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DOL Fiduciary Hearings: Why 401k Plan Sponsors Need to Pay Attention

March 01
00:42 2011

How do you retire so you never have to un-retire? That’s the question on every 401k investors’ mind and the Holy Grail of every 401k plan sponsor. Indeed, TDAmeritrade asks this very question on page A13 of the February 28, 2011 641574_72705584_red_apple_stock_xchng_royalty_free_300issue of the Wall Street Journal (Eastern Edition). But here’s the kicker, after promising “guidance that’s customized” “covering everything from your investments today to the resources you’ll need tomorrow,” the broker offers individuals up to $500 for opening a new account.

If that sounds like the old toaster ploy banks used to offer clients who opened new savings accounts, you’re right. It’s OK for banks and it’s also apparently legal for broker to engage in “pay to play” marketing schemes, but, in general, it’s problematic for registered investment advisers (and probably bank trust officers, too). These service providers understand the nuance in the different regulatory treatment, but what about 401k plan sponsors and their charges? Are these folks knowledgeable enough to understand that, despite “covering everything from your investments today,” TDAmeritrade is not offering fiduciary advice? While the TDAmeritrade deal applies to IRAs, is it really that much different from the deals offered to 401k plan sponsors?

On March 1st, 2011, the United States Department of Labor (DOL) begins a two-day hearing on its proposed definition of “Fiduciary” under ERISA. The DOL has scheduled testimony from thirteen panels representing a total of thirty-four professional organizations and two law school students. Ironically, no individual 401k plan sponsors or investors are scheduled to offer their opinion on a rule intended solely for their benefit. Regardless of this apathy, the DOL will soon make a decision. This decision could well decide the retirement fates of all 401k investors and the fiduciary liability of 401k plan sponsors.

Since these beneficiaries seem to have determined it’s not important to participate in the DOL’s hearings, we’ll help show the consequences the DOL testimony might have on their retirement plans. We’ve narrowed down the broad range of possibilities and their implications to 401k investors and plan sponsors to three potential choices. To do this, we had to eliminate one of the more contentious areas of the proposed rule – the one regarding ESOPs. This may be important to some, but it is so specific we decided to ignore it to prevent muddying up the analysis. With that, here are the three possible outcomes:

  1. The DOL Does Nothing – We’ll give this outcome a 35% chance of occurring. Unlike the SEC, the DOL apparently isn’t looking for increased funding, so the DOL appears less likely to hold their version of the fiduciary standard hostage. In this scenario, nothing changes – at least until the next big investment scandal. It still means 401k plan sponsors will need to stay aware. With all the debate, corporate sponsors will have a tougher time claiming ignorance. In the current world, we know we have problems. We know the solutions, but the solutions come at a cost (albeit primarily to the service providers). Will plan sponsors prefer short-term savings in exchange for increased long-term fiduciary liability? Individual plan sponsors will make their own individual decisions.
  2. The DOL Defines Fiduciary Down – In this scenario, which we handicap at 50%, the DOL goes with much of its original language, but modifies it to satisfy large industry groups. An example might be broadening the number of firms qualifying under the definition of “fiduciary” but creating an ocean of self-dealing exemptions. These exemptions might be similar to the Frost National opinion already promulgated by the DOL (this opinion allows “fiduciaries” to enter into an otherwise prohibited transaction and recoup 12b-1 fees). While this might seem an improvement from doing nothing, it may actually present an increase in fiduciary liability for 401k plan sponsors. Such a downward definition will encourage more financial service providers to offer more self-dealing products than today as these products can best cover up true fees and appear more attractive to 401k plan sponsors. Eventually, a scandal will expose this deception, but, unlike the first scenario, it’s likely 401k plans will have suffered greater losses.
  3. The DOL Retains a “Trust-like” Fiduciary Definition – This Panglossian scenario has only a 15% likelihood. Here, the DOL accepts its original language and rescinds the Frost opinion. In this case, any firm offering investment advice is considered a fiduciary. This increases protection for 401k plan trustees; hence, reducing their personal fiduciary liability. When TDAmeritrade prints an ad like the one described in the opening paragraphs of this article, it will be clear to all the firm is not a fiduciary and thus is making money by selling products, not by offering investment advice. While this outcome is good for 401k plan sponsors and participants, it does present a challenge to the current way some service providers perform their business. Given the line-up at the hearings, it will be difficult for the DOL to stand athwart the mighty wind of these professional lobbyists and listen to the silence of those not present. The apple is just too tempting to bite.

Granted, the final result may be a combination of some or all of these possible outcomes, but the general idea holds. Just like state governments have the unfortunate duty to face up to generations of poor retirement plan management for public employees, today’s federal regulators have to face up to generations of poor retirement plan decisions. Only then can employees expect to begin to reap the true benefits of their 401k plans and only then will plan sponsors rest easier.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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