Compliance March 23, 2010

Retirement Plan Advisers Should Expect Broader Definition of Fiduciary Status

Regulators might be cracking down on prohibited advice arrangements in retirement plans and broadening the scope of fiduciary status, suggested Jason C. Roberts, partner and co-chair of the Financial Services Practice Group at Reish & Reicher.
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Speaking at the ASPPA 401(k) Summit last week in Orlando, Florida, Roberts highlighted some of the legal concerns affecting advisers. For instance, several factors are driving an increase in litigation, including heightened expectations of advisers and increasing awareness of a fiduciary standard. “There’s more of an expectation for services from advisers,” he said.

Fiduciary status related to investment advice to retirement plans is one area regulators are watching closely. In December, the Department of Labor’s Employee Benefits Security Administration (EBSA) said it was considering broadening the definition of a “fiduciary” to any persons who provide investment advice to plans for a fee. Of the Employee Retirement Income Security Act’s five-part test of fiduciary status, Assistant Secretary of Labor Phyllis C. Borzi wrote in December: “We are concerned that it allows advisers from whom plans expect impartial advice to evade fiduciary responsibility” (see “EBSA Examines Fiduciary Status, Investment  Advice” and “Suiting Up”).

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Roberts said registered representatives and advisers should be on the watch for a broader definition of fiduciary status. He noted that Borzi has particularly expressed concern related to cross-selling and rollovers. Essentially, if the definition of fiduciary is extended to mean any investment advice, it could be extended to rollovers, which have played a large role to many adviser business models, particularly in the smaller end of the retirement plan market.“This is the one area where I think we’re going to see the most activity from the DoL,” he said.

Investment Advice Regs

Roberts also addressed the impact the recently proposed investment advice regulations could have on advisers (see “DoL Proposed Investment Advice Rule Requiring Fees” and “Investment Advice Regs: Interview with Jason Roberts”).

For advisers already operating with “pure-level fees,” they don’t need to use the exemption.

On the other hand, some advisers are providing advice under prohibited arrangements, Roberts noted. While the proposed investment advice regulations allow an exemption for investment advice, “I think these regulations are going to ferret out some of those prohibited arrangements,” Roberts said.

Overall, Roberts said there is more demand from plan sponsors to shift risk to an adviser and put accessible advice in the hands of participants—and advisers should be ready to answer plan sponsor’s inquiries about providing participant advice. “I think advice is going to be more and more sought after,” he said.

Roberts said broker/dealers who don’t provide participant-level advice will move to partner with third parties who do provide it. “I don’t think it’s going to be enough anymore to say, ‘I’m not providing advice, I’ve providing education;’ I think you’re going to have to say ‘I’m not providing advice, they are.’”

Compliance March 23, 2010

Retirement Industry Should Get Ready for Fee Disclosure

The U.S. Department of Labor hopes to have its revisions to the service provider fee disclosure regulations out by May, according to an official from the Employee Benefits Security Administration (EBSA).
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Speaking last week at the ASPPA 401k Summit in Orlando, Florida, Michael Davis, deputy assistant secretary of the EBSA said the Department has worked on new regulations under the Employee Retirement Income Security Act section 408(b)(2),  which will pertain to what information must be provided to plan sponsors about fees from service providers, including advisers.

Although he couldn’t say much about the contents of the rules, EBSA’s Davis said that the core principal of the regulations is increased transparency of 401(k) plan fees. He acknowledged the DoL had submitted a draft of the regulations to the Office of Management and Budget March 3.

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Davis acknowledged that after these regulations are issued, the Department plans to issue a second rule about what fees should be disclosed, and how they should be disclosed, to plan participants. Those regulations are “not far away,” he commented.

The goal of the participant regulations is uniformity, with the intent of offering enough information about fees to “allow for participants to have an apples to apples comparison,” Davis said.

As to concerns about whether the DoL will allow for enough time to comply with the regulations, Davis said the Department wants to make sure it works with the industry, but what the actual period for implementation will be is unknown.

Changes to the 408(b)(2) provision were originally proposed under the Bush administration in 2007 (see “EBSA Releases Proposed Revisions to Provider Fee Disclosures”) and a proposed regulation governing fee disclosure to plan participants was released in 2008 (see “EBSA Issues New Participant Disclosure Regulations”).

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