Suiting Up
There’s now no denying it; retirement plan advisers are fiduciaries, or will be soon
Reported by Elayne Robertson Demby
However, says Massey, who has approximately $60 million in retirement plan assets under management, whether acknowledged or not, he knew he was participating in fiduciary activities and giving the kind of advice that made him a fiduciary. Current clients, he says, wanted ongoing advice on which investment funds to select or drop from the fund menu. New and prospective clients, says Massey, expected his firm to perform clearly fiduciary tasks such as recommending an investment fund lineup and wanted written service agreements as well.
Massey’s new broker/dealer, Securities America, allows him to take fiduciary status if performing tasks that warrant it. “I now can take the fiduciary status on plans I work with,” says Massey. While there were various service changes from one broker/dealer to the other, he says, the biggest value advantage for him was that his new broker/dealer allowed him to operate within a written advisory service agreement with retirement plan clients and take appropriate fiduciary responsibility.
Massey’s tale is not unique. Defined contribution retirement plan advisers have seen the writing on the wall, and there is no escaping the word “fiduciary.” If an adviser works extensively with a retirement plan, experts say, it is virtually impossible to claim that adviser is not a fiduciary to the plan because of what services retirement plan clients expect from their advisers.
Broker/dealers have seen the writing as well, and are creating programs to accommodate the new reality. There are still broker/dealers, such as Merrill Lynch, aggressively arguing that their advisers are not fiduciaries but, generally, the independent broker/dealer industry, in the last five years, has been moving in the direction of allowing more representatives to acknowledge that they are fiduciaries, says Amy Glynn, Director of Retirement Consulting Services with Commonwealth Financial Network in Waltham, Massachusetts.
Commonwealth Financial Network launched a program in August 2009 to allow its producers to get certified through a number of programs, including the Accredited Investment Fiduciary Program and the Chartered Retirement Plan Specialist, and formally acknowledge their fiduciary role in the client contract, says Glynn. Prior to launching the program, Commonwealth did allow advisers to act as fiduciaries, but only two or three platforms were available. Now, she says, advisers can be fiduciaries and place plans with any provider they want. “It’s the first true vendor-agnostic independent program of any broker/dealer,” she says.
Whether or not a defined contribution plan adviser is a fiduciary to the plan is a matter of facts and circumstances, says Roberta J. Ufford, a principal with the Groom Law Group in Washington (see “Pop Quiz”). To some extent, it is governed by the contract and the actions of the adviser.
However, advisers themselves seem to believe they play that role. “My personal feeling is that, if you’re touching a retirement plan, then you’re a fiduciary,” says Stephen R. Popper, the Managing Director of SageView Advisory Group in Boston, Massachusetts, a dually licensed registered investment adviser (RIA) and broker. “I have the ability to influence decisions made regarding other people’s assets,” he says, “which, under the common law definition, makes me a fiduciary.” Popper’s firm has claimed fiduciary status to its clients since January 2007.
Additionally, whether or not an adviser is technically a fiduciary is meaningless if the client is unhappy. The reality is that, when push comes to shove, it is hard to say you are not a fiduciary if it comes to litigation, says Doug Igel, a senior analyst with Precept, a full-service benefits consulting firm in Irvine, California. Igel says that his firm does not currently formally acknowledge fiduciary status, but realizes eventually they will have to do so. Igel acknowledges that his firm may have fiduciary obligations to clients as plan advisers when providing consulting services to retirement plans. However, he says, the agreement between clients and Precept is not intended to give Precept any discretionary authority or any discretionary responsibility for retirement plans. “The relationship of Precept to retirement plans is intended to be that of a directed adviser with respect to the advisory services within the Services Agreement. Our client, as plan administrator and plan fiduciary, has the ultimate authority to make the final discretionary decisions as they pertain to the plan,” he says.
“If something goes wrong with the plan, and I am responsible, it does not matter if I’m a fiduciary or not; the client will sue and likely collect,” asserts Michael Kozemchak, of Institutional Investment Consulting in Bloomfield Hills, Michigan. If a client asks his firm to sign up as a fiduciary, it will. However, he has observed that, when clients seek outside ERISA (Employee Retirement Income Security Act) counsel on the matter, most attorneys discourage their clients from elevating the consultant to the level of fiduciary. “Most recognize that, if we screw up, we’re going to pay no matter what we’re called,” he says.
Popper believes that, since advisers have the liability whether they acknowledge it or not, it is probably better just to acknowledge it. “In my opinion, you get more protection saying you’re a fiduciary,” says Popper. Whether or not the adviser takes the label, he says, the liability is there but, if you accept and acknowledge the liability, you can quantify it, and protect yourself against it. Once you acknowledge the liability, you can quantify it based on plan assets, then protect yourself by putting in place processes to limit the liability. For now, say the experts, there is still room in the industry for advisers who are not fiduciaries, and many retirement plan brokers are still technically not fiduciaries under the ERISA definition. Advisers, notes Ufford, still can restrict the services they provide to clients to avoid being a fiduciary.
Nonfiduciary advisers, says Massey, still can provide generic investment education and enrollment services. Nonfiduciaries also can facilitate the operational and administrative tasks of the plan, such as working with a plan on a conversion from one vendor to another. Doing a plan review—e.g., reporting on deferral rates—also is unlikely to cause an adviser to be deemed a fiduciary.
Providing to sponsors generic reports that are not individualized to a plan or participant is not a fiduciary activity, notes Ufford. Additionally, she says, given that there is a facts and circumstances test as to whether or not an adviser is a fiduciary (see “Pop Quiz”) an adviser actually can make investment recommendations on a one-time basis and still not be a fiduciary under ERISA.
