Why Choice is Champion in the New 401k Fiduciary World

Benefits of shedding noncore capabilities are long established

Why Choice is Champion in the New 401(k) Fiduciary World


Smart advisors are recognizing the opportunity before them.

    Article Provided By:
LPL Financial

Have it your way.

While angst and anxiety over the Department of Labor’s looming fiduciary rule (known officially as the Conflict of Interest Rule) surround certain financial services industry sectors, one point is too often overlooked—the pace of innovation from leading firms to provide advisors with the fiduciary help they need.

As others fret, smart advisors understand the opportunity before them, and the corresponding choices that are now available to fit, and help grow, their practice. The manner in which they affiliate with a firm, combined with flexibility in how (and how much) fiduciary responsibility they agree to absorb, is equating to a level of business-model customization of which the industry has rarely, if ever, seen.

One major trend moving in the advisor’s direction is the rise in awareness of the role of the ERISA 3(38) investment manager.

Named for the ERISA code from which it was spawned, Section 3(38) identifies investment managers who have discretionary authority to act as fiduciaries. It’s especially useful in an age of high-profile litigation that stems from alleged fiduciary breaches by plan sponsors, trustees—and yes—advisors. Wielding Form 5500 as research, more attorneys are suing for excessive fees, revenue sharing, poor investment options, and more.

Indeed, St. Louis-based law firm Schlichter, Bogard & Denton currently has 24 cases filed against corporations and universities alleging a breach of fiduciary duty to 401(k) and 403(b) plan participants.1 And that’s just one firm.

Partnering with a service provider well-versed in 3(38) responsibilities may be a lifesaver for advisors looking to exit, or completely avoid, the investment management portion of the 401(k) business.

The benefits of shedding noncore capabilities through outsourcing to focus on client relationships and revenue generation are long established2, and fiduciary responsibility is no exception.3 Better to outsource to true experts, they believe, and thankfully resources are now available to make it happen.

“Over the past 18 months, we’ve really seen a shift to where 401(k) plan sponsors are looking for their advisors to become investment managers and to take on that 3(38) functionality,” says Bill Beardsley, Senior Vice President, Retirement Partners, at LPL Financial. “They’re now relying on the advisor not only to come up with the best investments and the most appropriate lineup for that 401(k) plan, but to actually implement and execute on it, but not all retirement plan advisors necessarily have the expertise or desire.”

The reason is two-fold. The first is the nature of the liability associated with 401(k) plans and the lawsuits that have arisen as a result. The second is the need, therefore, for specific expertise; someone who can perform the investment, analysis, research and ongoing monitoring, and remove the aforementioned liability by acting as a 3(38) investment manager.

“Many of our brokers have already professed to provide investment knowledge from a fiduciary standpoint,” he adds. “There has been a big shift in terms of moving 401(k) plans from a broker-of- record model to a 3(38) advisory model, and I think the Department of Labor’s Conflict of Interest Rule has just accelerated that movement towards the advisory model.”

The broker-of-record is a “suitability” model, one in which the financial professional provides education and guidance to plan sponsors. Conversely, engaging in an advisory relationship involves a fiduciary duty to act in the plan sponsor’s, and more importantly participant’s, best interest.

“It looks like if everything stays the way it is [with the Department of Labor rule], some level of fiduciary responsibility will also apply to the brokerage side as well through certain aspects of the Best Interest Contract Exemption,” Beardsley notes.

It all adds up to choice, and lots of it.

It’s a word Beardsley and LPL really like; choice of business model for the advisor and choice in the type of fiduciary relationship their affiliated retirement plan advisors would like to have with a particular 401(k) plan.

“It really starts out with whether or not the advisor wants to have a 401(k) sponsor relationship as a broker-of-record or as an advisory plan,” he emphasizes. “We want to provide that choice. If they decide to go the advisory route, at LPL Financial we have been doing that for years, and those processes are set up and established already. If they want to remain a broker-of-record because of the fiduciary rule, we have options to allow them do to so and still be in compliance.”

