The Next Step

Plan sponsors do not need to offer, or facilitate offering, investment advice to participants if they are afraid to, based on fiduciary concerns. “But some sponsors really want to make sure they do everything they can for their participants—and that’s both a blessing and a curse for those sponsors,” says Jason Rothman, managing consultant at consulting firm Findley Davies in Cleveland.

It’s a blessing because providing that advice can help more employees retire on time with enough money—and a curse because it makes plan sponsors more vulnerable to fiduciary risks. The new fiduciary rule from the U.S. Department of Labor (DOL) took effect June 9, and it broadens the scope of who and what fall under the fiduciary umbrella. In May, the DOL also released frequently asked questions (FAQ) to help clarify how the new rule applies.

The DOL wanted to make sure the new regulations cover a wide array of participant communications related to rollovers, says Dominic DeMatties, a partner at law firm Alston & Bird LLP in Washington, D.C., and former attorney adviser in the U.S. Department of the Treasury’s Office of the Benefits Tax Counsel. “It purposely drew a very broad line, and now [the rule] includes some things that people may not have considered fiduciary acts before,” although the FAQ have pared back plan sponsors’ and advisers’ misunderstandings somewhat, he says.

“The question that remains is: What things has the DOL not thought of clarifying? And in particular, what has it not thought of that a plaintiff’s lawyer might think of?” DeMatties says. Speculation that the Trump administration will end up scrapping some or all of the new regulations has made the situation more unclear for both sponsors and advisers. “So, many people in the industry are saying, ‘I’ll take a cautious approach now and wait to see what happens,’” he says. “Is now the right time to come out with a new participant investment-education initiative, when you’re not sure where the rule might land?”The new regulations affect participant-level fiduciary advice in several ways. Today, any adviser who gives investment advice to participants crosses the fiduciary line. The fiduciary rule “no longer requires that advice be provided on an ongoing basis to give rise to fiduciary status,” DeMatties says. “The fact that more instances are captured by the rule because of the elimination of the ‘ongoing basis’ requirement gives rise to differences in what [was] considered [a] fiduciary [act] before [the rule and what is] after the rule.”

Also, the regulations say that to cross the fiduciary line, a recommendation may be far less than the primary basis for a participant’s investment decision. “There’s always been some confusion related to, how far can one go within a communication to participants before crossing the fiduciary line?” DeMatties says. “People are going to be sensitive to, ‘Is that a personalized recommendation?’—even with respect to simple, everyday communications about a plan. It does significantly increase the risk of crossing the fiduciary line.”

The increased emphasis on personalization has shifted the line between education and advice for advisers and recordkeepers, says Brian Tiemann, a partner at law firm McDermott Will & Emery, in Chicago. “A lot of information that was provided as education to participants before included what constitutes investment advice under the new rule, meaning it is tailored to a participant’s specific circumstances,” he says. “Advisers and recordkeepers can still provide education that is general information on a plan and its investment options—factual information to let participants know what their options are. Advice is when they cross the line into a recommendation, where it involves talk of a participant’s own circumstances.”

And the new fiduciary regulations clarify that giving advice related to rollovers and some other distribution decisions makes an adviser a fiduciary. “Clearly, the new rule broadens the type of information given to participants that is considered fiduciary advice,” DeMatties says.

Nonetheless, crossing into fiduciary territory to be able to give distribution advice appeals to some recordkeepers, says David Blanchett, head of retirement research at Morningstar Investment Management in Chicago. “Recordkeepers generally don’t profit much from running defined contribution [DC] plans,” he says. “They make money off of rollovers and other retail investor business.”

To now deem advising on distributions as a fiduciary act poses a new challenge for the industry, Tiemann says. “These are topics that were covered by advisers and recordkeepers before, but there was not the same level of fiduciary duty imposed on them,” he says. “Now, there’s this clear delineation. But it’s a tough line, because a participant getting education is going to ask about what his options are and ask for advice on the choices. When it gets into tailored [recommendations] for participants, it’s fiduciary advice.”

But when he contemplates the new rule’s impact so far, DeMatties says, it is less the major regulatory changes than the heightened awareness among service providers and advisers of the potential for crossing that line—i.e., from simply providing certain plan information and education to giving advice—and that this awareness could discourage many advisers from providing even basic education. “The main difference is there is a lot more sensitivity, and in some cases outright refusal to participate in offering fiduciary investment advice,” he says. “Whether communication crosses the line or not, people are more afraid now that it does. That fear is the biggest difference now. Some advisers and providers are worried about risk, so they’re willing to say and do less. They are being advised to have far more muted conversations with participants.”

So, what communications fall safely on the side of education now? “Make sure participants have all the information they need to make good, informed decisions—that they have the information to understand the funds, the fees and their own flexibility to make investment decisions,” Tiemann says. “You can give participants all the information they need to [do that].”

DeMatties agrees with Tiemann that the regulations still allow several types of education: information and materials that describe investments and plan alternatives, as long as these contain nothing that recommends a particular investment or strategy; general financial, investment and retirement information; certain hypothetical asset-allocation models that are not personalized and make no recommendations; and interactive investment materials. “The main difference is that, for asset-allocation models and interactive investment materials, it is generally not permissible now to identify any specific investment alternative” without crossing the line into fiduciary advice, he says.

