In case you have not noticed, there has been a flurry of regulatory activity surrounding defined contribution plans and DC advisers in particular. While there will be greater disclosure requirements, more advisers will be considered a fiduciary and it will be harder for advisers to represent a DC plan and the participants at the same time. Experienced DC advisers can use this activity to further distinguish themselves and grow their businesses.
First, let's briefly review the pertinent pending and past regulations primarily coming out of the Labor Department.
Disclosure
* Retrospective plan level disclosure: Fees charged by service providers, including advisers, for plans with 100 or more employees went into effect with 2009 Form 5500 filings
* Prospective plan level disclosure: Fees to be charged by service providers, including advisers, must be disclosed in absolute dollar amounts with a statement of services, which requires the advisers to state whether they are acting as a fiduciary to the plan - 408(b)(2), effective 1/1/12
* Retrospective participant level disclosure: Disclosure to participants of fees charged by service providers including advisers - 404(a)(5)
Fiduciary status of advisers
Under proposed regs, an adviser will be considered to be a fiduciary if they provide advice for a fee - eliminating current additional requirements that the advice was:
* given on a regular basis
* provided through a mutual agreement or understanding
* the primary basis for the investment decision
Under proposed regulations, advisers who work as plan fiduciaries will not be allowed to represent participants in the plan absent a marketing exemption, which includes onerous language.
Just desserts
These regulations are a backlash against an industry that has tended to obfuscate fees through indirect and sometimes hidden arrangements that made it difficult if not impossible for sponsors and especially participants to understand exactly what they are paying.
Additionally, in order for advisers to effectively help improve participant outcomes while limiting liability and work for the plan sponsor, they needed to be functional fiduciaries even if their broker dealer would not allow them to make that acknowledgement. Though the DOL might be going too far, it is a reaction to the industry not going far enough - especially those providers and advisers who used to (still?) tell their clients that their DC plan is free.
To the cynics who love to complain about government intervention, railing that it just makes it harder and more costly to do business, threatening to leave the industry, our advice is to get over yourselves and start taking advantage of the opportunities of the 385,000 plans with between $250,000 and $100 million in plan assets represented by blind squirrel DC advisers that do not even know what's happening and the 115,000 plans without an adviser.
Value added
Advisers should be eager to explain to plan sponsors the value they are providing for the fees charged in terms of alpha or improved income replacement ratios for participants and reduced liability, costs and work for the plan sponsor. While there will be more paperwork and calls from the 70 million participants who will be waking up from the illusion that their DC plan is free, imagine how ill prepared the blind squirrels will be.
When two campers are woken by a grizzly outside their tent, one of them puts on his shoes to get away. The other camper says, "You can't outrun a grizzly." To which the first camper replies, "I only have to outrun you." Welcome to the new world of participant-directed DC plans - run with it!
Barstein is the founder and executive director of The Retirement Advisor University at the UCLA School of Management Executive Education. Reach him at
