Four Regulatory Hot Spots and What they Mean For You

What will be the top four regulatory items for financial advisers to deal with in 2012? Josh Cohen and Ben Jones of Russell Investments shared their thoughts.

The first set of issues involves fee disclosure, which includes disclosures from sponsors to participants and from providers to sponsors.

“We’re not anticipating a major impact from the sponsor to participant disclosures. Many sponsors already disclose these fees to participants. This just formalizes it a little more, maybe puts them in a new format,” said Cohen, defined contribution practice leader at Russell Investments, in a conversation with PLANADVISER.  And if more participants notice the fees, Cohen believes some will recognize the value in investing through the plan and receiving institutional-level fees, rather than investing on their own and paying higher fees.

The bigger impact, he says, will be 408(b)(2), disclosures from providers to sponsors. “This will shed a much brighter light on all the fees being paid. And what’s key is that the sponsors are going to have to do something with all this new information.”   

That’s where advisers come into play, said Jones, director, defined contribution for Russell’s DCIO adviser-sold business. Advisers will have to help sponsors evaluate and benchmark these fees. Jones explained that Russell categorizes advisers into two broad groups: specialists and generalists. He expects specialists to see substantial business growth as a result of 408(b)(2), particularly in the middle market. Their expertise will become an even more important value-add to clients.

However, Jones also said he disagrees with some reports that predict an end to generalists working with retirement plans.  He said there are simply not nearly enough specialists to work with all defined contribution plans in the entire country, especially in the small or micro-plan markets.  He predicts generalists “will embrace the new rules and evolve their processes to improve client experience and clearly communicate what their value adds to the table.” It will involve a lot of outsourcing, he added, because it will be hard for them to meet all the needs of all their plans.   

The second regulatory hot spot is the possible redefinition of fiduciary. Because the original proposal received a great deal of pushback from the industry, especially from those involved with IRAs, the Department of Labor withdrew it (see “EBSA to Re-Propose Definition of Fiduciary Rule”).    

“We believe, from everything we’re hearing, they will be reissued and the changes aren’t going to be significant,” said Cohen.  “A new proposal will offer more clarification, and it’s not clear what’s going to happen with the IRA part. We should expect a reproposal in 2012.” 

“As for advisers, it’s a lot of wait and see for the moment,” added Jones. “It does seem that the largest impact will be in the B/D community. Generalists will also need to figure out if their business model aligns with being a fiduciary.”  

A third hot spot, and one that Russell has been greatly involved with, said Cohen, is potential legislation regarding retirement income options in defined contribution plans.  

“The DoL is working on regulation to promote the usage of disclosures to participants; not just providing an account balance on their statement, but something in terms of projected retirement income,” he said.  The DoL and Department of Treasury held a hearing in September 2010 regarding this notion; Bob Collie, Chief Research Strategist, Americas Institutional, spoke on behalf of Russell.  

Cohen said the DoL has to figure out a few elements of what this legislation would look like: should it be mandated, or a safe harbor for those who want to provide it? Should it be based on a participant’s current balance, or based on future returns? Should the DoL provide the assumptions for this calculation or should the marketplace? “These are all important questions. We think it’s a good thing that we’re moving in this direction, and many providers already do this; our hope is something from the DoL will make it more common. We think it will help participants see their 401(k) more as a retirement savings vehicle, and not just another savings account,” he added.  

Jones said many advisers are embracing the idea of outcome-based approaches. “This would really help to gauge plan health in areas they may not have been benchmarking. But if there is not a standardized way to report retirement income, it will become increasingly important for advisers to understand the assumption their provider is using,” he said.  In fact, a few years ago Russell experimented with the assumptions used by five different recordkeepers – they put in the same figures for a participant into each calculator, and the results were wildly different, Jones and Cohen said. Some calculations showed the participant not at all ready for retirement, other showed they would be comfortable.   

The last hot spot for advisers is not exactly a regulation, but something that could have a dramatic effect on the industry in the next few years.  And that is the ongoing debate in Washington surrounding the deficit.  “Every bipartisan plan out there right now has targeted the tax treatment of defined contribution plans,” said Cohen. What’s frustrating, he added, is that even though the preferential tax treatment of DC plans is not a tax credit, but a tax deferment, the deficit plans are making it look like it costs Washington money.   

Jones notes that there might be a period of time before we see any action on this. “Advisers that spend that quiet time studying up on non-qualified plans can hedge their bets, so if there is a change, they have a solution to provide.”