Compliance March 21, 2024

Managing Fiduciary Conflicts in the Age of Convergence

ERISA expert David Kaleda discusses what the DOL’s proposed Retirement Security Rule may mean for retirement and wealth management firms.
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In recent years, retirement plan advisers for Employee Retirement Security Act plans and advisers for wealth management clients have joined forces within the same firm. 

This convergence occurs by reason of two business lines within the same organization agreeing to work together, by reason of a merger or other business transaction designed to bring these two advisory practices together, or some other reason.  Among the many challenges involved with integrating these two practices is complying with the fiduciary and prohibited transactions of ERISA and section 4975 of the Internal Revenue Code when providing advisory services to clients. 

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David C. Kaleda

This will be even more so the case once the Department of Labor issues its final Advice Regulation later this year, particularly with regard to recommending rollovers or other types of distributions from a retirement plan.

A key advantage of combining the retirement plan advisory business and the wealth management business is the ability to provide full service financial services to the client.  For example, a wealthy small business owner can use a single firm to provide advice on how to establish and operate a retirement plan covering the owner and her employees, how participants in the plan should invest their assets in the retirement plan, and how the business owner should plan for her financial future outside of the retirement plan. 

In many cases, an adviser will find itself in a position where it must make a recommendation to the client business owner to take a full or partial distribution from the plan and rollover the proceeds to an IRA.  Or the adviser may recommend the client take a distribution from the plan or an IRA in order to purchase life insurance or something similar.   Oftentimes, the adviser will have a conflict of interest when she makes that recommendation, e.g., the amount of compensation the adviser or the firm receives changes.

Rollover Regulation

The pending advice regulation, under review by the White House Office of Management and Budget, is squarely aimed at the above-described rollover and distribution recommendations, as well as others. Under current law, the DOL says either a recommendation to take a distribution from a plan and roll it over to an IRA or a recommendation to transfer money from one IRA to another so the adviser can provide ongoing advice or management is the first step in an ongoing relationship that’s investment advice under the DOL’s 1975 regulation.  

However, the Advice Regulation will result in a substantial expansion of the situations in which the adviser provides investment advice.  Many more recommendations will be “investment advice” for purposes of ERISA or the Code.  For example, a single recommendation to take a plan distribution and use the assets to purchase term, whole, or universal life insurance, a product which is not otherwise subject to the jurisdiction of the DOL, would be investment advice. 

The fact that an advisory firm and its advisers may be fiduciaries in a broader set of circumstances may not be off-putting to some.  Indeed, they may already act as fiduciaries under the Investment Advisers Act.  However, the challenge for many firms will be adopting policies and procedures to address prohibited transactions, i.e., conflicts of interest, under ERISA and the Code.  The DOL will require most advisers to comply with Prohibited Transaction Exemption 2020-02 (PTE 2020-02), several modifications to which will be effective at the time DOL makes the Advice Regulation effective. 

Therefore, unlike under the Advisers Act, firms and their advisers must comply with substantial and specific conditions under PTE 2020-02 including an Impartial Conduct Standard, disclosures, policies and procedures, a retroactive compliance review, and specific requirements related to correcting violations of the exemption’s conditions.  These conditions likely go well beyond what a firm and its advisers do to comply with the Investment Advisers Act.

Future State

In conclusion, we should expect to see continued convergence of the retirement and wealth management industries.  We likely will not see a decline in this trend due to the actions of the DOL, or any other regulator for that matter.  However, some firms today and even more in the near future will have to spend a great deal of time and money revamping their compliance policies and procedures to assure compliance with ERISA and the Code, particularly PTE 2020-02. 

Such firms should also expect that over time the DOL will begin using its enforcement authority to investigate firms and their advisers to confirm that they properly identify the instances in which they act as fiduciaries for purposes of ERISA and the Code and that they are in full compliance with PTE 2020-02.

David C. Kaleda, principal, Groom Law Group, Chartered.

Practice Management March 1, 2024

Manage My Wealth, Please

Plan advisers note increased demand from participants for individual wealth management, noting that they can often do so at lower fees or more creative fee models.
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Art by Anja Susanj

In today’s marketplace, it’s more the rule than the exception that a retirement plan adviser will have an individual wealth management division they’re working alongside with, or at least adjacent to in a parent firm.

