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.

Making a List

Believe it or not, PLANADVISER Magazine is five years old this year.

As such, we wanted to commemorate our fifth anniversary by recognizing as “legends” five individuals who had made a “significant personal impact to the retirement plan industry and the advisers who support it”.

Now, perhaps you think that would be easy—but I can promise you it’s harder than it looks. And over the past several weeks we have gone through our list—moving some off, bringing others on, and “sleeping on it” more nights than you might think.

First off, we limited the list to five individuals (for five years), and we also tried to focus in on the past five years. Limiting the list to five was hard enough (certainly once we got started), but trying to focus in on the period since we launched the magazine created an even more daunting task. Sure, it was “only” five years ago, but it’s amazing how much has happened during that time. That was the year the Pension Protection Act was signed into law, after all, not to mention the year that the first wave of revenue-sharing lawsuits was filed, and the year that the Securities and Exchange Commission (SEC), responding in the aftermath of the mutual fund trading scandal, introduced rule 22c-2. In fact, the cover story of the first issue of PLANADVISER was titled simply, “Now What?”.

When it came to compiling that list, however, while some names were, IMHO, obvious,
some were perhaps “too” obvious. There are those who have had an impact, albeit a controversial one, while others have arguably had an impact, but one that is softer, quieter, or perhaps simply not as pervasive as others.

The discipline of a finite list forces you to make tough choices, but it also inevitably leaves you wanting to create a list that is longer, and perhaps more inclusive, if only to give full recognition to the many professionals who have had—and continue to have—that “significant personal impact.” That said, we have chosen five individuals.

They come up in conversation with advisers all the time, and for good reason.
They are people we have watched and are watching—and people who bear watching in the years to come.

They are, quite simply, legends—and on Tuesday we’ll “introduce” them to you.

—Nevin E. Adams, JD

The PLANADVISER “legends” will be featured in the fifth anniversary issue of PLANADVISER and will be honored at our annual Awards for Excellence celebration in New York City on March 24. At that event, along with sister publication PLANSPONSOR, we will also be honoring our Retirement Plan Advisers and Adviser Teams of the Year, as well as our Plan Sponsors of the Year, as well as other retirement industry luminaries.

What Lies Ahead - Part 2

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is the second part of our look at the trends that were on our mind this past year—and those just over the horizon.

Stop Gaps: Closing the Pension Funding Gap

What we said last year: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector. The public sector’s commitment to pensions remains largely unabated—and yet, a sense remains that it may only be a matter of time before fiscal realities bring about a different result.

Where we are: For the very most part, little has changed. Pension funding remains a challenge, with the funding gap seemingly constantly buffeted between the ups and downs of the markets and interest rates, despite the conscientious efforts of most plan sponsors to keep up with ever-tightening funding requirements.


What’s ahead: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector, while in the public sector, financial pressures seem likely to result in a different future solution for newer hires. Sound familiar?

Conflicts of Interests—Advice Regulations

What we said: Will we ever get final advice regulations? Almost certainly, though almost certainly regulations very different from the ones put forth a year ago. Or perhaps they will not come until after the concepts embodied in the PPA have been recrafted by legislators, such as Congressman Rob Andrews (D-New Jersey), who has already introduced legislation (the aptly named “The Conflicted Investment Advice Prohibition Act of 2009”) that would do just that. Between now and then, participants will continue to get advice the way they always have—or have not.

Where we are: Well, we now have those regulations—a proposed final version, anyway. For the most part, they seem to have restored and shored the status quo. Not that that’s a bad thing.

What’s ahead: The final proposed regulations will, likely, become the final regulations, at least in the important areas. The big change in advice seems more likely to emerge from a different direction—the recently proposed regulations on the definition of a fiduciary, not so much because it will change the rules on advice, but because the controversy on advice has largely revolved around trying to avoid becoming a fiduciary while offering advice (and getting paid for doing so). And it seems likely that if the proposed fiduciary regulations become law, the advice net some have tried so hard to become ensnared in will, quite simply, be inescapable.

