Data & Research April 24, 2013

Retirees, Nonretirees Differ on Investor Optimism

Although nonretired Americans' optimism surged from -8 in November to +38 this spring, retired Americans' optimism only saw a slight increase, from -5 to +7.
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Overall, U.S. investor optimism rose to +31 in March, up from -8 recorded in November 2012, according to the quarterly Wells Fargo/Gallup Investor and Retirement Optimism Index. The divergence between retired Americans (with median age of 70) and non-retired Americans (with median age of 46) comes after six quarters of closely aligned sentiment between the two groups of investors where they seemed to move in tandem, noted Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust, speaking with PLANSPONSOR.  

More than half (65%) of investors say they have a 401 (k) plan (44% retired and 72% non-retired). Among those with a 401(k)  plan, 30% say the new fee information was something they “paid attention to,” while 70% say  they have paid  “little” to “no attention” to the new information about fees that has been published in the last year. Sixty- two percent say the new fee information has had “no impact” on the way they manage their 401(k); however, 37% say the new information had an impact. 

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One positive note, according to Nordquist, was that although half (51%) of investors say now is a “good time” to invest in the financial markets, 85% of investors made no changes to their investments in the stock market.   Ten percent of investors increased their stock market investments during the first quarter 2013 (6% of retired and 12% of non-retired). 

“The lack of action on the part of investors during the first quarter rally shows that people stayed the course and didn’t have a knee-jerk reaction that caused them to change their investment allocations,” she said.  

Compliance April 24, 2013

Don’t Be an “Accidental” Fiduciary

With regulatory changes coming, advisers need to reconsider their fiduciary status.
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The Securities and Exchange Commission (SEC) is preparing to issue a uniform fiduciary standard, and the Department of Labor’s (DOL) second attempt at redefining the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) is expected sometime this year. During a webinar hosted by Matrix Financial Solutions, Pamela S. O’Rourke, senior vice president and senior counsel at Integrated Retirement, said the DOL proposal will expand the scope of activity that would lead to fiduciary status for brokers and advisers.   

She explained that an adviser can either be a 3(38) investment manager who has discretionary control over plan assets and relieves the named fiduciary of liability for investment decisions, or a 3(21) investment adviser who shares fiduciary responsibility with the named fiduciary. The pending regulations focus on the ERISA 3(21) fiduciary definition.  

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According to O’Rourke, the primary path to ERISA 3(21) fiduciary adviser status is to render investment advice for a fee. Other ways are to exercise discretionary authority or control over management of plan or its assets, or to have discretionary authority or responsibility over administration of the plan. Under current law, a 3(21) adviser is subject to ERISA fiduciary standards if the adviser provides investment advice on a regular basis, there is a mutual agreement between the adviser and the named plan fiduciary that the advice serves as the primary basis for investment selection, and the advice is individualized.   

O’Rourke said the DOL is looking to eliminate the requirements that advice would be provided on a regular basis and that advice would be the primary basis for investment selection. “Even if you don’t intend to be fiduciary, you may inadvertently become a fiduciary due to functions you perform,” she warned.

“You don’t want to accidentally become a fiduciary,” O’Rourke added. “You want to make a conscious decision so you can adequately protect yourself, know what regulations guide you and what compensation is acceptable.” She explained that if an adviser’s advice could change his or her compensation, that is a conflict of interest. That could limit an adviser’s ability to take 12b-1 fees and commissions. A fee for service model, in which a fee is received for services regardless of outcomes, is acceptable. Advisers can also take a level compensation, which allows for 12b-1 fees, but the amount of 12b-1 fees does not depend on the investments selected. Also acceptable is receiving compensation if the advice is based on an approved computer model.  

If an adviser determines he or she is a fiduciary or wants to be, the adviser may want to be bonded and carry fiduciary insurance, O’Rourke suggested. She said it is also a good idea for an adviser to periodically audit his or her business model to be sure the adviser is maintaining the fiduciary status desired and in compliance with appropriate regulations.  

There is much an adviser can do for a plan sponsor without being a fiduciary, O’Rourke noted. Advisers can provide investment education, assistance with vendor searches, plan reports and analytics, fiduciary education for plan sponsors, investment selection and monitoring and benchmarking of service provider fees. An adviser may want to outsource fiduciary functions to compete with advisers who are fiduciaries.  

“Define and communicate your value proposition relative to fiduciary support,” O’Rourke said. “You don’t have to be a fiduciary adviser to provide support for plan sponsors’ fiduciary duties.”  

Earlier this year, Matrix Financial Solutions released a guide to help plan advisers review their business models (see “Matrix Financial Releases ERISA Practice Guide”).

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