduciary roles. But, right now, the fiduciary investment advice industry is in a state of flux, and it looks like the number of 3(38) investment managers is set to grow, according to a panel of experts at the 2015 PLANADVISER National Conference.

Daniel Notto, senior vice president and senior retirement plan counsel at AB, formerly AllianceBernstein, explained to conference attendees that Section 3 of the Employee Retirement Income Security Act (ERISA) is the definitional section. Subsection 3(16) contains the definition of a plan administrator, which includes duties of government and retirement plan participant disclosures.

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Grant Arends, president of consulting services at Alliance Benefit Group of Kansas City, Inc., said some recordkeepers have taken on a 3(16) role, moving from outsourcing to performing administrative tasks themselves and functioning as fiduciaries. However, there are few recordkeepers wanting to do that; the trend is in its infancy.

“Recordkeepers fear a fiduciary role because they process hundreds and even thousands of transactions per day; it’s scary to have fiduciary responsibility for those,” Arends noted.

Craig A. Bitman, a partner at Morgan, Lewis & Bockius LLP, added that there hasn’t been an explosion of recordkeepers or advisers taking a 3(16) role because of all the litigation about plan document language and disclosures. “This seems to be where you get the one-off, single-plaintiff litigation that is annoying and time consuming to deal with,” he said.

It’s tricky because plan sponsors don’t want to give up control of everything; for example, they many want to handle messaging to participants on their own, according to Bitman. “There are all shades of grey in between the three types of fiduciary service, for which plan sponsors can retain responsibility,” he noted. Advisers should make sure plan sponsor clients line up their plan document with a provider’s 3(16) contract and duties, because someone still named in the plan document can get dragged into a lawsuit.

Arends suggested if plan advisers are looking for 3(16) services for clients, they should read the fine print in contracts, because 3(16) can mean different things from different providers.

NEXT: The move to 3(38) investment managers

ERISA also provides definitions of 3(21) investment advisers and 3(38) investment managers. According to Arends, there is greater momentum for the use of fiduciary services due to the Department of Labor’s (DOL) proposed fiduciary rule. Plan sponsors are looking for fiduciary services.

Notto noted that thanks to the proposed fiduciary rule, just about anyone who provides investment services will be a fiduciary. “Like it or not, anyone who wants to stay in the business will have to accept being a fiduciary,” he told conference attendees.

The main importance of a 3(21) adviser is setting a process for selecting and monitoring funds and making a recommendation, but the retirement plan committee actually votes and makes the final decision about investment choices, Arends said. He noted that many plan sponsors are migrating to 3(38) services because 99% of the time, they accept an investment adviser’s recommendations, yet they are taking on all the fiduciary responsibility for selection.

According to Bitman, the U.S. Supreme Court decision in Tibble v. Edison International also led plan sponsors to pay more attention to the duty to monitor investments. “From a litigation perspective, the difference between 3(21) and 3(38) is somewhat marginal, advisers will get dragged into a lawsuit regardless of which fiduciary role they take. I think a lot of advisers are realizing it’s not much of a step to go from 3(21) to 3(38),” he said.

Bitman noted that the processes for performing 3(21) or 3(38) fiduciary functions is the same, the difference is between making recommendations and executing decisions. “The timing is better if you’re a 3(38),” he said. “If something happens in the market, a 3(38) can make changes faster than if he had to wait for a plan sponsor decision.”

Some clients are confident in an investment manager’s ability to select investments, but there may be a whole list of requirements clients may want to see addressed in the selection process, Bitman added. “There’s no standard contract, advisers will have to individualize them.”

He also said the DOL must expand its fiduciary rule for a seller’s exception. “How can I get into a new client relationship or make any kind of upsell if just explaining products and services will trigger fiduciary status?” he queried.

Client Service October 1, 2015

PANC 2015: Trends in Participant Education

Education is moving from away from a focus on investment classes and asset allocations to address the deeper, long-term values of saving. 
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While many industry practitioners will suggest the importance of retirement plan participant education programs have diminished with stronger uptake of automatic enrollment features, adviser Corby Dall, president and managing partner of 401(k) Advisors Intermountain, is happy to argue otherwise.

Speaking at the 2015 PLANADVISER National Conference during a panel discussion on participant education trends, Dall suggested the need for participant education has evolved post-Pension Protection Act, “but education is as important now as ever.”

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“Think of the large population that is being swept into retirement plans, with very little prior understanding of what the 401(k) plan is and what it can do for them,” Dall said. “Our duty, as advisers, is to help the participants realize what they are doing in the plan. As we all know, just getting into the plan is not enough for success.”

Michele Casey, corporate retirement director at the Casey Retirement Group at Morgan Stanley, joined Dall on the panel. She agreed that participants auto-enrolled into 401(k) plans both want and need ongoing financial education. Increasingly popular are more holistic approaches to financial wellness, she said, help with budgeting and debt management especially.

Another big reason automatic plan features only boost the demand for education, Casey and Dall suggested, is that the retirement planning process is no longer just theoretical for these new participants. “All of a sudden they actually have some money in the 401(k) plan, because somebody automatically enrolled them,” Dall said. “They open their statement one quarter and see they have several thousand dollars in the plan, and every day it’s becoming more important to them.”

Beyond all this, “financial wellness today is like offering fiduciary services was seven or eight years ago,” Dall said. “You are going to be left behind by clients if you aren’t doing this.”

NEXT: Wellness has wider implications  

Looking beyond advisers’ near-term business interests, Casey said there could be a lot to gain from general advocacy for greater amounts of financial education, whether in schools or the workplace.  

“The 401(k) is not the only component of the financial picture for a given individual, but as stewards of retirement it makes a lot of sense to get people to start the real financial planning conversations earlier in life,” she said. “We should be advocating for financial wellness training well before people hit the workplace, in my opinion.”

Wellness should take a broad approach, Dall agreed, and greater engagement in general with financial issues certainly won’t harm advisers’ business prospects moving forward. “It’s about having income exceed debt and liabilities,” he said. “It’s about setting goals and understanding consumption—teaching people to live within their means. In order to make a successful retirement, you also need to know how to stay out of debt, how to afford a car loan and a home loan. Student loans and health care costs, all of these things are important.”

For advisers serious about delivering new forms of financial wellness and education, Dall and Casey said there are a variety of emerging and established providers disrupting the marketplace, capable of delivering most of what an adviser could dream up. There will, of course, be cost and scale issues to consider, they said, but one can wring some impressive efficiency from today’s digital technologies.  

“If we are successful long term in this effort, we will be able to create expectations for our clients along the lines of the health/wellness project we have seen develop in the last 15 or 20 years,” Dall concluded. “Nobody is going to lose 50 pounds by next Tuesday, but we do have an expectation that people pay attention to their health and take some responsibility for that through health insurance. We want to develop a similar culture around financial planning and retirement.” 

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