Recent ERISA changes that impact advisors and their fiduciary responsibilities were a hot topic at the GRP Advisor Alliance (GRPAA) conference in Alaska.
The Pension Resource Institute and Retirement Law Group’s Jason Roberts began a weekend session with a recap of the changes compared with where we were not long ago.
“Where we are today isn’t that different from where we were in 2016—at least when it comes to plan advisors and IRA rollovers,” Roberts explained. “If you’re a fiduciary, you can’t profit from investment advice as that term is defined under ERISA. That would be considered self-dealing and a prohibited transaction under both ERISA and the tax code.”
He added that the DOL, in the new prohibited transaction exemption (PTE), overruled its own advisory opinion from 2005 and gave retirement plan advisors a clear path to “capturing” IRA rollovers so long as their recommendations are in the participants’ best interest.
Prior to the new PTE becoming effective in February 2021, primarily due to the 2005 advisory opinion, plan advisors that served in a fiduciary capacity had to “look over their shoulders” if they recommended a participant roll over into an IRA where they would receive more compensation than if he/she stayed invested in the 401k plan, Roberts said.
There was not an applicable exemption, but now there is, and plan advisors are no longer at a disadvantage vis-à-vis their non-fiduciary competitors. Indeed, according to Roberts, “plan advisors are in the catbird seat” for two reasons.”
- First, the PTE requires advisors to compare fees, investments and services available in the current plan to a new plan or IRA. Only if the benefits outweigh the additional costs, would it generally be in the participant’s best interest to roll over. The plan advisor should know those data points, while an advisor unconnected to that plan would need to gather and analyze that information. “Even if the information is readily available, many retail-focused advisors have reported difficulty deciphering it,” according to Roberts.
- Second, plan advisors are generally getting paid something if the participant remains invested in the plan they advise. For example, if the plan advisor is earning 50 bps on plan assets, and he/she recommends a rollover IRA with a 1% advisory fee, then the advisor only has a 50 bps delta to defend. On the other hand, if an advisor that has no connection with the participant’s current plan recommends the same rollover IRA, he/she has a 100 bps of “conflicted compensation.”
That said, Roberts cautioned attendees to understand the particular nuances of the PTE’s conditions and be careful when implanting the required policies and procedures. He also warned that the conditions will become more onerous for all financial institutions once the DOL’s “temporary enforcement policy” expires on December 20, 2021.
After that, advisors will be required to, among other things, provide a written fiduciary acknowledgment and a summary of the basis upon which the advisor determined the recommendation to be in the participant’s best interest. Financial institutions will also be required to conduct a “retrospective review” of their policies and procedures at least once a year and correct any deficiencies.
“As a former defense litigator for advisors and financial institutions, I can tell you that both the written disclosures and policies and procedures need to be well-thought-out,” cautioned Roberts. “These are the types of things that can easily become “Exhibit A” in any regulatory proceeding, arbitration, or litigation.”
Fiduciary liability policies
Lilian Morvay with the Independent Broker-Dealer Consortium and Registered Investment Advisor Consortium then took over to warn attendees about what is, and what is not, covered in certain professional liability insurance policies. While her advice was specifically for LPL Financial-affiliated advisors, her comments could be applied to industry advisors as a whole.
“Many professional liability policies will not cover advisors for past actions, and that’s a major hole for them,” Morvay said. “They also will not cover alternative investments, and by that, I mean non-registered securities like commodities. LPL will look to recover deductibles they must pay for any claims that name you and them.”
An important additional point: plan sponsors should buy fiduciary insurance. Many think fiduciary breaches fall under E&O policies, but they do not.
‘Highly motivated’ tort lawyers
The session concluded with a stark warning about future legal action initiated against plan sponsors and their advisors.
“Actions are being brought against smaller plans,” O’Hagan Meyer’s Nancy Hendrickson said. “ERISA claims are booming. Class actions typically get awarded attorneys’ fees, so they’re highly motivated.”
Fiduciary breach cases were once very complicated, but Jerry Schlichter pioneered the technique for filing claims, and others are riding on his coattails. Advisors are being named in the suits.
“Plan sponsors are not ERISA savvy,” Hendrickson added. “One of the biggest liabilities advisors have is that if plan sponsors are sued, they will turn on the advisor. Sometimes a plan will languish for years, and nothing will be done with costs until another advisor is able to come in much cheaper. Hello, lawsuit!”
Her advice was to document (document, document) efforts by the advisor to meet with the plan sponsor, which the sponsor might have ignored.