Tax Treatment—Paying Now or Paying Later

Where we are: For years, much of the impetus for the growth in tax-deferred savings plans has been the premise that one’s taxes and/or income would be lower in one’s retirement future. Those prospects no longer seem quite so certain, and new Roth provisions for workplace retirement plans offer today’s retirement savers a different kind of choice. That, coupled with a unique window of opportunity to convert tax-deferred balances (albeit at a price), has some seeing the benefits of tax-deferred saving in a whole new light.

What’s ahead: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. Of course, the impetus for the conversion itself is not only the timing window, but also the (still) looming sunset of the Bush Administration’s tax cuts (well, it was looming when I wrote this). Of course, the real issue may be a shift in assumptions about taxes; what if they won’t be dependably lower in retirement?

—Nevin E. Adams, JD

Editor’s Note: If you missed it, you can check out the rest of the list HERE

What Lies Ahead

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is a look at the trends that were on our mind this past year—and those just over the horizon.

Doctor Bill? "Curing" Health Care?

What we said: It is still hard to believe that the Senate and House positions on any number of key issues can be reconciled—but then, there was a point in the summer of 2006 when many felt the same way about the Pension Protection Act. But if it does pass—or if it does not—it seems safe to say that the issue is not going away any time soon. What remains to be seen is if the “cure” is worse than what it aims to remedy.

Where we are: Given the legislative hurdles that the Patient Protection and Affordable Healthcare Act (PPACA) faced a year ago, it still seems amazing that the legislation passed. Of course, the dominant majorities in Congress that were necessary to carry that off are no more (some would argue in no small part because of their role in passing the legislation), legal challenges have been filed by roughly half the states, and the newly resurgent Republicans in Congress are threatening to “repeal and replace.”

What’s ahead: Common wisdom is that the legal challenges will fall short, and that President Obama’s certain veto of any attempt to repeal (much less replace) the legislation will keep those efforts at bay as well. Those in support of the legislation continue to believe that the American public will eventually warm to the idea (in fairness, many already do), while those opposed find vindication in the results of the recent mid-term elections. My guess is that we will still be talking about this a year from now—and that the issue will loom large in the 2012 election cycle.


Fee Fie? Revenue-Sharing Litigation

What we said: Barring a smoking gun discovery among the cases already filed, it seems likely that the laws—and disclosures—will change before the litigation has any real impact. On the other hand, it is entirely possible that the mere existence of that litigation—and the ever-present litigation threat—will serve to reform the system in a way, and on a schedule, that would not otherwise have been possible.

Where we are: No smoking gun yet, but four years in, a number of the cases have settled, another group has been dismissed and, by my count, only one has been fully adjudicated (and that in favor of the plaintiffs). The courts are split on the issues, and many have been willing to extend plan fiduciaries the benefit of the doubt, so long as participants had the ability to make their own investment choices. As litigation worries go, this brand drew the highest level of concern in PLANSPONSOR’s annual Defined Contribution Survey—but it wasn’t much. As for that much-anticipated “second generation” of lawsuits? Well, somewhat surprisingly, it has yet to materialize.

What’s ahead: This year the Form 5500 took a big first step in prompting a new level of fee disclosures, and the near-final proposed regulations on 408(b)2 should carry that one step further. The Labor Department continues to challenge the courts’ generous application of ERISA 404(c)’s shield—and has gone so far as to make its point clearer on the application of 404(c) with the addition of language in the recently proposed participant fee-disclosure regulations. Many seem to think that more disclosure—and the more public disclosure in the form of Form 5500—will simply serve to provide the plaintiffs’ bar with fuel for the fire, while others believe that more, and more consistent, disclosure will make it easier for fiduciaries to know what they are paying and if it is reasonable. My guess is that both will turn out to be correct.

Auto-Premonition—Doing It for Participants

What we said: Automatic enrollment may have taken something of a “holiday,” but it seems unlikely to be “over” as a trend. Look for it to pick up the pace again in 2010—and for the Obama Administration to turn its attention to the issue in the next year (or two).

