By Karen W. Scheffler
The new Fiduciary Rule from the US Department of Labor (NYSEARCA:DOL) primarily affects financial advisors. But DC plan sponsors also face added responsibilities: some plan provider services may unexpectedly create a co-fiduciary status for plan sponsors that they didn't have before.
WHAT YOU DON'T KNOW CAN HURT YOU
The DOL's goal in releasing the Fiduciary Rule is to provide additional protection for defined contribution (DC) plan participants as they move toward retirement. Many plan sponsors like this idea. In fact, in our most recent survey of plan sponsors, nearly half of our 1,000 plan sponsor respondents said that the Fiduciary Rule was "definitely" necessary.
All good and well: the Fiduciary Rule certainly increases the fiduciary responsibilities of financial advisors and their accountability to retirement plan clients. But there's also a bit of a hitch for plan sponsors: it increases the burden on them to investigate deeply what their service providers are actually providing in the way of investment advice to participants -- and how they're getting paid to do that.
Plan fiduciaries have always had the duty to prudently select and monitor service providers and to ensure that fees are reasonable. Likewise, plan fiduciaries have always had to understand whether and how they were delegating responsibilities to service providers. Investment advice decisions for a company's retirement plan will frequently either be solely shouldered by plan sponsors or be completely delegated to an investment manager. But under the Fiduciary Rule, there are service situations wherein fiduciary investment advice is embedded within a provider's services, where it had not previously been. These could include, for example, such things as call-center scripts, asset allocation models and IRA rollover advice.
Plan sponsors, under the new rule, could wind up having co-fiduciary liability in these situations, and they could be liable for a breach of fiduciary responsibility by "another fiduciary" if the plan sponsor:
- Knowingly participates in or tries to conceal an act of omission by another fiduciary
- Has knowledge of another fiduciary's breach and doesn't make reasonable efforts to remedy the situation
- Enables another fiduciary to commit a breach because the plan sponsor has failed to comply with the "prudent man standard of care" that is a foundational principle of ERISA fiduciary responsibility
The first two situations would, generally, be unlikely. However, the third situation could, indeed, occur inadvertently -- enabling another fiduciary to commit a breach because a plan sponsor hadn't prudently attended to the full extent of his or her responsibilities.
CLEAR THE CLOUDS AROUND IRA ROLLOVER SERVICES
Take IRA rollover services, as an example. Prior to the Fiduciary Rule, plan sponsors often routinely included IRA rollover services as part of a bundled recordkeeping package without separately considering such service and the fees associated with it. That might mean simply checking a box on a recordkeeper's form to include rollover services to participants.
But when the Fiduciary Rule takes effect, that IRA rollover service may then include ERISA fiduciary investment advice. If that is the case, the service provider will be subject to ERISA's fiduciary duties and conflict-of-interest provisions.
Plan sponsors will need to ensure they know the full extent of those services, the service provider's role as a fiduciary, and any conflicts of interest the service provider may have in providing the services and receiving fees for the same. That's because even though it's not the plan sponsor disseminating the fiduciary and/or potentially conflicted advice, the plan sponsor now has a responsibility to know and understand these things in order to meet its own fiduciary responsibility to prudently select and monitor the service provider.
With a recordkeeper's IRA rollover services, plan sponsors may not have thoroughly understood the fee implications for participants:
For example, how many participants (and those recently retired) are using the rollover services? What are the individual fees involved, and can that service provider establish the reasonableness of those fees? Are those fees included as part of the overall recordkeeping fees or are they charged separately? Are the fees charged only to the participants that use the service, or is there a per-participant charge merely for having the service available? If the recordkeeper encourages participants to invest IRA rollover assets in proprietary products, what additional fees does the recordkeeper (or an affiliate) receive? How does that impact the reasonableness of the overall recordkeeping fees and/or rollover fees? How do those fees and services compare to other IRA services? Could the participant have remained in the plan and received lower fees for comparable investment products? If so, does the plan sponsor have a responsibility to make participants aware of this option?
Once the Fiduciary Rule takes effect, plan sponsors need to consider these and other questions in order to ensure they are meeting their fiduciary responsibilities. If participants wind up paying unreasonable fees for the rollover services associated with their company's retirement plan, ERISA co-fiduciary liability could draw plan fiduciaries into the line of fire alongside the service provider.
KNOW YOUR RESPONSIBILITIES, BUT KNOW YOUR SERVICE PROVIDERS' RESPONSIBILITIES, TOO
Our advice is for plan sponsors to reassess service provider relationships to understand which ones will be affected, and how, by the Fiduciary Rule. Similarly, reassess and understand the plan sponsor's duty of prudence and the responsibility to ensure the reasonableness of fees.
One critical issue: Before plan sponsors can fully comprehend what their heightened fiduciary responsibilities are under the Fiduciary Rule, they have to fully comprehend that they are, in fact, fiduciaries!
That may seem obvious, but we're seeing a concerning trend in our biennial plan sponsor surveys: among our respondents, fewer now actually acknowledge their fiduciary status than even two years ago. The percentage of plan sponsors who know they are, indeed, fiduciaries has dropped from 58% two years ago to only 44% today.
If you work on your company's retirement plan, your first step is to make sure all your plan fiduciaries know their status and get the necessary education and assistance to prudently fulfill their duties. The Fiduciary Rule provides good reasons to refresh fiduciary knowledge and skills.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.