Compliance April 7, 2020

A Brave New Fiduciary World

The response of advisers to the coronavirus pandemic can provide a concrete illustration of how fiduciaries now function.
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Over 46 years ago, the Employee Retirement Income Security Act (ERISA) was passed overwhelmingly in the House of Representatives, then in the Senate, to empower American workers and help them achieve retirement security.

Fast-forward to May 23, 2019, when the House overwhelmingly passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, now in effect. Besides that, Congress is still passing pension laws by wide margins, with bipartisan support. For all of this, results are suboptimal in terms of retirement readiness.

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These laws are intended to protect workers and help millions achieve financial independence. The legislative alignment was there in 1974 and is still here today, but statically interpreted, laws alone cannot be the only contributors in place to help American workers. To understand what more is needed, let’s frame the last 40 years of advisory retirement plan consulting.

The First Days of Fiduciary

After ERISA was passed, the first 401(k) plan came soon after, in 1980. Thus began the first phase of plan sponsors and advisers serving as fiduciaries—“Fiduciary 1.0.” Investment companies offered products known as “balance forward” at that time; these had very little transparency or quarterly or annual reporting and had a limited user experience.

The Fiduciary 1.0 environment persisted until the early 2000s and saw the rise of the accredited investment fiduciary and other designations; then began the Fiduciary 2.0 period. Formalized investment monitoring increasingly was utilized for plan investments; benchmarking of plan fees and formal fiduciary agreements—e.g., 3(21), 3(38) and, to a lesser extent, 3(16)—became increasingly prevalent. Many retirement plan advisers elevated their services from pitching product to offering formal investment advice based on sound fiduciary principles.

Plan sponsors were in dire need of this extra assistance, and the Fiduciary 2.0 period has been tagged as “fees, funds and fiduciary” for the increased awareness of the importance of, and diligence done regarding, such matters. These advances in plan governance are notable and necessary, but alone do not solve for the elephant in the room. Still to this day, it’s unlikely that a significant percentage of Americans will securely reach financial independence at a reasonable age via defined contribution plans. Middle-class income is not keeping up with the costs of health care, housing, cars and education. Retirement savings for the middle class is slipping down the priority ladder.  

A New Fiduciary Understanding

So here we are in 2020, after an 11-year bull stock market, now ended due to the pandemic. After all of the advances in legislation and plan design, Americans are still off track to reach financial independence.

This seems like the perfect time to revisit ERISA and the processes it established for retirement plans. Lawsuits are being filed routinely today that allege mismanagement of plan assets. Would a bear market or long stock-market correction invite even more suing of plan sponsors and more financial instability for plan participants?

Procedural and substantive due diligence rule the day. Engaged advisers are moving beyond the Fiduciary 2.0 deliverables of funds and fees to demonstrate, in conjunction with plan sponsors, clear process quantification, though flexibility will be required in that process.

While, as a legal matter, ERISA fiduciaries will continue to be measured by their processes, rather than their plan’s results, advisers who can produce measurable results and quantify their value in terms of participant outcomes and process are the leaders who will prosper in the Fiduciary 3.0 world. It will build upon Fiduciary 2.0 but with an increased emphasis upon retirement readiness, cybersecurity, wellness and plan participant engagement and education.

The response of advisers to the coronavirus pandemic can provide a concrete illustration of how fiduciaries now function. It also indicates the real value of using an adviser, which tends to be overlooked in a lengthy bull market. Providing participants with information about the operation of markets and focusing participants’ attention on the long-term time frame most have to save will decrease the likelihood that they will make emotional decisions that will hurt their retirement savings.

 Advisers can also counsel plan sponsors—who are frequently the named fiduciaries of their plan—and help them, too, to avoid rash decisions. Suspension of employer contributions or partial terminations may be unavoidable economic consequences of the pandemic, but a plan termination is not. Some sponsors will have special circumstances. For instance, in connection with a change in service providers, a blackout period is generally required; a financial adviser’s input on how to proceed in such circumstances, and help in fashioning clear, informative advice for participants, is a further illustration of Fiduciary 3.0 activity.

