What employers should do to ensure fiduciary rule compliance
After a number of delays and a series of twists and turns, the rule governing who is and isn’t a fiduciary when it comes to retirement advice went into effect Friday. Though retirement plan sponsors have been preparing for the rule for the last several months, preparation doesn’t stop with the implementation date.
There are a number of things plan sponsors should do to ensure they are in compliance with the rule going forward, including knowing whether their advisers are fiduciaries or have conflicts of interest; reviewing plan communications to make sure they comply with the fiduciary rule; and monitoring how plan providers handle IRA rollovers to make sure they aren’t recommending specific IRAs or investments to plan participants who want to rollover their workplace plan.
“Plan sponsors, in their capacity as fiduciaries, should know whether or not their advisers are fiduciaries and whether they have any conflicts of interest,” says Fred Reish, a partner in Drinker Biddle & Reath LLP’s Employee Benefits and Executive Compensation Practice Group. “If I were on a plan committee, I would ask the adviser for a written answer to those two questions.”
At this point in the process, retirement plans should know if their adviser is working in their best interest or is a broker-dealer with potential conflicted advice offerings. If they don’t know that, they need to call their service providers to find out.
Plan sponsors should also review the letters they receive from their plan advisers and take note of whether some services they were receiving in the past won’t be available because their service provider can’t provide them without having fiduciary status.
Small plan sponsors who haven’t heard from their recordkeepers should contact them to see what they are doing to comply with the fiduciary rule and to identify any disconnects between what the plan sponsor wants and what the recordkeeper is providing, Safra says. Most large plan sponsors have been hearing about this from their service providers for some time.
Many small plan sponsors rely on broker-dealers to give them advice on their plans. In the past, broker-dealers only had to follow a suitability standard of care rather than a fiduciary standard when it came to investment advice.
“The smaller a plan is, the more likely [it is] that you’re going to have conflicted advice under the new rule,” explains Douglas Dahl, counsel at Bass, Berry & Sims, a law firm in Nashville.
Dahl recommends that plans under $50 million in assets attempt to follow the model set out by larger plans. That means knowing who takes fiduciary responsibility for the retirement plan at their company. That could be the owner of the company or a specific person or committee. It also could mean outsourcing all or part of that responsibility to an outside provider. The key is knowing who their company’s investment fiduciaries are and making sure they are complying with the responsibilities they have toward the retirement plan and its participants, he says.
Review all fiduciary relationships
It is important to take a look at every relationship a plan sponsor has with investment advisers or investment managers and to receive assurances from those providers that they accept full investment fiduciary responsibility for the retirement plan. Some may indicate that they are only a point-in-time investment fiduciary, meaning they help a plan select investments but won’t monitor those investments into the future, Dahl says.
Larger plans have already addressed these issues. Many have established investment committees that follow an investment policy statement when it comes to monitoring and maintaining investments in a plan. Dahl recommends that all companies consider having an investment committee to document and monitor what investments are being selected or deselected from the plan on an ongoing basis.
It’s also important to note that even if a company delegates fiduciary responsibility for its retirement plan to a third party, the company still is required to monitor that fiduciary to make sure everything is being done in the best interest of the plan and its participants, he says.
“I do feel like, in light of the DOL fiduciary rule and in light of big litigation, there is a magnifying glass on ERISA fiduciaries,” Dahl says.
The fiduciary rule also applies to those who give advice in the IRA space. That can be problematic for plan sponsors when it comes to employees rolling over their 401(k) account balances to an individual retirement account.
Plan sponsors have a duty to know if their provider’s call center is encouraging the participants to roll over to IRAs with the provider. If they are, “the fiduciaries need to understand how those rollovers are being encouraged and whether the employees are being treated properly; for example, being put into reasonably priced and good quality investments,” Reish says. “There is a fiduciary duty to evaluate and monitor a plan’s service providers, and that includes the call center of the recordkeeper.”
It also is the plan sponsor’s duty to monitor the investment education participants are receiving from the plan provider. Plan sponsors have a fiduciary duty to monitor that education to determine if it is unbiased and appropriate, Reish explains. For example, a provider can’t use investment education to inappropriately encourage participants to invest in the provider’s proprietary products.
Where do we go from here?
Jon Stein, CEO of Betterment for Business, says he’s very happy the fiduciary rule is being implemented, but he’s concerned that the parts of the fiduciary rule going into effect this week don’t yet include the legal enforcement mechanisms designed to make sure companies who provide retirement advice comply with the law.
The biggest enforcement mechanism in the rule is called the best interest contract exemption, or BICE. It won’t be enforced until Jan. 1, 2018. The BICE would allow employers to continue working with a retirement plan broker who collects commissions from firms that offer retirement products as long as the broker meets certain conditions, such as agreeing to act in a fiduciary capacity and disclosing the different types of compensation and fees it collects. Brokers must also state that they won’t make any misleading claims about the investments they recommend.
“Without that accountability, improved standards for fiduciary advice may not mean much for actual investors,” he says.
He adds that if the Department of Labor chooses not to fully implement the rule and all of its exemptions in January, “there’s a chance that the already frequently confused distinction of being a fiduciary becomes even more misconstrued over time. Americans deserve a crystal distinction between advisers who follow a fiduciary standard and those who do not.”