Did We ‘Need’ a New Fiduciary Regulation?

I was recently asked by a reporter if the new fiduciary regulation was “needed.” The question caught me a bit off guard, because having been in “figure out how to deal with this” mode for most of the past year, I had long since moved past “why” and “if” to “when” and “how.”

I was reminded of our last home purchase – which we bought in a bit of a rush. Oh, it wasn’t like we didn’t know we were moving – but our ability to actually hone in on a new home was hindered by the fact that our current home had to sell first. And, as is often the case in such things (or has been for us), we had gone a long time with nary an offer, much less a viable one.

Once that offer came, of course, we had to move quickly (literally). And so, the planning that we had done mentally in anticipation of that day was thrust into overdrive. Ultimately we settled on a house that wasn’t the best we had seen, but it was the best available at the time (within the price and commuting distance restraints we placed upon it). At the time we moved in, I took some comfort from the fact that its prior residents had lived there more than a quarter century. More than enough time, I thought, to have fixed whatever ails might have arisen there.

It wasn’t long, however, before we realized that with that longevity in residence had come a certain complacency about the upkeep and maintenance; the even uglier things we found underneath the ugly pink carpet, the doors that we hadn’t opened during the inspection that fell off the hinges, the garage door opener that dropped out of the ceiling after a dozen uses…. I was later to tell folks that we spent the next several years (and no small amount of money) doing the 25 years of maintenance that the former residents had simply chosen to live without.

Was Fiduciary Regulation Needed?

So, with that experience in mind, I returned to the reporter’s question… was the new fiduciary regulation “needed”.

After a quick pause, I responded that, more than 40 years on, it certainly bore consideration. After all, the retirement savings world has changed a lot over the past generation, and if DB plans were never quite as ubiquitous as some remember them, defined contribution plans, and IRAs – which now have more assets than the DC plans which spawned many of them – increasingly are. It’s not just those individual retirement savers, either – the plan sponsor fiduciaries that play such an integral role in critical areas like plan design and outcomes measurement need all the help they can get in these increasingly complex areas.

At some point you can’t be in this business and not know that, as in all human endeavors, there are bad actors. Generally speaking, and thankfully, they are the minority. But they are out there, and every retirement plan advisor I have ever spoken with can cite examples, frequently multiple ones, of situations they have encountered, and not always been able to fix. You can’t credibly argue there aren’t problems – only whether this particular solution is well suited to, and cost effective for, the task for which it has been presented.

And yet, while all that was known and acknowledged, like the family having grown accustomed to the walls that surround our existence, there were no clarion calls for change, certainly not of the scope and scale contemplated by the Labor Department’s fiduciary regulation.

Not that I ever bought the widely cited $17 billion figure that proponents of the regulation said (and continue to say) it was costing American savers. Nobody knows the exact figure, of course (though I’m pretty sure you won’t be close if your assumptions are predicated on the notion that all active management choices are at an advisor’s direction, and only look at IRAs, even if you do cut that result in half). But let’s say it was exaggerated by a factor of two – would a $9 billion “rip-off” have been enough to warrant redress? What if it were a “mere” $1 billion?

But is the cure “proportionate” to the ills it purports to address? I’m pretty sure it will cost more than the current projections suggest – that’s the nature of such things. However, I’ve been in this business too long not to appreciate the benefits that ERISA’s oversight can bring, and those may well be understated. That said, it would be naïve to assume that flat fees (or flat rates) are necessarily cheaper in every situation. Or that the advice that comes with those pay structures is inherently “better.” But a shift in those directions will remove what is surely at least a temptation for some. And if fewer individuals take advice at those rates, and on those conditions – well, they will almost certainly do so with a greater appreciation for what such insight is worth, even if they are unwilling to pay for it.

Though it is less than a week old, there’s a pretty consistent sense that the final regulation is more workable than its predecessor. Indeed, many would argue, considerably so. Make no mistake, the Labor Department may not have acquiesced in every comment or suggestion made over the past year, but they were clearly taking notes.

That does not, however, mean that it doesn’t still have “bugs” that have to be worked out, provisions that need to be refined, definitions that need to be clarified. We may have known this was coming, but this new fiduciary “home” has only just come on the market.

It’s not unusual for “cures” to be worse than the disease – or to at least be more costly. The fiduciary regulation may yet turn out to have unintended consequences (count on it) – or, hard as it may be to imagine right now, we may look back in a couple of years and wonder at how quickly we adjusted.

