in ‘The Year of the Fiduciary’
January 25, 2010
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If you think selling and servicing 401(k) plans isn’t easy today, ERISA is about to make it even harder. Its new fee disclosure requirements and its redefinition of ERISA fiduciary to include just about anyone who gives any kind of investment advice are going to create a litany of challenges for plan providers and advisors. Some recordkeepers and administrators may get out of the retirement business altogether, while others, particularly registered investment advisors, will have to take on the legal responsibilities of the ERISA fiduciary role, shedding the various ‘fiduciary-lite’ designations many assumed they held in the past.
The good news is that firms that can adjust to these challenges can use them to their competitive advantage Here are ten steps your firm can take to prepare for The Year of the Fiduciary.
1. Understand what it means to be a fiduciary
Really. Many people think they know what it means to be an ERISA fiduciary, but may not, while others have no idea at all. So let’s start with basics. Anyone who advises a plan on its investments must follow ERISA’s five fiduciary rules:
- Ensure that the portfolio offers an appropriate number of diversified investment options
- Make sure that costs are reasonable
- Evaluate, select and manage investment options in a prudent manager
- Follow plan documents, unless they conflict with ERISA regulations
- Always act in the best interests of the plan and its participants
If any of these provisions present a challenge to you or your organization, start thinking about how you may need to adapt.
2. Eliminate conflicts of interest
If you receive a commission for selling investment products or services, you’re not acting solely in the plan’s best interests. While ERISA’s proposals provide a loophole that allows brokers and other commission-based advisors to act in a non-fiduciary capacity, the price of this evasion is that these brokers must explicitly acknowledge that these conflicts of interest prevent them from providing investment advice. This will not go over well with plan sponsors, many of whom consider investment advice and fiduciary assistance to be the most important considerations for selecting and sticking with plan providers. Brokers that want to stay in the business may need to establish separate RIA practices within their firms to accommodate these demands or risk losing business to fee-based RIAs who aren’t saddled with conflicts.
3. Get ahead of the ‘fee disclosure’ game
The days of ‘hidden fees’ are over. ERISA will soon require plan providers and investment companies to provide full disclosure of fees and expenses paid out of plan assets. Investment companies will have to provide detailed breakdowns of payments paid to plan administrators, including sub-TA fees, rebates and payouts from 12b-1 fees. Likewise, plan administrators will have to disclose any payments over $1,000 paid to affiliated recordkeepers, trustees, lawyers, accountants and other service providers.
ERISA is giving plan providers and investment companies until July to get their fee-disclosure act together. Smart plan providers will begin disclosing these costs much earlier, first to existing clients and then to prospects. Disclosure should come in user-friendly formats that educate, rather than confuse, plan sponsors and participants. Forward-thinking providers will even provide comparison of each category of fees to industry averages for plans of similar sizes and asset levels.
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