What do you think of our site upgrade?
Hosting an industry conference? Ask us about including it in this ticker?

Will 401k World Change by Fall? 3 Pressing Regulatory Issues 401k Plan Sponsors Need to Know Right Now (Part I of II)

June 15
07:32 2010

(The following is the first of two parts summarizing a keynote speech given by the author to a focus group on fiduciary concerns in Buffalo, New York on June 9, 2010.)

They say things happen in threes. By the time the leaves begin to fall, this adage may prove true for 401k plan sponsors (and any ERISA fiduciary for that matter). Since the start of the year, the Department of Labor (DOL) and the Securities 311214_4844_urgent_stock_xchng_royalty_free_300Exchange Commission (SEC) have worked diligently on developing a fresh regulatory framework. These potential new rules may dramatically change how 401k plan sponsors manage their companies’ retirement plans. Failure to understand the implication of these changes can ensnare companies and their ERISA trustees with unexpected liability issues.

There’s one thing we know for sure. These changes are going to have an impact on how investments are selected both at the individual level and at the plan level. They’re going to have an impact on how your providers get paid, or if they get paid, or if you can even use those service providers anymore. So, this is going to be something that is very, very critical. And these changes are occurring right now, even as we speak. In a world normally barely more exciting than watching paint dry, these next three months may prove to be what can only be called awatershed event for 401k plan sponsors.

What are these impending changes and what actions can the typical fiduciary take right now to decrease fiduciary liability?

A Summary of the Three Likely Changes:

  • 401k Investment Advice Rule – An artifact of the Pension Protection Act of 2006, “investment advice” applies to individual plan participants, not to the plan itself. The outgoing Bush administration issued the initial “Final Rule” of in January 2009. Within six months, the Obama administration rescinded those rules. In February of 2010, the DOL issued a new draft Rule and asked for public comment. More than 70 individuals and institutions (mostly service providers, very few plan sponsors or plan participants) felt compelled to address this controversial draft before the comment period ended in May. The draft rule sought to end conflicts-of-interest. Some think it goes too far, others fear it doesn’t go far enough. Oddly, the bigger controversy appears to be the DOL’s inadvertent de facto decree in favor of index funds (based purely on expense ratio, not on investment performance). This bias may derive from the DOL’s attempt to embrace a particular investment theory (in this specific case, Modern Portfolio Theory). Although the DOL did ask for commentary regarding prevailing investment theory, very little public comment came from academia. The DOL has indicated its decision on the wording of the new “Final Rule” will come out in the Fall of 2010.

  • Adoption of a Universal Fiduciary Standard – Two types of “advice” standards exist in the financial industry. The “Suitability Standard” derives from the brokerage industry. It limits the liability of the advising broker to the determination of an investor’s suitability for any investment. The types of vendors subject to the Suitability Standard include members of the brokerage, insurance and, often, the financial planning industry. The other standard – the “Fiduciary Standard” has roots in the trust industry and, in fact, one can trace its lineage to 1215 AD and the Magna Carta. Among other differences, the Fiduciary Standard prohibits a fiduciary from profiting from any transaction involving beneficiary assets (“prohibited transactions”). Banks, Trust Companies and SEC Registered Investment Advisers abide by the Fiduciary Standard. Currently, 401k vendors can employ either standard. Muddying the issue is a DOL ruling permitting providers who would otherwise be deemed fiduciaries to engage in certain prohibited transactions. Rumors buzz in Washington regarding the potential unification of the financial services industry under on “Fiduciary Standard.” Plan sponsors can expect a universal standard to happen anytime soon, maybe in the form of a hybrid or maybe never happen at all. Changes can come in the form of the previously mentioned Investment Advice Rule from the DOL, a regulatory change from the SEC (which currently interprets a broker exemption under the Investment Adviser Act) or from Congress itself during the current reconciliation process of the Financial Regulatory Reform Bill (the House wants a unified standard, the Senate doesn’t).
  • Significant Modification to the Use of (and Perhaps Even the Elimination of) 12b-1 fees – During the industry’s early years, mutual funds received a gift from Congress in the guise of 12b-1 fees. Mutual funds could use these fees to offset marketing costs in order to build economies of scale and reduce the total expense ratio for all shareholders. Over the years, these fees morphed into something more akin to the commission rate load funds typically used before the current popularity of no-load funds. This is primarily an SEC-based issue and, indeed, the SEC has promised to have some form of pronouncement on this in August 2010.

If any one of these regulatory bodies adopts enacts some form of the above changes, many 401k plans will likely have to change the way they operate – from how they pay their vendors to whether or not they can continue to even employ those vendors. Can a 401k fiduciary do anything to better prepare for this? Next week we’ll explore the answer in “4 Liability Reducing Strategies for Today’s 401k Plan Sponsor (Part II).”

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Roger Wohlner
    Roger Wohlner June 15, 09:28

    Chris, good post. The 401(k) world certainly looks poised for change, as a fee-only advisor I view these changes as good for sponsors and participants so long as Congress doesn’t cave in to the financial services lobbyists.

    In my opinion, conflicted advisors should be barred from providing this advice to particpants, period. Anyone who might gain from participant investment patterns or anyone who could earn a commission by swaying participants to roll over plan assets upon termination of employment should be barred in my opinion. I strongly feel that no advice is superior to conflicted advice.

    As far as the Fiduciary Standard, an advisor either acts in the best interest of their client or they don’t. I don’t see what is so complicated.

  2. Bridget L. Steinhart, VP, Aon
    Bridget L. Steinhart, VP, Aon June 17, 11:41

    It seems that the SEC’s comments were very specific to 12b-1 fees, but many other issues/opportunities exist attached to the funds around which the typical plan sponsor is not fully aware. Sub-ta fees, wrap fees, mortality fees, sales expense recovery fees, “administrative maintenance fees” are just some of the examples of hidden fees or revenue to the service providers that are not known to participants. Digging through that level of detail is critical to help the sponsor make the most effective decisions possible among service provider choices.

    Another comment regarding conflicted advisors…for advisors that are linked in some way to the service provider (e.g., the recordkeeping arm shares terminee contact information with IRA advisers), a potential for negligent hiring exists for the fiduciaries of the plan. One way to mitigate risk (assuming the advisor service can’t be eliminated) is to review the contract, product offerings and participant communications, and for fiduciaries to make concerns very explicit. Failure to resolve might be reason enough to put the plan out to bid.

Only registered users can comment. Login is sponsored by…

Order Your From Cradle to Retirement book today!

Vote in our Poll


The materials at this web site are maintained for the sole purpose of providing general information about fiduciary law, tax accounting and investments and do not under any circumstances constitute legal, accounting or investment advice. You should not act or refrain from acting based on these materials without first obtaining the advice of an appropriate professional. Please carefully read the terms and conditions for using this site. This website contains links to third-party websites. We are not responsible for, and make no representations or endorsements with respect to, third-party websites, or with respect to any information, products or services that may be provided by or through such websites.