AS PROFESSOR BARBAY SAID in the Rodney Dangerfield classic, Back to School, “There are two types of people in business: the quick and the dead.”
The most successful businesses are those that either see where the future is headed, or recognize opportunity during periods of fundamental change. The 401(k) business is experiencing the latter. Financial advisors who wish to increase their role as retirement plan advisors can take advantage of these changes. Here’s how:
FEE DISCLOSURE REGULATIONS
Financial advisors need to be prepared to comply with, and understand, Department of Labor (DOL) regulations. Every financial advisor should work with an ERISA attorney in making sure their current client service agreements comply with the plan sponsor Section 408(b)(2) DOL regulation (there are so many advisors not in compliance). Second, whether it’s through the client service agreement or another form of communication, the financial advisor must make sure all fees that they are directly or indirectly paid are disclosed.
In addition, financial advisors should ensure the third party administrator (TPA) their clients use is also making all required fee disclosures. The financial advisor should serve as an ombudsman for the client as part of its white glove service. He should always review the TPA’s fees and help the plan sponsor to determine whether they’re reasonable.
FIDUCIARY ADVICE REGULATIONS
In 2011, a regulation was implemented by the DOL that finally allowed retirement plan providers to offer investment advice to plan participant. This is a tremendous opportunity for advisors to consider. Before this regulation, 401(k) retirement plan providers could not give advice to participants per ERISA; either the provider or the plan sponsor was required to hire an independent firm to provide the service. It was meant to avoid conflicts of interest; some advisors were receiving extra compensation by pushing specific investments. There was also concern about bundled providers, namely mutual fund companies like Fidelity, Vanguard, and T. Rowe Price, who were paid for plan administration but also derived revenue from mutual funds they offered on the investment menus they administered.
The reason for this rule change by the DOL is rather simple—only the largest retirement plans could afford to hire independent third party providers to give individual investment advice to participants. Participants of small-to-medium sized plans didn’t get advice.
The rule change is a win-win for financial advisors who take their role as a retirement plan advisor seriously. Providing advice can augment their practice and allow them to differentiate themselves from their competition.
THE POTENTIAL FIDUCIARY RULE CHANGE
The DOL is still in the process of implementing a regulation that would have changed the definition of a retirement plan fiduciary. The significance is that it will require brokers who work on retirement plans to essentially become fiduciaries and have a fiduciary duty to those plans. While congressional and Wall Street pressure has stalled the DOL implementation, it is still the DOL’s intent to promulgate a new fiduciary definition and applying that definition to individual retirement accounts.
What is the significance of a change in the definition? While retirement plan advisors that are registered investment advisors (RIAs) were always plan fiduciaries, the change would offer brokers three choices on how to proceed if they were considered plan fiduciaries. Brokers would either become fiduciaries, partner up with RIAs and ERISA §3(38) fiduciaries to handle non-fiduciary functions (as well as getting paid on a plan), or leave the retirement plan industry altogether. So there is a significant amount of opportunity for both RIAs and brokers if the rule change is made. Many small broker-dealers may decide to exit altogether because of liability concerns. While the change has not been made, it would be wise for all types of retirement plan advisors to pay attention to any changes proposed or made to the fiduciary definition.
Ary Rosenbaum is an ERISA/ retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.. At a flat fee, Ary 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.
