Reish and Kaplan Offer Legal Advice for Advisers

The Dodd-Frank Act, target-date funds, and the evolving role of a fiduciary were some of the topics Frederick Reish and Robert Kaplan touched on at the ASPPA 401(k) Summit this week. 

Reish, formerly of Reish and Reicher, now with Drinker Biddle & Reath, and Kaplan, Vice President, National Training Consultant at ING U.S. Retirement Services, spoke at ASPPA’s 401(k) Summit in Las Vegas. The two prominent industry figures certainly had a wealth of regulatory information they wanted to share.

Dodd-Frank Act 

The Dodd-Frank Act, issued last summer, has so far resulted more in published reports than tangible changes in the industry, they said. One key report was from the Securities and Exchange Commission (SEC) to Congress, discussing a “uniform fiduciary standard” (see “SEC Report Leaves Unanswered Questions”). Kaplan said the report was consistent with others stemming from the Act, in that Washington wants to put more standards on practitioners in the financial services industry.

Reish believes a fiduciary standard will be extended to broker/dealers (B/Ds), but he said it will have to be modified from the current standard, calling it “fiduciary light.” The standard for B/Ds will have to include a duty of loyalty, he added. If that happens, Reish questioned, will a dually registered adviser-B/D be able to say he is a fiduciary for securities purposes, but not ERISA purposes? “That doesn’t resonate,” Reish said. It would be too awkward for one word to label two different things. He thinks the new standard will have to lean towards an ERISA-fiduciary status.  And it’s still not clear how a new standard would be implemented. Reish said he’s been working with B/Ds to come up with internal fiduciary programs where top 401(k) advisers will be allowed to become fiduciaries; it’s not out in the field yet, but it’s being worked on internally and should be rolled out in six to 12 months.

Target-date funds 

In 2008, TDFs lost a tremendous amount of value, Kaplan and Reish said. Most funds lost an average of 25%, but more aggressive funds lost as much as 40% of their value; and for people within a year or two of retirement, these losses were unacceptable. So Washington has rolled out more disclosure requirements. Reish said these requirements focus on the problem as an asset allocation issue, along with the glide path (which is just a moving allocation).

Reish said you have to disclose asset allocation details in marketing materials, not just the prospectus. The allocation needs to appear next to the title of the fund, “the 2010 fund, 20% X, 40% Y, 40% Z,” for instance. There needs to be a prominent table, chart or graph to show the glide path in five-year increments, with a statement that says the allocation will change over time until it eventually stops changing.  The disclosure also needs to state that a participant should not pick a fund solely based on his expected date of retirement–just because you may be planning to retire in 2030, the aggressiveness or conservativeness of the 2030 fund may not be the best choice.   

The panelists said an adviser needs to consider the unique needs of the plan and its participants when selecting a TDF; Reish gave an example of a law firm versus a manufacturing plant. If the employees can work a few years beyond their expected retirement, should the market take a downturn, then a more aggressive fund would be appropriate (as in a law firm). But if the employees will have to retire at a certain time, the fund shouldn’t be too risky at the target date.  Reish said you need to look at the culture of the company; how will the market affect them? If there’s a recession, will they be laid off?  He said advisers need to apply analytical thinking tools when picking a fund; “We’re entering a maturity stage in TDFs and we need to act maturely.”

Reish made one final point regarding TDFs, and said the industry needs to start benchmarking the funds. However, you can’t benchmark them all together, because in bad markets, the conservative funds will look like the better choice.   

Definition of fiduciary  

Kaplan said the Department of Labor (DoL) has been very clear that the definition will be changing. Phyllis Borzi, Assistant Secretary of the Employee Benefits Security Administration (EBSA), has said comments suggesting that the DoL throw out the proposal all together, those comments will not be considered, but constructive recommendations would be appreciated.

Reish touched on several aspects of the proposal. He said that the new definition says if you provide advice for a fee, you’re a fiduciary. The advice does not have to be given on a regular basis, which is a change from the original five-part test. And whether you call yourself a fiduciary or not, if you play the part of one–you are.

One part of the proposal that is causing headaches is the question of providing advice or appraisal concerning value of securities pr property; this will impact employee-stock ownership plans.   

Also, if you give individual advice about plan management, such as voting on proxies, or referring investment managers, these will now be functions of a fiduciary, Reish noted.  He also joked how we’re going to be releasing thousands of new fiduciaries in the world, which will lead to increased competition. For the experienced advisers, it may seem burdensome but it will help them prove their value.   

Reish summed up the changes surrounding fiduciary status in the clearest terms possible. As of January 1, 2012, you will have to say if you are or are not a fiduciary–otherwise, you will be out of the retirement industry; there is no gray area. He said if a financial professional does not want to be a fiduciary, he or she will need to work hard to prove they are not. He noted that there will be a place for non-fiduciary advisers – they will need to clarify what this place is exactly in the coming months.