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DOL Detractor Reveals Due Diligence Secret to 401k Plan Sponsors

March 16
00:07 2011

You find yourself surrounded by hordes of costumed zanies all shouting self-confident advice. You feel as if you’re drowning in some surreal Mardi-Gras frenzy. All comes together when you recognize the neatly trimmed man in the 993681_31908852_box_curtain_stock_xchang_royalty_free_300tailored sports jacket calmly ask, “so which do you choose? What’s in the box or what’s behind the curtain?”

For a moment, the man possesses the vague amorality of Schrödinger’s cat. You trust him because he sits smack dab in the middle of the fence, neither up nor down, neither left nor right. In fact, he’s both the box and the curtain. After all, it is your choice. Whether you win the new car or the booby prize – it all rests on your imminent decision.

Pretty scary, huh?

But suppose the prize isn’t for you, suppose it’s for your loyal employees, the one’s you consider as close as – if not closer than – family. And instead of a new car and a harmless gag gift, what if the choice presents the stark difference between a safe, secure retirement and meager pittance that precludes retirement.

Now that’s really scary.

Consider this. What if our dispassionate game show host decides to move away from the fence? What if he actually suggests which might be the better choice? Would you go with his advice? Most certainly you would if you were confident he had only your interests in mind. But what if he didn’t? How would you know if he does or he doesn’t?

In the world of investment professionals, it’s often difficult for the 401k plan sponsor to pick out the advisers from the advisors. But, through the frank admission of testimony from an opponent to the DOL’s new definition of fiduciary, telling the difference might just have gotten easier.

It appears a number of industry groups feel the DOL is going too far. Three major organizations all provided written testimony at the DOL recent hearings on the definition of fiduciary: The American Society of Pension Professionals and Actuaries (ASPPA), the National Association of Independent Retirement Plan Advisors (NAIRPA), and the Council of Independent 401k Recordkeepers (CIKR).

Brian H. Graff, who testified on behalf of the ASPPA, NAIRPA and CIKR, said, “It is also important to point out that the proposed regulation would not, as some commentators have suggested, preclude commission-based brokers and advisors from working with sponsors, and thus would not eliminate an important distribution channel for plans. Under the so-called limitation in the proposed regulations, such brokers and advisors would be able to exempt themselves from the regulation, provided certain disclosures are made to the recipient of the advice.”

Mr. Graff then says these disclosures are “over broad and unduly harsh.” But he does agree it is “most important” to disclose to 401k plan sponsors “that the broker/advisor is NOT acting as an ERISA fiduciary and thus the advice given is not afforded the protections of ERISA.”

Remember, a fiduciary can only act in the best interests of the beneficiary. Anyone not acting as a fiduciary, well, it’s less clear whose interests they’re acting in. This testimony may have therefore inadvertently revealed a hidden secret 401k plan sponsors can use during their due diligence process – ask the candidate if they are acting as an ERISA fiduciary or if they are not acting as an ERISA fiduciary.

In the end, the decision comes down to you: What’s in the box or what’s behind the curtain?

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Allen Vaughan, AIFA
    Allen Vaughan, AIFA March 17, 20:27

    You make a good point about Brian’s testimony. The point you make is correct: a plan sponsor should ask if their advice would make them a fiduciary to the plan, as specified under ERISA §405(d)(1), §401(c)(3) and §3(21). I’ve been screeming this since I went independent in 2004, but, as usual, it’s a ‘crying in the wilderness’ until the news goes viral as it has with Dodd-Frank.

    In addition, a plan sponsor should ask if the 401k is the sole line of business in which the advisor practices his art. I advise plan sponsors to ask it in a more disguised form: “Tell me what percentages your total business ecompasses: _____% personal business, ____% 401k/DC/DB business, ____% other. If this is done in a verbal/live setting, I tell the plan sponsor to then ask the advisor (if they’ve answered in the affirmative to doing personal business to some degree) whether they plan to work with their employees in their personal investment “needs”. Certainly, that can also be structured into an “ABSCAM”-style question to get the advisor/broker to ‘fess up to using the plan as a conduit to going after more, high-dollar-reward personal investment business. For me, that’s a conflict of interest under ERISA 404(a)(1)(A,B&C), the “sole purpose” and “exclusive benefit” clauses of 29USC1104. OK, I’ve bloviated enough. Anybody else reading this should be able to get the picture now of what some of us are trying to coach plan sponsors in how to screen the sales people that darken their doors. My attitude is, brokers need no longer apply! I got sick of trying to train them in the 1990’s. Now I’d rather run them out of the business altogether, Mr. Graff!