The various options are:

  • An advisory plan under the LPL Retirement Plan Consulting Program (RPCP). Retirement Plan Consulting is a fee-based platform under the LPL Financial corporate RIA that allows approved advisors to provide plan sponsor clients with fiduciary services with respect to the plan’s investments.
  • A broker-of-record plan that uses LPL Financial’s tools to meet a standard of care with level-fees and a process in place to help select and monitor investments. The advisor would be an ERISA 3(21) fiduciary, and follows the type of workflow under which they would operate.
  • The plan remains as a broker-of-record relationship, but it would still need to switch to level- fees typically surrounding the money market account or the cash option on the investment menu. If it’s a mutual fund or NAV-type of product, the DOL views that as a conflict of interest because the financial professional and their firm are not getting paid on the money market. If it’s an insurance-based product, the financial professional and the firm can’t be paid any differently on the fixed account side than on the separate account side; it should be level fee. The institutional 3(38) available from the record-keeper would then be engaged.
  • The final option is the LPL Financial Small Market Solution, which is its 3(38) solution. It’s completely scalable across the providers with which the firm has partnered including a choice (again) between three different record keepers and three different target-date series. Benefiting from assonance, the solution acts with discretionary authority over plan investment selection and monitoring, accepts ERISA 3(38) fiduciary responsibility for investment-related decisions and provides an Investment Policy Statement (IPS).

The Small Market Solution is something about which Beardsley, and the company as a whole, are particularly excited. It includes LPL’s Plan Support Services, designed to serve even the largest plans, and now scaled to fit small plans. Plan Support Services include unbiased investment oversight and reporting, such as:

  • Quarterly Fiduciary Investment Reporting Manager (FiRM) reports.
  • Investment Monitoring, notifying advisors each quarter of any plan investments that have been added to the watch list or removed from the line-up, as well as the replacement funds. Commentary is also provided on those funds.
  • A Fee Analysis and Benchmarking report every two years, showing the total cost of the advisor’s plans compared to peer groups, including detailed separate costs for investment fees, record keeping and advisor compensation.
  • Periodic plan service reviews that help advisors manage the service provider RFP process.
  • Unbiased evaluation of plan investments using LPL’s proprietary 12-Point Scoring system, which weights investments based on five years of data covering key qualitative and quantitative aspects.

“It leverages our LPL research team and what they bring to the table from a monitoring, technology and reporting perspective,” Beardsley adds. “It also leverages Worksite Financial Solutions, which is our participant financial wellness platform. It’s an information and employee advice solution that includes a participant managed account service, and a QDIA option. It also provides transition assistance when employees join or leave a plan, education assessment tools, plan sponsor microsites, and participant websites to access resources to help with retirement readiness.”

And even though it’s tagged as the Small Market Solution, a key to its effectiveness is its scalability, from start-up 401k plans to micro and small market plans to large market opportunities. It’s seeing adoption across all market segments, across LPL Financial’s more than 14,000 advisors.

A big reason is the quality and depth of the research team, led by Burt White, the firm’s chief investment officer. The firm employs more than 50 research professionals, including 12 Chartered Financial Analysts and 17 masters’ degrees, with an average of 13 years of industry experience. They maintain more than 300 portfolios tailored to specific, thematic objectives, and LPL services an estimated 45,000 retirement plans with more than $120 billion in retirement plan assets .

“Our research team does over 1,000 strategy and due diligence reviews a year, as well as written manager profiles and commentaries, and they maintain our select list of managers as well,” Beardsley concludes. “LPL is about independence and choice. Some of our vendor partners, in order to comply with our open architecture platform, had to add share classes and investments to their products and services. The fiduciary services we pioneered are now available to all LPL Financial advisors, and they can take full advantage.”

It’s no longer a question of if fiduciary services will be a standard part of the advisor’s business, but when. Understanding, offering and/or partnering with a dedicated firm to effectively act in a fiduciary role seeks to ensure protection for the advisor, reassurance for the sponsor and—ultimately—better outcomes for plan participants.

For more information on the LPL Small Market Solution, please email smallmarketsolution@lpl.com.

Disclosure: Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. Worksite Financial Solutions is a program exclusive to LPL Financial and its advisor partners.


1 Schlichter Bogard & Denton. Uselaws.com. Dec. 14, 2016.

2 “FA Guide: Outsourcing.” Investors.com. May 20, 2016.

3 “401k Advisors MUST Educate Plan Sponsors On Two Numbers.” 401kspecialistmag.com. Sep. 27, 2016.

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