Sweeping Changes in Advice

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 valuable services.

• 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 success criteria.

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.