Regardless, the waiting is over. The work begins.

4 Reasons Why Plan Sponsors Should Care About the Fiduciary Proposal

As I talk to retirement plan advisors and plan sponsors around the country, there seem to be three camps of thought on the Labor Department’s fiduciary reproposal:

• those who think it will be a big deal;
• those who think it will be a big deal but manageable (once certain key issues are addressed); and
• those who are nearly completely oblivious as to the proposal, its potential impact or its current status.

Unfortunately for advisors in the first and second category, nearly all plan sponsors seem to be in the third group.

Here’s why plan sponsors should care about the proposal.

You might have to change your plan education materials.

Remember back when your plan education materials only had generic fund references, and your participants struggled to figure out which of the specific funds on their plan menu were supposed to match up with those colored pie chart pieces? Remember how frustrated they were when you couldn’t tell them? And how poor the results were? Perhaps not, because you’ve been able to show sample asset allocations including actual fund names for well over a decade now as participant education.

However, as currently proposed, the Labor Department’s fiduciary proposal would consider any specific fund references to be advice, not education. And that would make the folks who provide such materials fiduciaries. And that would likely mean a return to education materials that aren’t nearly as educational.

You might have to change advisors.

The rules about how advisors work with retirement plans and retirement plan participants are getting ready to change, arguably in ways as significant as at any time since the passage of ERISA. For some advisors, that may mean that they will want to focus on different areas, some may choose to focus on different size plans, or to forgo working with plan participants altogether.

And while this could also bring a whole new generation of advisors to choose to work with these plans, this is a big change. And though we don’t yet know what the ultimate result will be, things will likely not be the same, particularly for smaller employers, who may very well find that the advisors they work with now will not be willing (or able) to serve their plans under the new regimens.

Your advisor might be more expensive.

There are doubtless advisors and advisor practices out there who won’t have to change a thing in order to comply with the new regulations, and whose fee structure won’t be affected. But others will, and those who do have to make changes could have to make a lotof changes – and that could affect how, and how much, they charge. And that could, of course, have an effect on others.

These changes might not be effective immediately, and how – and how much – will obviously depend on exactly what form the final regulations take. There will almost certainly, at least at the outset, be fewer advisors working with retirement plans. As for what that may mean to their costs, only time – and the final regulations – will tell.

Your advisor may not be able/want to help participants with their rollover decisions.

Today many retirement plan advisors only work with plans, or with participants in those plans. However, a growing number either work with participants as they consider a rollover decision, or have others in their firm who do. Participants who have developed a relationship with a plan advisor while they are accumulating retirement funds often have an interest in extending that relationship to the time when they are trying to figure out what to do with a rollover, or how to create a reliable stream of retirement income that won’t end before their retirement (particularly since a significant percentage of plans don’t offer a systematic withdrawal option). Similarly, plan sponsors, who have undertaken a review and monitoring of those advisors while they work with plan participants have generally prefer to see those discussions taking place with that trusted advisor than with some random advisor off the street.

And for those plan sponsors who want to encourage ex-employees to roll those balances over to another account, the current plan advisor can be a valuable help in facilitating that decision.

However, the Labor Department’s current proposal would, at best, greatly complicate this relationship. The services provided to a participant among many in a workplace retirement plan are quite different from that for an individual in a rollover situation, or one who would be rolling those savings into an individual retirement account (IRA), with the broader array of choices and decisions that would entail. However, the DOL’s current proposal would restrict even a level-fee plan advisor from working with an individual participant circumstance if he or she charged more, even if the level of service was significantly different and more complicated, even if he or she charged a flat fee for those highly individualized services.

That’s why the American Retirement Association and NAPA have advocated for a “level-to-level” compensation exemption that would address this issue.

Of course, at this point, these potential issues are just that – potential issues. The Labor Department has taken great pains to assure legislators, industry professionals and the public at large that they have listened, and are making a serious effort to address the major concerns expressed regarding the proposal (our concerns are outlined here and here).

Still, the devil is (always) in the details, the “proof” in the pudding. But as we wait to see how the Labor Department has chosen to address the concerns expressed, plan sponsors – and advisors – who haven’t yet given consideration to the potential new landscape for retirement plan education and advice would be well advised to do so.

- Nevin E. Adams, JD