A 2023 survey by the March McLennan Agency found that nearly 80% of firms now offer a hybrid model that offers both wealth and retirement services. The trend reflects consolidation within the industry as advisers looking to provide additional services that will drive revenue and continued demand for such services from participants.

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“There’s a shift taking place with the role of the adviser, from being really focused on investment performance to needing to be a financial guru and educator on a broader range of financial topics,” says Olivia Eisinger, GM of advisory at Apex Fintech Solutions. “When consumers think about their finances, it’s not retirement over here, and wealth over there, and then insurance there and debt. It’s all one financial life.”

Eighty percent of plan participants are interested in access to a professional, whom they can call with questions to make investment and savings decisions for them, according to a 2023 online survey done by Voya Investment Management. The same survey found that 84% of employees want personalized advice and guidance that constructs investment portfolios based on their risk tolerance levels.

“People, unfortunately, are not generally comfortable or educated to manage their own investment savings for retirement,” says Todd Lacey, chief revenue officer with Stadion Money Management, which is owned by Smart Pension Ltd. In Watkinsville, Georgia. “That’s been the trend for a long time.”

Building On Existing Relationships

The idea of a plan advisory syncing participants—even members of the C-suite—up with individual advisement is still relatively new to the industry, but it’s gaining acceptance quickly. Proponents of the convergence of retirement and wealth management say it’s simple: workplace savers increasingly want wealth management, and the trusted organizations already advising on their employer’s plan are ideally situated to provide the service.  

“We do see that participants that use a financial adviser want some sort of previous relationship or connection to that adviser before they make that transition,” says Elizabeth Chiffer, a retirement analyst at Cerulli Associates in Boston.

Often, the relationship begins within the plan, with financial wellness services for participants. As participants grow older and start to have more complicated lives, they may also begin using in-plan managed account services, Chiffer says. That work may allow advisers to collect other participant data, such as out-of-plan assets, and use that information to start a conversation about wealth management.

Another opportunity for some advisers is capturing individual retirement account rollovers from participants who are leaving the plan entirely.

“Capturing the rollover assets is certainly a point of competition, and a point of interest for the adviser and for the recordkeeper,” Chiffer says.

Opportunity In Life Milestones

While the decade before retirement is an obvious time when many participants start looking for more personalized wealth management, advisers say that other important life milestones, such as receiving an inheritance, expanding a family, or getting a divorce also often motivate such interest. Jason Gerber, managing partner at Prime Capital Investment Advisors in Little Rock, Arkansas, says that in addition to life milestones, market volatility also often drives more plan participants to inquire about wealth management services. He notes that this happened when the market tanked and the economy faced uncertainty in 2020.

“Some of these different market cycles demonstrate the need that people have for someone to help them make decisions about their money,” he says.

Those decisions often lead to broader conversations in which advisers can talk to a participant about when or if it makes sense to move assets out of a plan.

“The biggest thing that people need is often financial planning,” says Jania Stout, senior vice president of the Retirement + Wealth division at One Digital in the Washington, D.C., area. “Then, after they get information, they can choose whether to keep their assets in the plan or to roll them into a wealth solution. It really depends on their wealth tolerance and stress level around doing it on their own.”

Keeping Costs Low

Stout says that such services, typically billed as a percentage of assets under management, generally cost more than what participants are paying for in-plan services, but less than what they might pay to work with a pure wealth management shop.

“We are discounted from what you’d get out in the market,” she says. “The reason for that is that we don’t have to factor in the cost of finding the opportunity.”

Gerber says his firm aims to keep wealth fees between 0.8% to 1.2% of AUM.

“We try to be commensurate with what they’re paying in the plan, but that’s not always the case, given additional needs and planning, but it’s always spelled out very clearly,” he says. “We make sure that participants understand what they’re paying.”

Eisinger says that the shifting role of advisers may also mean it’s time to change how they think about fees and pricing for their services. For clients with low account balances, for example, or who want to keep their assets in plan, it might make sense to consider a non-AUM fee arrangement, such as a flat rate for certain services, or a subscription fee.

“When RIAs get paid by a percentage of AUM, the narrative is that they’re motivated to help clients grow their wealth,” she says. “But that story doesn’t articulate that the adviser is there when a life event takes place or a client needs to think through the implications of another financial decision.”

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