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.
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.
Marcia 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.
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