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3 Pointed Questions Determine If New DOL Decision on the 401k Investment-Advice Rule Increases Your Fiduciary Liability

November 19
16:49 2009

After months of delays, the Department of Labor today finally declared the official end to the so-called “Investment-Advice” Rule promulgated during the waning days of the Bush administration. The question now on the mind of every 401k fiduciary:  Will the DOL’s decision increase my personal fiduciary liability?

1236598_72334608_life_rings_royalty_free_stock_xchng_300First, a bit of history. The DOL doesn’t have a stellar track record when it comes to making rules that involve investments. Nearly a decade ago, it embraced and today continues to display a Modern Portfolio Theory bias in a behavioral finance world. Just two years ago it officially blessed the then new concept of target date funds as one of the three pre-approved default investments for 401k plans. We know where that got us.

In January of this year, the DOL introduced the Investment-Advice Rule. This edict gave brokers the ability to offer direct one-on-one investment advice to 401k participants. House Education and Labor Committee Chairman George Miller, D-Calif. led the charge against this, with the support of the Obama administration, because he felt it failed to adequately address the conflict of interest issue. Indeed, just recently, Phyllis C. Borzi, assistant secretary of the Employee Benefits Security Administration, a unit of the Labor Department, suggested continuance of the rule would lead to “biased” advice (see “Labor Department nixes Bush OK to let brokers advise 401(k) plans,” Investment News, September 14, 2009).

Of course, it doesn’t leave the 401k fiduciary much comfort knowing the DOL had several times deferred implementation of the Investment-Advice Rule before effectively killing it today. Worse, although they promise to reissue the rule, the DOL has not set a time table. Most likely, the administration will give Congress first dibs on redefining the “Fiduciary Standard” and possibly eliminating the “broker-dealer exemption” (see “The Fiduciary Standard Debate,”, October 27, 2009).

So, while Washington fiddles, here are three vital questions every 401k fiduciary must answer to determine if the new DOL ruling will increase personal fiduciary liability:

  1. When was the last time we conducted a comprehensive 401k plan diagnostic review? Such a review examines not merely regulatory compliance but also fiduciary liability exposure. Specifically, among the things to survey in a diagnostic include identifying all service vendors and all potential conflicts of interest. For a more complete description, see “5 Critical Components of a Plan Diagnostic Test,” Fiduciary News, September 23, 2009.
  2. Do any of our 401k plan’s investment options pay commissions (including 12b-1 fees)? Few plans still buy traditional load (i.e., commission) based funds. Many, however, continue to use funds that incur 12b-1 fees (although according to the ICI’s most recent report, this trend is also going down). The fiduciary exposure increases when the 401k investment options include commissions and 12b-1 fees.
  3. Who picks the 401k investment options? Two potential liability exposures can occur here. First, the plan fiduciary might be choosing the funds directly in the mistaken belief that regulators treat mutual funds in the same manner they treat Registered Investment Advisers. To see the importance of this distinction, read “Broker or Registered Investment Adviser? What’s Best for the ERISA/401k Fiduciary?” Fiduciary News, October 7, 2009. Secondly, many especially smaller plans have hired bundled service providers. The practical consequence of the original Investment-Advice Rule encouraged this. While sometimes plan costs demand the use of bundled service providers, short of an outright discretionary trust relationship (where the bank becomes a named fiduciary of the plan), reliance on a single vendor may increase fiduciary liability.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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