In the life of a retirement plan, a year goes by very quickly. With the clock ticking down to less than a year until the new Department of Labor rules on fee disclosures go into effect, retirement plan advisers have geared up for the advent of the rules and are executing their preparation plans. Moreover, many see the rules as a golden opportunity.
At Moreton Retirement Partners, for example, the rules "were a key agenda item for all of us in our annual review meetings during the first quarter of this year," says Chad Larsen, the firm's president.
Moreton broke its implementation approach down into three phases, says Larsen:
1) Analyze and fully understand what the rules will require.
2) Hold internal discussions during annual review meetings to determine exactly what will change for each plan, and then look at the firm's 110 plans individually to determine how the rules will impact each one.
3) Have proactive discussions with the firm's 23 vendors to determine exactly where they are in their own preparation processes and confirm that they will meet the requirements on schedule.
The ultimate goal, says Larsen: Planning ahead so that nothing comes as a surprise to plan participants, fiduciaries or governing committees.
Moreton's most recent activity was a client event in May. "We brought in all of our clients, and went through all of the new regulations and walked them through it all. We had great participation - everybody wants to know what their responsibilities are and that we're on top of it," Larsen notes.
The first two phases of the plan are complete, and they are now engaged in the third phase. So far, Larsen says, the responses from vendors have varied. "For the most part the national vendors are well on their way," he reports, although some are further along than others.
Although Larsen has received sample statements from just a handful of vendors at this point, "they've all said, 'Yes, we're working on our systems to change our quarterly statements to add everything that needs to be there,'" says Larsen. "Our biggest concern is not with the large firms like Prudential, Fidelity, or Principal; it's with some of the smaller firms that don't have either the technology budgets or the staff to make changes."
Most advisers are waiting for their recordkeepers to finalize their programming. Right now most recordkeepers are almost ready to release the first drafts of their required notices, says Stephen Popper, managing director at SageView Advisory Group. Some are ahead of the curve - Principal, for one, has already provided their first draft to their relationship managers, Popper reports. "All of them will have it when we need it, but there may be scrambling involved for some," he says.
Tim Minard, senior vice president of Principal's Retirement Distribution division, believes most advisers are in good shape. "From where we sit today, most advisers have a pretty good understanding of what needs to be produced, and most have a fairly high degree of confidence in the value proposition they've set forth to their clients," he reports.
Providers face big changes
Principal is following its own implementation plan, according to Minard, starting with looking at all of the plans it provides. "If the fees are simple expense ratio fees, that's different than a sponsor having administrative fees added to the investment fees, so we've done an allocation of the plans to outline exactly what are those fee disclosures, and how they are different from anything they've seen in the past," says Minard. Principal staff are now in the process of reviewing all that with clients.
In October, Minard is planning to do a regulatory update with all of Principal's clients in preparation for year end.
"By then we plan on having the final disclosures and the final outlines and sample statements from all of our vendors," he says. "We want to feel comfortable that everything is in place by year end - the annual notice for sure. The first quarterly statement to participants won't come into play until March 31, 2012, but honestly, we want to make sure that everything is in place prior to year end."
Of course, initial implementation in 2012 won't be the end of the compliance responsibility, Minard notes. There will be the annual notice, which may change each year depending on whether there have been changes in a plan's investments or fee structure.
"This is going to change a lot of the way we've done business in the past," Minard says. "I think some of those changes are very positive. But my concern is that we're going to inundate participants with additional information and paperwork that may not be fully understood or even looked at. That's the challenge."
The cost of compliance may also create unintended consequences, Minard notes: "The reality is that this does not come without a cost - when you add up the amount of time and effort and changes to the technology, there's a cost associated with that."
As a result, he believes, the fee disclosure rules could end up driving up participant fees.
From commissions to fees
Some advisers are ahead of the curve on fee disclosure. At SageView, Popper says they saw the issue coming about five years ago. At the time, about 25% of their business was registered investment adviser work, where SageView was a stated fiduciary and gave investment advice. The firm mainly serves the mid-market and is dual-registered - an RIA that's broker-dealer supervised. "We just decided that's a better way to operate - it's transparent, it's easy to understand, clients know what they're paying for," he says.
More importantly though, making the switch to fee-based got them out of the commission business, where payment is based on assets and flow. "The truth of the matter is that the work we're doing is not predominantly asset based, it's risk-based," Popper says. "We wanted to be thought of as the retirement plan experts, not just a broker."