Where we are: Well, in many respects, it was déjà vu all over again—with a sluggish economy doubtless contributing (no pun intended) to another flat year for automatic enrollment adoption rates. Still, while the overall adoption rate in PLANSPONSOR’s annual Defined Contribution Survey was slightly lower this year, there was a discernable uptick in adoption at the largest programs—even if small and micro plans showed no change at all. That said, the primary motivation this year, as it has been the past two, has been to be more proactive in helping workers save, and there’s every indication that it will remain so in the future.

What’s ahead: I’m sure plans will continue to adopt the design—for all the right reasons—but it is hard to see anything leading to any kind of major acceleration in the trend in the short term.

Default Lines—Targeting Target-Dates

What we said: We don’t know yet what regulators may try to do to help ensure that investors—particularly near-retirees—are not misled by the simplicity of a fund title and marketing pitch. Plan sponsors are on notice that there are differences here and, with luck, will continue to ask pointed questions. Because, after all, when you’re selling “you don’t have to worry about it,” somebody has to.

Where we are: Much of the “damage” from 2008 has been restored, providers have taken pains to ensure that buyers understand their underlying glide path assumptions (certainly those having to do with equity allocations at age 65), and regulatory bodies have taken some baby steps in helping individual investors better understand these offerings. All in all, the storm seems, for the very most part, to have passed.

What’s ahead: More and better disclosures, a growing interest in offerings that take more into account than mere retirement date (including managed accounts), and more discussion around the importance of open architecture solutions and concerns about the (lack of) ERISA fiduciary status for the providers who bundle their own offerings together. But as for real change—failing another sharp stumble in the markets—most seem to be content with the way things are.


Next up: Pension Funding, Advice, and the Roth 401(k)

"Interests" Bearing

Last week the Labor Department issued a proposal that would, by its reckoning, provide the first update to the definition of an ERISA fiduciary since shortly after the birth of the federal regulation (see DoL Broadens Fiduciary Net.

The move was much-anticipated and, in the eyes of many, long overdue. Clearly, the Labor Department wanted to narrow the exceptions to that definition (that were, somewhat ironically, put in place by the Labor Department of 1975) and, in the process, subject more advisers to ERISA’s fiduciary standards.

At a high level, the Labor Department is seeking to restore the two-part test for fiduciary status found in ERISA, one that was expanded to be a five-part test in the 1975 regulations. The proposal seeks to set aside the additional conditions that the advice be rendered “on a regular basis,” that the advice would serve as a “primary basis” for investment decisions with respect to plan assets, that the recommendations are individualized for the plan, and that the advice be provided pursuant to a mutual understanding of the parties. Instead, the new proposal would impose fiduciary status when a person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so, and receives payment (direct or indirect) for that advice.




The Implications

That change is almost certainly going to drive some of those advisers (and their sponsoring organizations) away from these programs, though I am hard-pressed to mourn that loss (the proposal left intact the exemption for education, and if those lines are easily crossed, by now surely we all know where they are). Those who remain may well charge more for their services in compensation for the extra exposure, certainly in the short run. However, those who do so will be competing against organizations and advisers that made that commitment years ago and who appear to be competing quite successfully already. Consequently, if the newly “converted” seek to profit by a rapid escalation of their fees, I suspect they won’t find that to be a successful strategy.

Those responsible for closely held stock valuations are most likely to feel some pain in the short run. After all, they have long enjoyed a special dispensation from fiduciary status At this writing, I’m not altogether sure how one conducts a security valuation that is exclusively in the interests of the plan participants and beneficiaries—but I’m no more comfortable with the notion of a valuation that ignores the impact that those valuations could have on the exposure of the plan that takes on those assets based on that valuation.

