Don’t Be an “Accidental” Fiduciary

With regulatory changes coming, advisers need to reconsider their fiduciary status.

The Securities and Exchange Commission (SEC) is preparing to issue a uniform fiduciary standard, and the Department of Labor’s (DOL) second attempt at redefining the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) is expected sometime this year. During a webinar hosted by Matrix Financial Solutions, Pamela S. O’Rourke, senior vice president and senior counsel at Integrated Retirement, said the DOL proposal will expand the scope of activity that would lead to fiduciary status for brokers and advisers.   

She explained that an adviser can either be a 3(38) investment manager who has discretionary control over plan assets and relieves the named fiduciary of liability for investment decisions, or a 3(21) investment adviser who shares fiduciary responsibility with the named fiduciary. The pending regulations focus on the ERISA 3(21) fiduciary definition.  

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

According to O’Rourke, the primary path to ERISA 3(21) fiduciary adviser status is to render investment advice for a fee. Other ways are to exercise discretionary authority or control over management of plan or its assets, or to have discretionary authority or responsibility over administration of the plan. Under current law, a 3(21) adviser is subject to ERISA fiduciary standards if the adviser provides investment advice on a regular basis, there is a mutual agreement between the adviser and the named plan fiduciary that the advice serves as the primary basis for investment selection, and the advice is individualized.   

O’Rourke said the DOL is looking to eliminate the requirements that advice would be provided on a regular basis and that advice would be the primary basis for investment selection. “Even if you don’t intend to be fiduciary, you may inadvertently become a fiduciary due to functions you perform,” she warned.

“You don’t want to accidentally become a fiduciary,” O’Rourke added. “You want to make a conscious decision so you can adequately protect yourself, know what regulations guide you and what compensation is acceptable.” She explained that if an adviser’s advice could change his or her compensation, that is a conflict of interest. That could limit an adviser’s ability to take 12b-1 fees and commissions. A fee for service model, in which a fee is received for services regardless of outcomes, is acceptable. Advisers can also take a level compensation, which allows for 12b-1 fees, but the amount of 12b-1 fees does not depend on the investments selected. Also acceptable is receiving compensation if the advice is based on an approved computer model.  

If an adviser determines he or she is a fiduciary or wants to be, the adviser may want to be bonded and carry fiduciary insurance, O’Rourke suggested. She said it is also a good idea for an adviser to periodically audit his or her business model to be sure the adviser is maintaining the fiduciary status desired and in compliance with appropriate regulations.  

There is much an adviser can do for a plan sponsor without being a fiduciary, O’Rourke noted. Advisers can provide investment education, assistance with vendor searches, plan reports and analytics, fiduciary education for plan sponsors, investment selection and monitoring and benchmarking of service provider fees. An adviser may want to outsource fiduciary functions to compete with advisers who are fiduciaries.  

“Define and communicate your value proposition relative to fiduciary support,” O’Rourke said. “You don’t have to be a fiduciary adviser to provide support for plan sponsors’ fiduciary duties.”  

Earlier this year, Matrix Financial Solutions released a guide to help plan advisers review their business models (see “Matrix Financial Releases ERISA Practice Guide”).

Higher Education Plans Save More Than Corporate Counterparts

Participants of retirement plans with higher education institutions are saving more than their corporate counterparts, says a new report from Transamerica Retirement Solutions.

The report, “Retirement Plans for Institutions of Higher Education,” showed that higher education institutions outperform the corporate sector when it comes to faculty and staff deferral rates, and plan design practices that can generate successful retirement outcomes. Among those surveyed, the average deferral rate for faculty and staff was 13.4%.

An average of 41% of higher education institutions were found to offer automatic enrollment and over half (54%) applied a default contribution rate of 5% or more. The report also found that many such plans include features such as default contribution rates and automatic deferral increases, and that participants have access to more tools that help better prepare them for a secure retirement than their corporate counterparts.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“Higher education institutions have made significant changes and improvements to their retirement plans over the past five to 10 years,” said Danny Carr, vice president and national practice leader of Higher Education for Transamerica Retirement Solutions. “Through plan design features like automatic enrollment and automatic deferral increases, plan sponsors are able to positively drive better retirement savings outcomes for their faculty and staff.”

The report projects that higher education retirement savings plans will continue to evolve, and that by the end of this year, usage of automatic enrollment will increase to 57% and usage of automatic deferral increases will more than double to 17%.

The study was conducted during December 2012 and sampled 58 public and 32 private institutions, the majority of which are four-year colleges or universities (83%). Most of these institutions had fewer than 5,000 eligible employees. The sample is split almost evenly between those with a single provider (47) and those with multiple providers (43). Respondents have either sole decision-making (48%) or are members of a committee or board responsible for making retirement plan decisions. Of the 90 respondents, 38 partner with a retirement plan adviser or consultant.

A copy of the study can be requested by e-mail at marketinsights@transamerica.com.

 

«