Asked what advisers who want to sidestep giving participant-level fiduciary advice can do, DeMatties says, “Make sure what you’re providing is generic education and not tailored to the participant. Make sure you are just communicating facts about the plan and its investments.”

A Range of Alternatives

Even before the new fiduciary rule, some recordkeepers offered participant-level fiduciary investment advice. “We have historically provided advice to participants on in-plan investments and how participants should allocate their investments based on their particular circumstances and risk tolerance,” says Jon Graff, director of participant services at Wells Fargo Institutional Retirement and Trust in Charlotte, North Carolina. “But now, with people starting to stay in their plan longer instead of rolling their money over into an IRA [individual retirement account], we’ve seen the need to offer extended advice services to participants, to also cover distribution issues.”

Wells Fargo Advisors’ registered representatives give this type of advice to participants. “With the new DOL rule, distribution conversations have moved over to the fiduciary arena, such as whether it’s a better idea for a participant to stay in the plan or move [his] money out of the plan,” Graff says. Wells Fargo’s distribution fiduciary advice goes beyond rollovers to topics such as when a retiring participant should take Social Security, and the rate at which he can safely withdraw his balance in retirement. “When we think about distribution consulting, we’re thinking about it in a much broader way than just, ‘Should I do a rollover?’” he says.

Sponsor clients may have Wells Fargo give participants fiduciary advice on investments, distributions or both. Already, 82% of that firm’s retirement plan clients utilize its distribution advice offering, a higher percentage than utilize its investment advice. “After all the years they have spent helping employees save for retirement, sponsors want their retiring participants to make good decisions,” Graff says.

Empower Retirement’s participant-level fiduciary advice package now covers saving, investing and distribution, says Carol Waddell, senior vice president and head of the company’s retirement solutions group, in Denver. Ninety-nine percent of Empower’s ERISA [Employee Retirement Income Security Act] plan clients utilize the fiduciary advice package for their participants, she says. “It’s not part and parcel: It’s one fiduciary service,” she adds.

Offering broader participant-level fiduciary advice “is a big change for us,” Waddell says. Prior to the new fiduciary rule, Empower offered participants investment advice via its sub-adviser relationships with Morningstar Inc. and Financial Engines Inc. Those managed account offerings continue, but Empower itself also now gives participants fiduciary investment advice on issues such as whether they fit into the “Do it yourself” or the “Do it for me” investor category.

Further, reps in the retirement solutions group also provide participants with distribution-related advice. “At the point of termination, people want and need help to understand the pros and cons of different distribution alternatives and the fees associated with those alternatives,” Waddell says. “So we put together a model that is nondiscretionary. We ask participants a consistent set of questions, collect a consistent set of data from them, use a fee-comparison tool to do an analysis, and then we present the recommendations to [them].”

Beyond recordkeepers, third-party providers such as GuidedChoice Inc. also offer participant-level fiduciary advice on investments and distributions. GuidedChoice can serve as a 3(21) or a 3(38) participant-level fiduciary, and about 75% of its plan clients work with a plan-level adviser, says Sherrie Grabot, founder and CEO of the robo-advice pioneer, in San Diego.

GuidedChoice will provide fiduciary accumulation advice, decumulation advice or both. For accumulation, the firm offers robo-style automated portfolio recommendations to participants. “For decumulation, we have online tools that will help [them] figure out the best place to put their money when they leave, and the best way to take their distributions, both in the plan and for their retirement accounts outside of the plan,” Grabot says. “Our tools also help participants discern whether they should take an annuity, or self-annuitize by giving themselves a monthly ‘paycheck’ coming out of their retirement plan account.”

Retiring employees face complex distribution decisions, Grabot notes. “I do think that’s where we obviously all need to go,” she says of giving fiduciary distribution advice to participants. “For the average person, it needs to be spelled out very clearly, so [he’s] not overwhelmed by the decisions [he has] to make.”

Morningstar’s Blanchett says he expects to see steady growth in robo-advice offerings to 401(k) participants, particularly once plan sponsors have a wider choice of options on their recordkeeper’s platform. “Even before the new fiduciary rule, I think there already was an overarching desire by sponsors to provide participants with more tools to engage them and help them achieve success,” he says. “One problem with robo-advice adoption is that most platforms offer sponsors only one robo-advice provider. It’s effectively a binary choice: You either use the one available or you don’t offer robo-style advice. I think sponsors would like to see more options.”

Today, it generally costs between 10 and 60 basis points (bps) to utilize a robo-advice offering in a defined contribution plan, Blanchett says. “The cost of robo-tools has come down considerably, and at some point that makes it worth the consideration for plan sponsors,” he says. “At the same time, the scope of services being provided to participants is increasing. Today, many of these robo-tools are being positioned more as a ‘financial planner in a box’ type of unconflicted advice.”

Art by Alessandro Gottardo