HISTORY IS LITTERED WITH the corpses of large corporations that didn’t understand (or willfully ignored) changes in their industry. They fell by the wayside only to be succeeded by competitors that did. Examples include:
- Montgomery Ward was once one of the largest national retail stores. Unlike Sears, it faltered post-World War II because it didn’t recognize a demographic shift to the suburbs.
- Blockbuster Video, the most successful video rental company in the country, died because it didn’t foresee the viability of mail-order DVD rentals.
- Pan American Airways couldn’t survive in a deregulated airline industry; one where they were forced to compete with other carriers for international routes.
The lesson from each? Change with the times or the times will change you. It’s especially apropos for retirement plan advisors.
FEE DISCLOSURE WAS AS INEVITABLE AS THE SUNRISE
Traditionally, the rules regarding retirement plan fees created a conundrum. While plan sponsors didn’t have a legal right to request or receive disclosure of all plan fees, they nonetheless breached their fiduciary duty if expenses were unreasonable when compared with the larger marketplace.
While TPA fees for non-401(k) investment plans were straightforward (base fee and per-participant charge), daily valued 401(k) plans were cloaked with fees and expenses that plan sponsors didn’t understand, and many TPAs didn’t want to reveal.
Whether it was 12b-1 fees, revenue sharing, sub t/a fees, wrap fees or custodial fees, certain TPAs simply weren’t forthcoming about the reimbursements they received. They wanted to create the illusion that expenses were much lower than they actually were.
Yet two major market crashes since 2000 meant it was inevitable that participant 401(k) losses would shine a light. It was therefore no surprise the Department of Labor implemented fee disclosure regulations after Congress failed to promulgate change.
Three years after fee disclosure regulations were implemented, we are still seeing the resulting changes—including lower price points, mergers and company exits altogether.
THE FIDUCIARY DEFINITION
I always found it particularly interesting that both brokers and registered investment advisors could claim the title of retirement plan advisors. It meant each could assist plan sponsors in drafting investment policy statements, select funds, educate participants and collect fees. The one difference is RIAs had a fiduciary duty of care to the plan, while brokers did not.
The DOL found it interesting, as well. It decided to update its definition of a fiduciary, Corpse
something that was sorely needed. Mutual funds weren’t as popular in 1974, 401(k) plans didn’t exist and no one knew what a “daily valued participant directed 401(k) platform” was. The DOL has issued proposed regulations that will put brokers and some TPAs on the same fiduciary footing with RIAs. I believe they will pass.
For those advisors who are already fiduciaries, they are (thankfully) ahead of the curve. Some RIAs have gone further ahead by opting to be ERISA §3(38) and §3(21) fiduciaries. Broker-dealers, by contrast, have three options if the change to the definition of fiduciary is made: leave the retirement plan business, become a fiduciary, or team with a ERISA §3(38) fiduciary.
ALWAYS BE OPEN FOR THE NEXT BIG THING
No matter the nature of change—whether its exchange traded funds in 401(k) plans, an entirely new plan design like DB(K) or a new plan provision like automatic enrollment—keep an open mind.
When automatic enrollment was finally codified into law, I suggested to my former TPA that they consider highlighting its benefits in order to grow assets as part of a branding campaign. Nine years later, I’m still waiting to hear.
From the October 2015 issue of 401(k) Specialist magazine.
Ary Rosenbaum is an ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C. At a flat fee, Rosenbaum helps plan sponsors reduce their plan cost, facilitate administration, and limit their fiduciary liability.
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.
