Data & Research March 14, 2014

IRI Criticizes DOL’s Fiduciary Redefinition Efforts

The overwhelming majority of clients feel their advisers are serving their best interests and meeting fiduciary responsibilities, according to research from the Insured Retirement Institute (IRI).
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A strongly positive perception of the work of retirement plan advisers is just one finding among a list of survey outcomes covered in a new IRI fact sheet, which outlines the importance of financial advice and the need to protect workers’ access to retirement planning services and information. The IRI releases the fact sheet at a time when the retirement planning industry is awaiting a rule proposal from the Department of Labor (DOL) that could change or expand the definition of “fiduciary,” potentially restricting access to certain types of inexpensive advice and account rollover services.

In basic terms, the DOL is considering whether to expand the definition of fiduciary to cover more types of service providers and advice relationships (see “New Restrictions Loom for IRA Rollovers”). The DOL, alongside other federal regulatory bodies such as the Securities and Exchange Commission (SEC), has said it is concerned that converging business models and the widening use of technology may be causing conflicts of interest not currently addressed by the Employee Retirement Income Security Act (ERISA) and other regulations.

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The IRI opposes this interpretation in its fact sheet and elsewhere, calling the redefinition a “rule in search of a problem.” On the IRI’s assessment, expanding the definition of fiduciary will likely have the unintended consequence of depriving lower- and middle-income Americans of access to affordable retirement planning services and advice. This could occur in cases where providers of certain low-cost advice and investment solutions—often provided digitally or through remote call centers—will decide it’s too risky to take on fiduciary status for all clients, especially those with smaller account balances and less profit to offer.

It’s a similar argument to the one put forward recently by the Congressional Hispanic Caucus in an open letter to Secretary of Labor Thomas Perez (see “Congressional Hispanic Caucus Weighs in on Fiduciary Rule”), though the caucus appears at least partially open to a redefinition, so long as it truly cuts down on conflicts of interest. Other Congressional groups, such as the New Democrat Coalition, have expressed similar views.

“Time and time again, our studies have shown the benefits of planning for retirement with the help of a financial professional,” says Cathy Weatherford, IRI president and CEO. “Those working with a financial adviser are more likely to have retirement savings, more likely to have determined a savings goal, and overall are more confident with their financial preparations for retirement.”

Weatherford says other studies, coming from inside and outside the IRI, have concluded that working with an adviser leads to better savings behaviors and greater retirement assets.

“Given these findings, it’s imperative that we protect the client-adviser relationship and help ensure that all Americans have the opportunity to attain a financially secure and dignified retirement,” she says.

The new research results contained in the IRI fact sheet are from a January survey of Americans, age 51 to 67, that shows most investors are satisfied with their relationship with their adviser. Key findings from the study and underlying survey show the following:

  • Eight in 10 respondents said they are better prepared for retirement because of their financial planner;
  • Three in four said they are likely to recommend their adviser to a friend or relative;
  • Eighty percent said they are aware of potential conflicts of interest their advice provider may face;
  • The overwhelming majority of clients agreed that their adviser acts in their best interest; and
  • Less than 5% of investors share the views expressed by DOL to justify its proposed tightening of fiduciary rules, with less than 1% strongly agreeing with the DOL’s perspective that merging business models and technology developments have potentially increased conflicts of interest for certain types of advisers and financial services providers.

In interpreting these figures, the IRI suggests that working with a professional adviser clearly increases the probability that an individual will save. Furthermore, savings rates increase with the length of time a client works with a financial adviser. As a result, professional advice has a positive and significant impact on financial assets, the IRI says, even after accounting for other variables.

Compared to those who go it alone at the same age and wage level, investors working with a financial advisor for four to six years will have about 58% more assets at the end of that time period, says the IRI. Those with an advice relationship lasting seven to 14 years typically see about 99% more in accumulated assets. A 15-year relationship yields approximately 173% in additional assets over those saving and investing without an adviser.

The IRI says professional advice also has a positive influence on other retirement planning behaviors, including increased usage of tax-advantaged savings vehicles, improved asset allocation, greater portfolio diversification and less speculative investing.

The redefinition proposal addressed by the IRI was originally offered in 2010 but was withdrawn the following year in response to industry pushback, particularly concerning IRA investors, the majority of whom have small accounts under $25,000.

According to the IRI’s analysis, most IRA investors today have full-service brokerage accounts. In fact, more than 30 million households—27 million of which are from the lowest wealth segment—hold assets solely in these normally commission-based accounts.

Under the originally proposed rule, advice provided through these full-service brokerage accounts could have constituted a conflict of interest and triggered prohibited transactions if the broker received additional profits from making the recommendation. As a result, these investors would potentially be forced to leave their current accounts and move to either a fee-based adviser account, which are only available to investors with enough assets to meet the applicable minimum balance thresholds applied by most providers, or low-support brokerage accounts. Neither result would be desirable, the IRI says.