One of the most interesting aspects of the proposal was the Labor Department’s expressed interest in reconsidering its position that a recommendation to a plan participant to take a permissible plan distribution would not constitute investment advice, even when combined with a recommendation as to how the distribution should be invested. Said another way, the DoL is now willing to consider that such encouragement could constitute advice at a level sufficient to trigger ERISA fiduciary status. In announcing its interest, the DoL noted that “[c]oncerns have been expressed that, as a result of this position, plan participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests.” In fact, there has already been litigation involving rollover advice—and there are any number of stories out there about advisers persuading participants to take advantage of early withdrawal provisions and pull their money out of the plan to put it in their hands. Not that that couldn’t be advantageous for the participant—but shouldn’t the adviser encouraging them to pull money from ERISA’s environs be held to that same standard of care?

Of course, at this point, the proposal is just that—though it will be interesting to see the comments that are made on this new definition over the next 90 days (1).

As for where this takes us, it has not always been clear that all plan sponsors fully appreciated the significance of working with advisers willing to put plan and participant interests ahead of their own. But they should; and, IMHO, this proposal will improve the chances that they—and their participants—will benefit from that protection, whether they seek it or not.

—Nevin E. Adams, JD

(1)Comments on the proposal can be submitted electronically by e-mail to e-ORI@dol.gov (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at http://www.regulations.gov.

"Access" Points

On Friday, the Department of Labor, as part of the White House’s Middle Class Task Force, formally unveiled a couple of initiatives.

The “new” one—and the one likely to capture the attention of the retirement plan community over the next several weeks—deals with investment advice for participants (see “DoL Proposes New Advice Rule”).

At a high level, the DoL has taken a major step back from the position it took in the final regulations on the subject put together—by the DoL—in 2008 before being halted, and then withdrawn last November by the new Administration (see “IMHO: Executive Order”). They also, IMHO, seem to have taken a step back from the admonitions of the Pension Protection Act of 2006 (PPA) to draft regulations that would craft an exemption to ERISA’s prohibited transaction rules that have long barred the ability to be compensated for advice on a basis that might vary according to the recommendations of the adviser1.

Withdrawal “Symptoms”

Now, many (including, apparently, some that signed that legislation) have always had an issue (to put it mildly) with this particular provision of the PPA, which they fear opens the door to “conflicted” advice (see “IMHO: Irreconcilable Differences”). Of course, proponents of the PPA’s interpretation have argued that part of the DoL’s charge was to build compliance and disclosure structures that would prevent that result. However, that apparently wasn’t possible—at least for the current DoL, which, after halting the publication of the rules and putting it back out for comment, decided last fall to withdraw its proposal “in response to concerns raised in public comment letters questioning the adequacy of the final class exemption's conditions to mitigate the potential for investment adviser self-dealing2.”

Let me be clear: I’m not faulting the DoL for essentially adopting the position that the solution that they had crafted under the leadership of one Administration was not workable under another. Greed is a corrupting force, and even the most able, honest, and forthright adviser could, on any given day, be tempted to offer advice that better fits his or her own needs than that of a participant (we also know that there are plenty of advisers out there who are neither able, honest, nor forthright). Let’s face it—the folks most in need of investment advice are most assuredly also the least likely to read (or to understand) the disclosures that are supposed to put them on notice that the advice they are about to receive could be tainted (note that, even with those opportunities muted by the new regulations, the proposed disclosure form runs FIVE pages). In large part, IMHO, requiring that compensation for investment advice be “level”—as the newly proposed regulations do—is no more than a return to the status quo.

That, of course, is also its limitation. After all, while the new regulations were touted as a means of “increasing access” to “high quality investment advice,” I think it’s fair to say that the practical result is an emphasis on “high quality” (read “not from a source whose compensation varies according to the advice provided”) rather than “access,” because I’m hard-pressed to see how the new regulations will do much to engender a real expansion of advice offerings3.

Shifting Gears

Mitigating the impact of this shift in position—and, make no mistake, it is a shift—is the reality that there are many more fee-based advisers serving this space today than there were even as recently as 2006. Perhaps some of these were motivated by the ability to offer participant advice, but I see little connection between that movement and these particular regulations. Another reality is that a growing number of participants are simply being defaulted into investment options without the “intervention” of the participant, much less an advised participant.

