The ‘At Retirement’ Conversation
As retirement nears, participants naturally have increasing numbers of questions about how to manage their accumulated assets, and many turn to their retirement plan advisers for help. A retirement plan adviser supposedly needs ready answers about annuities, long-term care insurance, wealth management, 529 college savings plans and estate planning, to name a few savings vehicles.
Enter the Department of Labor (DOL) with regulations that, due to concerns about the potential for conflicts of interest, strictly stipulate how plan advisers can advise participants. “[Someone may] look like an adviser who is working for the participant’s best interests,” says David Weiner, principal at David Weiner Legal in Chicago, “but [he has] an interest in what the participant does with his money.”
“The government has this idea that advisers won’t look out for the best interests of the participant,” says Adam Sokolic, senior vice president of Retirement Partners at LPL in San Diego. In Sokolic’s experience, “Ninety-nine percent of advisers want to help people [make the right financial decision].”
Weiner says the DOL and the financial services industry are engaged in a battle. “The industry viewpoint is that the DOL is attempting to solve a problem [it] has not articulated, and the DOL says people are being swindled by advisers acting in their own interests,” he says. “The two sides are not listening to each other. Each is characterizing in worst-case terms what the other is trying to do.”
“I’m getting more questions about this than any other issue,” says Fred Reish, an Employee Retirement Income Security Act (ERISA) attorney and partner with the firm Drinker Biddle & Reath in Los Angeles. “I believe it’s at least partially due to the aging of the Baby Boomers in a defined contribution [DC] world.”
More than a quarter-million Boomers retire each month, and how best to advise them is gaining increased attention from both plan sponsors and retirement plan advisers. Weiner maintains that an adviser can legally discuss any topic. “But what is he going to benefit from? That’s where it gets dicey,” he says.
Definitions and Landmines
The plan adviser can give advice, Weiner says, but the type of compensation carries restrictions. “Compensation cannot depend on what the participant does with the advice. That has been the law since 2005.” The DOL specifies a safe harbor for advice: An adviser can work on a flat-fee basis or by using a computer model. However, Weiner calls this impractical, since such models do not factor in much more than traditional asset classes, as opposed to the robust offerings a retirement financial plan ought to have, such as life, health, property or long-term care insurance, he says. He lists three categories of fiduciaries: in-house fiduciaries, outside fiduciaries and non-fiduciary vendors.
Assets also are divided into three categories, according to Reish: in-plan assets, personal assets outside the plan, and assets that fall somewhere in between the two, as when plan assets are being rolled over into an individual retirement account (IRA).
The plan adviser is free to give advice about investments or financial assets outside a plan, Reish says, subject of course to insurance or securities laws. Because ERISA regulates recommendations involving plan distributions, assets outside the plan—such as IRAs, other accounts and Social Security—are not governed by ERISA.
Most experts see rollovers as a landmine for the plan adviser who is a fiduciary to the plan, since the transaction means a financial benefit to the adviser from plan assets. “But if a participant has already made a decision to take a distribution and roll it over to an IRA, and just asks the adviser to make investment recommendations about investing in the IRA, the adviser is not regulated by ERISA,” Reish says. “The adviser is not regulated [regarding] the participant’s distribution decision.”
That is why many advisers turn away from advice and deliver education, which they consider necessary for participants—and safer, from a regulatory standpoint.
Advisers can and should talk about income planning and products that can deliver income in retirement, Sokolic says. The trick is to give the pros and cons of each investment choice generally, laying out a balanced view of a particular vehicle for participants without pinning down a specific investment.
“You talk in broad strokes about what’s available, and you don’t make specific recommendations. It’s up to the participant to make the decision,” says Ryan Mumy, president and founder of Mumy Financial Advisors LLC in Hickory, North Carolina. “Talk to them about saving outside the plan, about 529s, about Roth IRAs, life insurance and estate planning,” he says.
Sokolic points out that participants have many questions—some quantifiable, others less so—an adviser can respond to with education. “Participants have no idea how long they’re going to live [or] the reality of their life or their health issues in retirement,” he says.
