How 401(k) Advisors Protect Themselves from Risk

There are defined next steps to becoming a fiduciary.
There are defined next steps to becoming a fiduciary.

Under the pending DOL fiduciary rule, any perceived recommendation for how to treat money rolling out of a retirement plan is a fiduciary act. The rule has emblazoned the line between providing information and providing advice. For 401(k) and defined contribution advisors, as well as wealth advisors, you may present options to an individual regarding their retirement plan without becoming a fiduciary.

But if you advise on what decision appears best for your client, you are accepting fiduciary responsibility. In fact, even recommending money stay in-plan is a fiduciary action.

If you become a fiduciary, there are a few logical next steps: adhere to “Duty of Care” standards, determine if there are any prohibited transactions involved, and if there are—determine which exemption you will employ. If the recommendation will result in new or increased compensation for the advisor there is an implied conflict and an exemption is needed.

While advisors will use more than one exemption for their book of business, the most common exemption is level fee. Additionally:

  • 41 percent of advisors say they’ll use level fee for all their business and 42 percent indicate they will frequently or occasionally use it.
  • The Best Interest Contract Exemption (BICE) will be used for all clients for 9 percent of advisors and 42 percent will use it frequently or occasionally.
  • Other exemptions employed include grandfathering, sophisticated investor and to avoid becoming a fiduciary altogether.
  • 77 percent of advisors indicated they will never avoid being a fiduciary, but 18 percent are still unsure.

Like anything that appears complex, due diligence can be boiled down to a step-by-step process. To protect themselves from risk, top advisors benchmark their advisory fees and services, show clients how the recommended rollover option compares to what the client is receiving in plan, and they document client priorities and discussions during the decision making process.

This due diligence activity is built into a step-by-step process within Ann Schleck & Co.’s new IRA Fee/Service Reasonability Evaluator guide, available in the second quarter of 2017.

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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