Additionally, the proposed regulations contain new restrictions on the design and deployment of the computer model (the selection must be made by a plan fiduciary unaffiliated with the adviser), and some intriguing questions about the applicability of specific investment theories4, as well as a determination that it is not only the adviser, but the adviser’s firm whose compensation impact must be considered. However well-intentioned, these new elements will almost certainly impede, rather than accelerate, the availability of these tools.

While the DoL made an effort to estimate the impact advice can have5, we have no such estimates on the impact of potentially conflicted counsel. Presumably, those conflicts could put participants in the clutches of a “Madoff wanna be,” but, frankly, I’m hard-pressed to understand the difference between the recommendations potentially incentivized by the personal interest of an adviser versus those of a plumber, real estate agent, used car salesman, or lawyer (though perhaps a rigid adherence to ERISA’s prohibited transaction rules provides the requisite justification).

No one—certainly not this writer—is in favor of promoting advice that isn’t good for participants. Ultimately, keeping the door closed on potentially conflicted advice may be the safest and most prudent course, though one might be inclined to think that the structures already in place (the selection of an adviser is a fiduciary duty, after all, and providing investment advice for a fee is a fiduciary act) would keep the worst at bay—and that new proposals could be crafted to weed out the rest. Or one might be inclined to insulate the participant from even potentially “good” advice, because that advice might also serve the adviser’s personal interest.

Regardless, the Labor Department has laid out a new course on how participant advice can be offered, and how advisers can be compensated for that service. They have asked for input on that new direction6—and I sincerely hope they get it.

—Nevin E. Adams, JD


1 “A final rule and related class exemption published in January 2009 were withdrawn in November 2010 in response to concerns raised in public comment letters questioning the adequacy of the final class exemption's conditions to mitigate the potential for investment adviser self-dealing.”

2 Not to be cynical about it, but those concerns were expressed by just 28 individuals/institutions (which the DoL has published at http://www.dol.gov/ebsa/regs/cmt-investmentadvicefinalrule.html). More accurately, there weren’t (even) 28 expressions of concern about the regulations themselves. Many, as you might suspect, were simply pointing out areas of needed clarification; several were just pointing out the need for final regulations, noting that the lack of certainty about the rules had created a legislative limbo in which nobody was doing anything, or at least anything different, regarding the provision of investment advice. That said, apparently somewhere in that relatively modest number of comments lay arguments compelling enough to persuade the Labor Department that there was no way to thread that particular needle.

3 The DoL would presumably take issue with my conclusion, since the regulations repeat the assumption associated with the prior—but very different—version that this approach would “extend investment advice to 21 million previously unadvised participants and beneficiaries.”

4 This may well be the “battleground” of commentators over the next several weeks. The DoL solicits comments “on the conditions applicable to investment advice arrangements that use computer models.” This is a far-ranging section of the proposed regulations, ranging everywhere from “what investment theories are generally accepted” and should this regulation not only specify them, but “require their application.” I suspect at some level that some may draw comfort from this apparent effort to bind in not only what process is appropriate for these models, but what inputs. One can’t help but wonder, however, if those findings might at some point be extrapolated (implicitly or explicitly) to other applications.

5 There are some interesting acknowledgements in the proposed regulation: that there is no requirement to “offer, provide, or otherwise make available any investment advice to a participant or beneficiary”; that in scoping the impact of the regulations, the DoL assumed that, on average, participants and beneficiaries who are advised make investment errors at one-half the rate of those who are not.

6 Written comments on the new investment advice proposal should be addressed to the Office of Regulations and Interpretation, Employee Benefits Security Administration, Room N-5665, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, D.C. 20210, Attn: 2010 Investment Advice Proposed Rule. The public also may submit comments electronically by e-mail: e-ORI@dol.gov or through the federal e-rulemaking portal at http://www.regulations.gov.