The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

The DOL Says No Advice Is Better Than "Schlocky" Advice

February 2011

For years, many service providers to 401(k) plans have benefited from the vagaries of the 401(k) marketplace. Fees have not been required to be clearly disclosed. Plan sponsors were told there was “no cost” to run the plan. Salespeople have been allowed to call themselves “advisors.”

These vagaries have perpetuated because the volunteer committee members who run most corporate retirement plans have not understood them. These committee members are well-intentioned, but they have full-time, demanding (and better paying!) jobs. Therefore, these fiduciaries have relied on their service providers for direction. And since many – even most – of those providers are being compensated from the investments in the plan, the result has been the proverbial fox guarding the henhouse.

Better late than never, the Department of Labor (DOL) is stepping in. My last column focused on the new regulations from the DOL that will mandate transparency in retirement plan fees and expenses. This column addresses the next effort of the DOL, which is to clearly separate the salespeople from the true advisors by clarifying the regulatory definition of who is a fiduciary under ERISA.

To be considered a fiduciary under the current regulations, an advisor must meet five criteria:
1. The advisor must provide advice or recommendations
2. The advice must be given on a regular basis
3. The advisor is engaged pursuant to a mutual agreement or understanding
4. The advice serves as the primary basis for investment decisions for the plan
5. The advice is individualized to the needs of the plan

Obviously, that’s a very specific, limiting definition. This affords sales reps a great deal of wiggle room, allowing them to recommend investments to the plan which will compensate them (a clear conflict of interest) and still call themselves an “advisor” without being bound by the fiduciary standard of putting the interests of plan participants above their own self-interests. Unfortunately, that is far too often the case.

The proposed DOL regulation would throw out the five-part test and would hold anyone providing advice or recommendations to a fiduciary standard. The new regulation would also disqualify the following from claiming fiduciary status:

1. Any person who provides advice or recommendations in their capacity as a purchaser or seller of securities (i.e., a broker). In this case, the broker must notify the plan sponsor that the advice they are providing is not impartial and may actually be adverse to the best interests of participants.
2. Any provider that offers only investment education.
3. Any platform that is purely a menu from which the plan sponsor may choose.

The result of this regulation is that anyone who claims to offer objective advice to a retirement plan will have to accept their status as a plan fiduciary in writing. Not surprisingly, the 800-pound gorillas of the 401(k) marketplace are fighting this new regulation. They claim that the burden of having to disclose heretofore hidden compensation is burden enough and the requirement to act as a fiduciary and actually put the interests of plan participants ahead of their own interests is beyond their capability.

Some providers have gone so far as to say that they may have to exit the retirement plan business altogether. They argue that participants would then be harmed by a lack of advice.

But perhaps no advice is better than bad advice. As Assistant Labor Secretary Phyllis Borzi said of the proposed requirement: “If it gets rid of schlocky advice, that’s okay with me.”


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