  2. Joe Smileson
    Joe Smileson March 17, 21:24

    Detractor? The testimony from Graff says the following:

    “ASPPA, CIKR, and NAIRPA applaud the Department for updating the regulation defining the
    term “fiduciary” under ERISA section 3(21) to provide fiduciaries with the information they
    need to make informed decisions. Although we have some suggestions for improving the
    proposed regulation, we plan to primarily focus our comments at the hearing on our support of the approach taken by the Department.”

    He doesn’t sound like a detractor to me.

  3. Mark Levin
    Mark Levin March 18, 07:14

    Detractors? I will tell you what I think are detractors. The DOL. They appear to be nothing but toothless, barkless dogs. We are trying to convince plan sponsors about the value of a fiduciary advisor and they look at us like we are selling snake oil. I tell them about the DOL and ERISA and even give them the website links and they think it is all a marketing ploy. I even had an major local accounting firm question the need for our services and they said “we want to run this by our attorney to see if this is really necessary”. You know what their expert attorney who holds himself out as a Tax and Pension Specialist advised them? “Mr Levin should be addressing his services to Merrill Lynch as they are the trustees of the plan and you are only the plan sponsor and dont have that responsibility.” I would say the over 80-90% of the prospects I speak with have no interest or fear from the DOL and think our message is just a marketing ploy. So what is next? Should the DOL come down hard by beefing up compliance personel and going door to door fineing plan sponsors who dont have any documentation for their decisions, no benchmarking of investments, no IPS? Probably not. While they could probably bring in enough in fines to cover the national debt, it may just kill the retirement plan market all together. I have had prospects even say to me, just the thought of that kind of liablity, they may shut down their plans. But how about some positive incentive, like an extra tax credit for following the rules. If plan sponsors were required to not just check a box but make an affirmative statement, under oath, acknowledging penalties for mis representation, maybe then they would understand what is required of them. Right now some think that because the TPA checks a box and marks 2F or 2G on their 5500 they have done all they need to do for 404c compliance. They dont even know what 404c is, but when you tell them they truely believe it is the TPA or the Plan Providers or the agent that sold them the plan who has to make sure that all is well with the plan. Then you have some knucklehead attorneys that tell them it is so. In summary, Unless the DOL begins some really informative and scary method of getting to the plan sponsors, you will continue to see what is really out there. The HR people, the Executives and Company owners just think we are chicken little.

  4. Wayne Isaacks
    Wayne Isaacks March 18, 11:16

    So, we ask the majic question: “Are you an fiduciary?” Do they know? It’s all very technical, and the knucklehead attorneys don’t always agree.

    Reminds me of the TV crime drama folklore that drug dealers can ask a suspected undervcover cop, “are you a cop/”, andd they have to tell thetrusth. At least they would know for sure if they are or are not a cop.

    Seems to me the big problem is greed (Gordon Gekko): that of the brokers who want to”manage” your money into thier pockets, and investors who believe the pure truths that one can generally outperform the market, and that double-digit or even 8-9% returns should be normal. generally inflationary periods ( like our last 20 years though it’s been officially deemd no inflation because 3% inflation is the new “zero”) make people belive this, and the corrections are very disappointing.

    “Are you a fiduciuary?” indeed. Due diligence is more demanding, there are no majic spells that do the job of investigation, and critical judjment. “How do you make your money?” is a better question the answer to which can illuminate inehernt conflicts of interest. Another is to evaluate the recommendations and inquire ” what do you and others get paid for this invenstment decision?”

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