Service models that can produce robust results for the participants give sponsors and plan fiduciaries the best chance to insulate themselves from litigation and liability under ERISA. All these years since 1974, the act’s core principles remain timely for confronting the financial challenges that loom for many plan participants.

photo of Marcia WagnerMarcia Wagner is an expert in a variety of employee benefits and executive compensation areas, including qualified and nonqualified retirement plans and welfare benefit arrangements. She is a summa cum laude graduate of Cornell University and Harvard Law School and has practiced law for 32 years. Wagner is a frequent lecturer and has authored numerous books and articles.

Practice Management April 6, 2020

First Time Advising in a Bear Market?

It’s easy to tell clients their accounts have grown by leaps and bounds, but helping them calmly navigate a severe and sustained market downturn is another matter.
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Art by Claudi Kessels


Veteran retirement plan advisers have a wealth of recommendations for their younger counterparts on how they should be advising plan sponsors and participants during the coronavirus pandemic and the associated market downturn.

David Flores Wilson, founder of Planning to Wealth, says the first thing advisers should realize is that over the past 90 years, there have been bear markets every six to eight years. That means knowing how to help clients navigate market downturns is an essential and enduring skill for any successful adviser. Additionally, it means advisers must find ways to remain calm themselves during periods of market and client stress.

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“It is normal from a market perspective—but extraordinary in terms of what we are all going through,” Flores Wilson says. “We don’t know how long this is going to go on. So, it is important to be empathetic about people’s situations. Don’t just focus on their retirement planning. Many people will be more concerned right now with their shorter term income projection and budgets.”

Given the uncertainty associated with the coronavirus pandemic, Flores Wilson says, there are various practical and grounded questions that advisers can help their clients focus on.

“Ask if they have an emergency fund,” he suggests. “How are they set for covering expenses for the next two to six months? Are they able to get relief from the CARES [Coronavirus Aid, Relief and Economic Security] Act? If they are stable financially, this may actually be a good buying opportunity.”

Flores Wilson observes that, in addition to the CARES Act, there will likely be other stimulus bills coming out of Washington in the weeks and months ahead.

“The advice people will need will be changing from week to week,” he adds.

Demonstrating Leadership

John Anderson, managing director and head of practice management solutions at SEI, says he can remember the crashes of 1987, 2001 and 2008. He says one lesson he shares with younger advisers is that they can play a powerful role in helping their clients “tamp down their emotional responses” to the current pullback in the market. Given their trusted position of authority, advisers may be surprised to learn just how much they can do to assuage clients’ fears and concerns, he says.

“The right response is to be able to show leadership,” Anderson says. “To help make this a reality, we hold daily check-in calls with all of our advisers, to show our junior advisers we are all working together. Hopefully, advisers will have already helped participants build diversified portfolios that can hold up to and recover from the volatility. It is important to help clients see the big picture. That should help alleviate some of their stress.”

Julie Genjac, managing director, applied insights, at Hartford Funds, agrees that the most important role retirement plan advisers can perform right now is to show leadership. Participants’ responses “all start with the adviser,” Genjac says.

“Be the leader your clients want you to be,” she says. “Be proactive. Check in with clients to make sure they are doing OK. Have an opinion about the markets, the future, the state of the union, the economy. Collect your thoughts and articulate your story.”

Of course, the client’s financial plan should be the cornerstone of the conversation, Genjac recommends.

A Tough Job 

Marty Reid, an independent financial consultant whose broker/dealer (B/D) is Cetera, warns novice advisers that keeping clients’ perspective on the long term will not be easy. This is especially true with clients who are near retirement or who have recently retired.

“You have to make them understand that the worst thing to do right now would be to cash out unnecessarily,” Reid says. “Left on their own, they may make short-term, rash decisions that could negatively impact their long-term outlook. Help them manage their emotional response to the market.”

Reid says one effective lesson is to show investors how even backing away from the market for a short time can have seriously negative effects on long-term returns. A commonly cited statistic to demonstrate this point is that six of the best 10 days for the equity markets during the January 2000 to December 2019 time period occurred within two weeks of the 10 worst days. Case in point, the best day of 2015 (August 26) came only two days after the worst day (August 24).

Reid adds that those with a higher risk tolerance might see this as a buying opportunity.

“Now is a wonderful time to review financial plans with clients,” he says. “They will derive comfort from knowing that their adviser is being proactive.”

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