In a recent conference call with reporters on the separate topic of fee disclosure within defined contribution plans, top DOL officials declined to provide an update on what the final fiduciary redefinition may look like. However, Phyllis Borzi, Assistant Secretary of Labor for Employee Benefits Security, confirmed the DOL plans to re-release the final proposal in August of this year.

More information is also available at www.irionline.org.

Compliance March 14, 2014

Streamlined Fee Data May Have a Hitch

The DOL’s fee data proposal is fairly straightforward, but could trigger a prohibited transaction, says Bruce Ashton, a partner in Drinker Biddle & Reath’s Los Angeles office.
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When they are adopted, these guide requirements should make it easier for plan sponsors to find the information they need to assess whether a service arrangement and the compensation are reasonable, Ashton says.

However, covered service providers will have to furnish a separate document that details where the plan sponsor can find required information—“and plan sponsors must know that they are supposed to receive this document,” Ashton tells PLANADVISER.

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Ashton stresses that this is crucial information, because if plan sponsors don’t receive the guide along with the required disclosures, they need to ask for it. And if they still don’t get it, that failure has to be reported to the DOL, and the service agreement must be terminated.

Failure to do this, Ashton says, means the plan sponsor fiduciaries have engaged in a prohibited transaction—and could thus be personally liable to restore funds to the plan.

A fiduciary’s need to know what they are required to get from the service provider, and to ask for it if they don’t get it, is not new, Ashton says. But the requirement that service providers give another item of disclosure is new. And fiduciaries must know about this so that they can add it to their checklist of items to look for and ask for, if it is not received, to avoid engaging in a prohibited transaction.

Ashton emphasizes that service providers need to be aware that this amendment to the regulation is going to be finalized. He recommends they begin the process of designing their guide and working with their systems people on the mechanics of populating it and delivering it to prospective clients—possibly the most important step service providers can take.

Registered investment advisers (RIAs) and third-party administrators (TPAs) are unlikely to feel much of an impact, Ashton feels, since they tend to use relatively straightforward service contracts to make disclosures. Recordkeepers and broker/dealers, on the other hand, tend to use multiple documents or very lengthy ones for their disclosures, at least in Ashton’s experience.

 

 

Lengthy Disclosures?

“I don’t mean to imply that there is anything wrong with doing this,” he says. “It may simply be necessary because the arrangement between the plan and service provider is complex.” But if they make these lengthy disclosures after the regulation becomes final, Ashton says they will also have to provide a relatively short road map that points out where the disclosures can be found.

Since the DOL has asked for comments on varied issues, service providers should decide if they want to comment. Issues include the page number limitation for when they need to provide the guide, how to provide the specific location: should it be by page number, or section number, or a link on website, if the information is provided electronically? Should there be a link back?

This new requirement will apply only prospectively, says Ashton. “This is not stated explicitly in the proposal, but there is an indication that the requirement will only apply on an effective date in the future, as yet unknown,” he says. There is no indication that the DOL intends for service providers to go back to existing clients to provide the guide. “Service providers may want to comment on this just to get an affirmative response from the DOL that this is the intent.”

A requirement to provide a notice of changes in the disclosures previously made to plans already exists, Ashton notes. “It appears that the amendment to the regulation will require that the service provider also send out an annual notice of any changes to the guide if there have been changes to the disclosures,” he says.

Ashton says that service providers may want to comment on this requirement as well to see if there is a way to avoid duplication of effort on when changed information needs to be sent out.)

Showing Information

The proposal doesn’t seem to have anything especially tricky, Ashton says. “The DOL has gone to great lengths to make it clear that service providers can make the disclosures in any format they want to so long as it gives the plan fiduciaries a clear indication of where to find the information,” he says. “However, if the RIA incorporates its Form ADV by reference in its disclosures, it will probably need to provide the guide.”

The need to do this could trip up some RIAs, he says, who may think they don’t have to do this. Some TPAs that may receive indirect compensation may also be impacted if they use a brochure or other disclosures from a plan provider to disclose this compensation. Ashton points out that they may not realize they will probably be covered by this guide requirement.

Ashton says that some providers could be lulled into thinking they have complied with the guide requirement, because of the reference to an “other specific locator, such as a section.”

“Suppose they refer, in their guide, to a section of a document that is 20 pages long?” Ashton theorizes. “My suspicion is that this won’t be considered by the DOL to comply with the requirement of the reg. The point is that providers will need to be aware of the spirit of the reg, and not just the words.”

Participants will most likely remain unaffected by the requirement, Ashton says. “To the extent the requirement helps their employers to analyze their service providers and potentially negotiate better deals, it may help participants in the long run. But I don’t see any short-term impact, either good or bad,” he says.

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