However, the list of tasks that fiduciaries can do for retirement plan clients is broader, and includes many of the key responsibilities sponsors now expect advisers to perform. Managing the fund lineup, adding and changing funds, allocating funds, and assessing investments all make an adviser a fiduciary, says Massey.
It is getting harder to be in the industry and not be a fiduciary, says Ufford, because the industry standard is moving to provide advice to sponsors. Sponsors, says Popper, are looking to pay advisers to tell them what to do with their plans. “Clients look to their adviser to be the expert, so, no matter what, you are giving advice in some form,” agrees Igel.
Helping sponsors choose investments, notes Massey, makes an adviser a fiduciary, and sponsors now expect advisers to help them perform this task. “For example, if you ask advisers if they help a plan sponsor select investments, everyone would say ‘yes,’ and that is a fiduciary act,” says Massey. “So, if you say you’re not a fiduciary, either you’re not doing those things that are expected of you, or you’re flying without a net.”
Additionally, employers now are beginning to expect their advisers to assume the role of fiduciary contractually, says Glynn. Acknowledging fiduciary status in the contract, notes Ufford, makes an adviser a fiduciary even if he was not otherwise, because one of the factors in determining if an adviser is a fiduciary is mutual consent (see “Are You a Fiduciary?”). Thus, even if advisers are not providing plan-specific advice, they may need to assume the role of fiduciary for competitive reasons, agrees Ufford.
Yet, some see elevated risks for both sponsors and advisers when advisers take on the fiduciary mantle. “I think you’re increasing the risk for the committee rather than decreasing it when hiring a consultant as a cofiduciary,” says Kozemchak. When an adviser is a cofiduciary to a defined contribution plan, he says, it puts that adviser on the same level as other committee members. Most committees do not want to follow every piece of advice their adviser gives them, he notes, and, when the adviser is a fiduciary, a strong argument can be made that the committees should.
The adviser is hired as the expert, he points out, and, if the adviser is a cofiduciary and tells the committee to do something and it does not do it, then the committee did not follow its own expert, says Kozemchak. If the disregarded advice eventually leads to a claim and it is discovered that the committee ignored the advice of its fiduciary expert, then both the committee and the adviser are on the hook, he argues. “As we all know, cofiduciaries are responsible for each other’s actions and the plan sponsor is generally the one with the deepest pockets,” he adds.
While the industry is moving in the direction of all advisers acknowledging fiduciary status, new regulations and legislation may speed up the process. The Obama administration has shown much more of an interest in the conduct of advisers than the Bush administration, says Ufford. For example, she says, the Obama DoL takes the position that the current rules defining investment advice inappropriately limit the number of advisers defined as giving investment advice and do not go far enough, and announced that it may draft regulations on the definition of investment advice (see “DoL Intends To Rule on Definition of Fiduciary/Investment Advice”).
The White House also is proposing legislation requiring fiduciary status for broker/dealers and their registered representatives. Congressional leaders have endorsed the concept and legislation, The Investor Protection Act of 2009, is working its way through Congress. In addition, the leadership of the Securities and Exchange Commission (SEC) and FINRA, which oversee RIAs and broker/dealers, respectively, have endorsed the concept, as has SIFMA—the primary trade association for broker/dealers. So, it seems almost certain that broker/dealers and their registered representatives will become fiduciaries under the SEC rules.
However, it will be the marketplace that drives retirement plan advisers to be ERISA fiduciaries, not legislation, says Popper. Brokers, he says, likely eventually will get out of the retirement plan business because they can make more money managing individuals’ money, then they can from managing retirement plans—and, he adds, they will have fewer liabilities.
DoL Intends To Rule on Definition of Fiduciary/Investment Advice
In December, the Department of Labor’s Employee Benefits Security Administration (EBSA) opened rulemaking to define who is giving investment advice under ERISA. Specifically, the rulemaking would amend the regulatory definition of “fiduciary” to more broadly define as a fiduciary any “persons who render investment advice to plans for a fee.” This would expand significantly the definition of fiduciary under ERISA, says Roberta Ufford.
The DoL stated that this rulemaking is needed “to bring the definition of ‘fiduciary’ into line with investment advice practices and to recast the current regulation to better reflect relationships between investment advisers and their employee benefit plan clients. The current regulation may inappropriately limit the types of investment advice relationships that should give rise to fiduciary duties on the part of the investment adviser.”
Are You a Fiduciary?
The ERISA definition of “investment advice” is different from the definition of “investment advice” under federal securities laws, says Ufford. ERISA does not preempt federal securities laws, she says, so advisers can be SEC registered investment advisers and not be giving ERISA investment advice. Thus, she says, a retirement plan adviser may not be a fiduciary, even if he is providing investment advice as defined under federal securities laws.
Ufford says ERISA advisers may be fiduciaries if they: 1) make recommendations; 1a) regarding securities or plan asset investments; 1b) on a regular basis; 2) those recommendations are the primary basis for investment decisionmaking by the plan; 3) the recommendations are individualized for the plan; 4) receives a fee; and 5) there is mutual agreement.
Thus, says Ufford, whether or not an adviser is an ERISA fiduciary is a facts or circumstances test. For example, providing generalized, investment education, says Ufford, does not make an adviser a fiduciary under ERISA.
Pop Quiz
If you agree with any of these statements, you are likely to be found to be a fiduciary to a client:
- I provide advice to a client that relates only to that plan.
- I make recommendations as to which investment options a client should have on its plan’s fund lineup.
- I review investment fund options and make recommendations to add or drop funds.
- I charge for my services.