Fiduciary Expert Reish’s Take on DOL ‘Duty to Monitor’

More guidance on the DOL and 401(k) "duty to monitor."
More guidance on the DOL and 401(k) “duty to monitor.”

We don’t know if they’re gems, but they’re certainly hidden, and fiduciary giant Fred Reish is out to uncover them.

We’re referring to a number of interesting observations in the preamble to the DOL’s final fiduciary rule regulation and exemptions—specifically when it comes to the much talked about (and highly litigated) “duty to monitor.”

“In the preamble to the Best Interest Contract Exemption (BICE), the DOL noted that a fiduciary adviser and his or her financial institution (e.g., RIA firm or broker-dealer) could contractually limit the duty to monitor,” he explains in a post to his website, before going on to quote the DOL at length:

Further, when determining the extent of the monitoring to be provided, as disclosed in the contract pursuant to Section II(e) of the exemption, such Financial Institutions should carefully consider whether certain investments can be prudently recommended to the individual Retirement Investor, in the first place, without a mechanism in place for the ongoing monitoring of the investment. This is particularly a concern with respect to investments that possess unusual complexity and risk, and that are likely to require further guidance to protect the investor’s interests. Without an accompanying agreement to monitor certain recommended investments, or at least a recommendation that the Retirement Investor arrange for ongoing monitoring, the Adviser may be unable to satisfy the exemption’s Best Interest obligation with respect to such investments. Similarly, the added cost of monitoring such investments should be considered by the Adviser and Financial Institution in determining whether the recommended investments are in the Retirement Investor’s Best Interest.

Shorter version in plain English, according to Reish?

“ …if an advisor isn’t going to have a duty to monitor the investments, don’t recommend investments that retirement investors lack the capacity to properly monitor.

“It’s not clear where that line will ultimately be drawn–for example, does it refer to the particular investor or the average investor? As a result, some caution is warranted.”

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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