Every year presents new challenges for retirement plan sponsors and advisors. Here are just a few items to watch, as well as suggestions to stay ahead of the curve.
- New fiduciary rule
Anyone surprised? Anyone?
While the Department of Labor’s fiduciary rule failed due to a negative court decision (as well as President Trump’s opposition to it), in the words of Dr. McCoy, it’s not dead as long as we remember it.
How do we remember it?
Maybe ask the broker-dealers who spent millions in legal fees to comply with the rule and ended up eliminating certain blocks of their retirement plan business in order to comply.
Ask the plan sponsors who learned about fiduciary duty and realized their brokers don’t serve in that capacity.
Ask the registered investment advisors who always served as fiduciaries and are secretly happy the rule was watered down.
Now the DOL has indicated that they’re going to take another stab at implementing a new rule; maybe third time’s a charm.
Attention is now on the Securities and Exchange Commission and their version of a new fiduciary rule. The question is whether the DOL will try to use that rule as part of theirs.
Regardless of whether a new DOL fiduciary rule is implemented, keep in mind that the failed proposed rule still affects the industry, as more plan sponsors ask about fiduciary services.
As recent as a decade ago, most of the retirement plan industry didn’t know what ERISA §3(38) meant, but it’s no longer the case.
As a plan advisor, you need to understand the continued impact of the failed rule and what it means for your practice.
- Consolidation
It seems every week brings news of another third-party administrator merger.
Large consolidation in both the TPA and investment advisory business has occurred since the fee-disclosure rules were implemented in 2012.
Big plan providers are getting bigger by gobbling up their smaller counterparts.
Some of these larger TPAs and investment advisors are themselves gearing up for initial public offerings.
Many retirement plan providers have exited the business as well, especially on the bundled insurance company side.
What does it all mean?
More consolidation will eliminate competition.
Will it help increase pricing because fewer providers mean less competition? Decreased competition often results in decreased capacity, which means increased prices, but in the retirement plan industry, fewer competitors may actually further decrease pricing.
How is that possible? Providers that are buying smaller competitors are hoping consolidation will lead to cost savings through economies of scale.
The problem, of course, is that consolidation will mean fewer jobs as redundancy is eliminated.
I’m not sure if it’s good or bad, because there’s always demand for quality employees. If too many exit the industry altogether, it’s a problem.
What impact this consolidation will have on the retirement plan business is certainly open for debate, but as a retirement plan provider, it is a cause for concern.
- Multiple Employer Plans
Multiple Employer Plans (MEP) were dealt a big blow when the DOL ruled that having no commonality (the so-called open MEP) meant it wouldn’t be considered a single plan for ERISA purposes.
MEPs that weren’t single plans had to issue a Form 5500 for each adopting employer.
A big selling point for an open MEP was that there would be one 5500 for the plan and nothing for adopting employers.
That advisory opinion—issued for only one MEP—nonetheless took the wind from the sails of the open MEP movement.
However, President Trump created renewed interest in open MEPs with an executive order to develop new rules regarding MEPs.
There was much MEP anticipation, but unfortunately, the proposed DOL rules did nothing to bring back MEPs, it simply mirrored their 2012 advisory opinion.
It means MEPs will still need commonality between adopting employers to be considered a single plan for ERISA purposes.
But take heart—if it’s not regulation, maybe it will be legislation. There are about a half-dozen congressional bills that would create open MEPs.
- The end of revenue sharing
While revenue sharing is still legal, litigation against many large plan sponsors had a chilling effect on its practice. Selecting funds that pay a revenue share has pretty much stopped, but I think the end of revenue sharing will lead to other problematic practices.
Fidelity recently announced it would charge five basis points on any Vanguard funds held in 401k plans which they administer. Vanguard didn’t pay any sub/TA fees to Fidelity for the work. Fidelity didn’t think this was fair and slapped on the basis point charge (also to probably make their index funds more attractive).
These maneuvers will be more common. Certain 401k custodial platforms and bundled TPAs will start charging extra for non-proprietary mutual funds and extract fees from fund companies for access to client plans.
Only time will officially tell, but look for more of these “access for pay” within the industry as a whole.
Ary Rosenbaum is an author and ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.
He is also the host of That 401(k) Conference, a fun and informative retirement plan conference taking place at Dodger Stadium in Los Angeles on Friday, February 22, 2019, from 9:00 am to 2:00 pm. Special guest: Steve Garvey.
Rosenbaum’s latest book, humbly titled “The Greatest 401(k) Book Sequel Ever,” is available in Kindle and paperback at Amazon.com.
Ary Rosenbaum is an author and ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.
