The Prudent Fiduciary

Scott Pritchard | Principal

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

Fiduciary Prudence in a Post-2008 World-Part Three

June 2009

As we consider fiduciary best practices in the wake of 2008, you may realize that the first two factors…

  1. A strong “do-it-for-me” solution.
  2. Fee transparency.

…are directly linked to legislative efforts to improve the retirement security of American workers. The Pension Protection Act of 2006 (PPA) directly endorsed “do-it-for-me” solutions as the best default investments, while Congressmen George Miller (D – CA) and Robert Andrews (D – NJ) are pursuing a bill in the House that would make full disclosure of 401(k) fees the law of the land.  

The third area plan sponsors should focus on in a post-2008 world is also tied to the PPA: Utilization of a fiduciary adviser

Recognizing that participants need help in making their asset allocation decisions and that plan sponsors are reluctant to offer advice for fear of the fiduciary liability, lawmakers sought to create a new safe harbor that would increase the availability of advice in 401(k) plans. But they also recognized that most plan providers have significant conflicts of interest and that their advice would be clouded by those conflicts.

So, in an effort to overcome the prohibited transaction rules, the “fiduciary adviser” under the PPA was created with certain limitations. Advice offered by a fiduciary adviser must:

·         Not impact the compensation received by the adviser (aka the “level comp” provision).

·         Be generated by an independently audited software program.

If these conditions are met, then a plan sponsor can offer advice to participants through a fiduciary adviser without liability for the resulting advice.

Interestingly, conflict-free advice has always been available from a second type of fiduciary adviser, the independent, fee-only Registered Investment Advisor (RIA). 

By engaging an RIA, plan sponsors have always been able to shield themselves from the liability associated with participant advice, as well as the fiduciary task of investment selection and monitoring.    

As we move forward from 2008, we can all acknowledge that participants need help. Fortunately, plan sponsors now have two options for providing that much-needed investment advice. Whether by using the services of a provider who meets the limitations set forth in the PPA or by engaging an independent, fee-only RIA, the utilization of a fiduciary adviser is definitely a prudent best practice that can make a difference for participants, while also protecting plan sponsors.

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