When talking to clients about disclosure, Popper favors a simple approach. "You can eliminate the need to talk about this as a retirement plan issue if you just look it as a non-financial-services product, and ask some simple questions: How much are you paying; what value are you getting in return; is that value worth what you're paying; and is the cost reasonable?"
In Popper's view, the fee disclosure rules make advisers responsible for the information they're sharing with clients. "If you're touching a retirement plan, you're a fiduciary - end of story. You have influence over someone else's decision or directly impact someone else's money. On its face that's a good functional definition of a fiduciary," he says. "So you have to face the truth that that's what you're doing, versus what people have been hiding behind, which is, 'I'm not really a fiduciary; I'm just a broker' or 'I'm just making a transaction.' Retirement plans are not a transactional business."
Transparency is the key
When Minard discussed the rules with Principal's adviser partners, he says, many advisers noted the amount of time they've spent with their clients to make sure they understand exactly what's going to change when the rules take effect next year. Many of them argue that they've already dealt with a level of transparency with their clients "such that they feel confident that although it may be presented in a new way, this really won't be new information to them," he says.
"My concern with that is that it's one thing to think you're fully transparent; it's another thing that people on the other end of that conversation take it to the same level of transparency you intended - meaning 'Before fee disclosure I thought I was fee-transparent but the plan sponsor just glossed over this stuff,'" Minard says. "Now, when it's thrown out in such a direct fashion, it's really going to put that transparency issue to the test. This is why advisers have been spending a lot of time telling their clients, 'This is what you're going to see.' I just don't know that the attention on that topic was such that a plan sponsor really rolled up his sleeves and understood it."
Minard believes that the effort that plan sponsors put forth around transparency is going to determine how they react once the fee disclosure rules take effect. "If they've paid attention to it, and had good conversations with their advisers about it, I think they'll be all set," he says.
At Moreton, "We're thrilled at the new regulation - especially the [plan sponsor] element," says Larsen. "For a group like ours that has written service agreements in place outlining exactly what our fees and services are, we feel that this is a very positive thing. We're still surprised at how many plan sponsors are working with folks who don't have anything like that in place. Not only that, they have no idea what their broker is making and what they've committed to do in return for those fees."
To advisers who are constantly looking for a key differentiator, the fee disclosure rules present a golden opportunity to separate themselves from the competition. "To me, this is probably the most significant opportunity, in many ways, since the Pension Protection Act of 2006. This is a very exciting time," says Glen Young, director of retirement planning at Ashton & Young, Inc. in Troy, Mich. "Once we get into the first quarter of 2012, for a broker who embraces it and is already upfront about disclosing what you earn, this is a great opportunity to separate yourself."
Principal Financial's Minard agrees. "I think committed advisers who focus on the retirement plan space, as opposed to somebody who writes a plan or two, are viewing this as a tremendous opportunity to really show how much better off a plan sponsor is in working with someone like them - someone who understands all this, who is ahead of the curve and really specializes as opposed to somebody who dabbles," Minard says.
This doesn't mean that generalist advisers aren't going to have a place in the market, he adds, but rather how many of them see the opportunity. "There is a small segment that says, 'If I don't respond to this and do it correctly, if I don't make sure that this transparency issue is fully understood at the plan sponsor level, I could be at risk.' So they're taking it very seriously," Minard says.
While fee disclosure is probably the most talked-about requirement facing advisers, Young sees an opportunity in the description of services advisers must provide.
The opportunity arises because a consultant or broker with some flexibility as far as being a fiduciary goes can assume that responsibility if he or she chooses to, he explains. (Not every plan sponsor will want that, because if the adviser becomes a fiduciary, the plan sponsor does too.)
For an adviser who serves as a fiduciary, the issue then becomes whether the consultant will be a fiduciary at the plan level, the participant level, or both. "From what I'm seeing so far, the industry is responding quickly and efficiently to provide solutions where if I'm a broker and my broker-dealer is probably not going to allow me to be a fiduciary, I'm going to have some new products and services from existing vendors that provide the opportunity for me to continue to make a living in a non-fiduciary role, by shifting the fiduciary work at the plan sponsor level back to the vendor," Young says.
Ashton & Young is now looking at the viability of participant-level responsibility and providing investment advice at that level. "There's a big need among participants right now for planning and advice," says Young. It's even possible that some plan sponsors will be seeking an adviser who can help address that need. "If you can do that in a fiduciary capacity," he says, "you will separate yourself from other advisers."
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