Why Your Retirement Plan Participants Should Never be Someone’s Profit Center

Posted on March 20, 2017

Author Name By Steve Gordon

When defined contribution plan participants seek guidance or personalized advice related to their deferrals and investment options, they are counting on their employers to ensure the accountability and trustworthiness of the individuals providing it. After all, plan participants do not select those professionals themselves. Under the previous administration, the Department of Labor issued the Fiduciary Rule, which was designed to provide plan participants the confidence and comfort of knowing that advisors were being held to a higher fiduciary standard.

The Rule would subject those providing participant advice to provide more fee transparency and put the participant’s needs before their own and the needs of their brokerage firm. Who could argue against greater fee transparency and providing advice that is primarily advantageous to the consumer?

Unfortunately, lots of organizations did and the current administration has taken steps to delay the applicability date set for April 2017, which might kill the Rule altogether.

If you sponsor a defined contribution plan, perhaps you should be taking note of who is vocal for the law’s demise. Beware the advisor who approaches you under the guise of “improving participant outcomes”, yet will not allow themselves to be defined as a fiduciary for this advice. Remember, a fiduciary is someone that is required to place the interests of your participants ahead of their own. Many firms and professionals are fighting this new rule because it not only requires them to be a fiduciary but also exposes their traditional ability to generate additional revenue from your participants. Here are some specific examples of how your participants can serve as a profit center:

  • Best advice for your participant vs. the “fit” standard: If an advisor recommends that a participant roll their assets out of an employer-sponsored plan and into an IRA, a fiduciary must consider if the IRA is going to be more expensive for the participant in addition to other investment-related factors. Advisors who are licensed under FINRA and are not serving as fiduciaries may only need to ensure that the investment they are recommending is a “fit”. As you can see, this distinction can be significant. Who will advise your participant to stay put and take no action when doing so may be the best course? To generate additional fees from participants, the industry targets “money in motion”. Remember, your participants should already be in an institutionally priced plan with regularly monitored investment options.
  • Limited access to advice: Let us explore two of the more susceptible demographics who often need professional guidance. First, consider the participant who has no financial background, is on the lower end of the pay scale and needs encouragement to save a little more for themselves. With no financial incentive, the wrong model can all but ensure they get very little attention relative to those participants with larger balances. One could argue that they need more assistance than average to fully understand the implications of not saving enough or missing out on the employer match. On the other end of that spectrum, there is great financial incentive to spend time with your retirees who typically have larger in-plan balances, as well as the potential for significant outside assets.
  • Too much access to advice: Unfortunately, while retirees may have higher balances on average, they are also more likely to be suffering from diminishing cognitive abilities, which could make them a more vulnerable demographic. It is common for retirees to be approached with annuity products that are very difficult to understand, generate high sales fees and have a difficult time performing in a low-interest rate environment. Again, they are counting on their employer for the trusted advice they need at a very important stage of their lives.

We advocate a fully independent, fully transparent advisor model where the institutional advisor to the employer is separate and distinct from those providing advice to your participants. Most often, your recordkeeper is best equipped to provide this advice using salaried employees under the watchful eye of your institutional consultant. Before allowing additional access to your participants, ask yourself some simple questions:

  • Who is best aligned to provide objective advice to your participants?
  • Are you paying a third-party resource for services already available through your record-keeper?
  • Are the professionals providing the advice licensed by FINRA to collect commissions or benefit from rollovers?
  • Will low balance participants receive the same attention as higher balance participants?
  • Where are the assets going that are rolled out of the plan? Will those participants be better off?
  • What is the effect on plan expenses when assets are rolled out?

The Department of Labor fully understood these conflicts of interests when it designed the Fiduciary Rule, making it a well-defined rule that expands the Employee Retirement Income Security Act (ERISA) of 1974’s definition of what constitutes an “investment advice fiduciary.” Though it is currently facing scrutiny, the Fiduciary Rule is one piece of regulation that would be largely beneficial for both clients and those who maintain the high ethical standards necessary to call themselves true fiduciaries.

The Fiduciary Rule’s singular objective is not to stifle investment deals, but to encourage advisors to uphold high ethical standards and be true fiduciaries for clients, both big and small. Advisors would not be permitted to sell proprietary products that only work in their own best interests. This would put the pressure on the broker/dealer firms that claim independence but are currently still swayed by backroom deals that often leave clients in a worse position.

Along with pressure on firms, the rule would also work to keep client expense ratios low by influencing advisors’ home offices against receiving compensation from vendors, as well as revenue sharing. The rule also proposes that fees are never higher than commissions unless dictated by the advisor. Transparency, after all, is key to securing trust in one’s fiduciary.

Instead of banning a single product, the Rule focused on the open disclosure of compensation and identifying any conflicts of interest that may arise. Despite this fact, the Fiduciary Rule has hit a snag with those who feel the rule too vaguely defines the term “fiduciary” and will cause costs to rise due to compliance and other concerns.

Only time will tell, but, if passed, the Fiduciary Rule could provide added assurance for investors across the country. Though general concerns over more regulation have merit, this is one place where we believe oversight is not only beneficial, but necessary.