The Holy Grail
This market offers rewards aplenty for the right adviser. Retirement income is the holy grail of conversations between participant and adviser, Sokolic says. “The participant has been focused for 40 years on accumulation and needs to know what to do with this huge pot of money,” he says. “How do you convert it to a stream of income to last you the rest of your life? Should you file Social Security early? File and defer? Work till you’re 70?”
Who can have this conversation—safely—with a participant? An adviser? An educator? “We don’t have true guidance on providing education,” Mumy says.
“The crux of the issue is whether the adviser is a named fiduciary on the plan, says Chuck Hammond, co-founder of the 401(k) Study Group in Hanover, Pennsylvania. “Many advisers go into the space for the direct opportunity to cross-market other services.”
It is possible to offer services without incurring a fiduciary backlash, says Douglas Dubitsky, vice president of Guardian Life Insurance Retirement Solutions in New York City. Rules for ERISA-prohibited transactions are fairly clear.
Under some circumstances, an adviser can sell services and receive compensation, Reish says, but the investment advice must be prudent, according to the DOL, and the compensation level or flat.
The adviser can work on a flat-fee basis or bring in independent advisers, Mumy says. Act like a fiduciary, he says, by justifying a recommendation and proving it. Such diligence can pay advisers well, down the road. “If you do a good job,” he says, “who are they going to reach out to for help in retirement?”
Documentation is key to post-education sales, Sokolic says. “If a participant is interested in a long-term care plan, for example, as long as there has been documented education, the adviser can, in fact, sell ancillary services. At the point of sale, I would want to disclose very clearly.” He suggests that the adviser’s written disclosure should state that the participant is making the decision on his own, as well as detail the fees and services the adviser provides.
The adviser is also prohibited from referring the business to another adviser in his office. “ERISA looks at relationships between advisers and entities and has a broad affiliate concept,” Weiner says. Anyone selling these products must be independent of the adviser.
The plan sponsor that wants to provide information about products and rollover services to participants, for example, can assemble a list of IRA providers, Weiner says. The list could include the recordkeeper and the plan adviser in addition to other providers. “This will put the fiduciary adviser in a position where, under current DOL authority, he is not bound by DOL restrictions to stay flat-fee,” he says.
Money that originates outside the plan is fair game for unregulated services from advisers, Reish emphasizes.
“Disclosures from the plan sponsor to each participant looking to engage the adviser are important,” Hammond says, adding that the participants must understand what services are not tied to the plan or to the role the adviser plays.
Avoiding Tripwires
Three precautions can help an adviser avoid prohibited transactions, according to Hammond. Advisers need an acknowledgment, signed by the plan sponsor, explaining that additional financial services offered are not part of the company’s retirement plan benefits. Second, the adviser must agree to not generally and publicly promote products and services.
It is common, Hammond says, for participants to ask about other services at enrollment or educational meetings. If participants ask about these, the adviser can acknowledge that the services can be provided—but at an extra charge and not as part of the plan. Disclaimer language must also explain that the participant has no obligation to purchase additional services or advice from the adviser. A large part of avoiding tripwires comes down to how other services are promoted, says Hammond, who also stresses that the adviser’s compliance department must review all documents.
Finally, Hammond recommends a confirmation letter that the participant signs—and is made to understand—that outlines the fees and services provided.
For an inside fiduciary to give this type of guidance is good fiduciary practice, Weiner feels, and courts may even start to impose this duty. At the moment, the law remains unclear on the responsibility, he says, and plaintiffs who sue a plan sponsor that failed to provide some kind of guidance are unlikely to win. Recently though, he points out, plaintiffs increasingly are defeating motions to dismiss and keeping lawsuits very much alive.
Weiner notes that resistance is mounting against the DOL’s redefinition of fiduciary; the department might not even come out with a revised one. If it does, he says, “rules that apply are likely to change.” More outsiders could become fiduciaries, and courts are redefining who is a fiduciary. In some situations, Weiner says, a plan’s recordkeeper is found to be acting in a fiduciary capacity.
“All of this could change soon,” Hammond reiterates, “but [providing] disclosures to all parties is never a bad idea.”