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

What 401k Plan Sponsors Might Expect from Proposed Fiduciary Rules

April 19
00:15 2011

Industry groups have cited several different reasons why the Department of Labor should not adopt its proposed changes in the definition of fiduciary under ERISA. Among these reasons the most cited include “the increased cost of financial advice,” 564543_18792096_transition_stock_xchng_royalty_free_300the narrowing of investment choices” and the difficulty of transitioning their business from one centered on the suitability standard to one centered on the fiduciary standard. What merit do these dire warnings have, particularly since many 401k plan sponsors already employ providers who follow the fiduciary standard? Fiduciary News looks at these concerns and finds some simple answers and at least one surprise.

Let’s knock off the first two quickly. First, even the SIFMA study admits the potential increase to the cost of providing investment advice only impacts clients with less than $200,000. Most 401k plans far exceed this amount. More importantly, the Consumer Federation of America rejected the findings of the SIMFA study, saying SIFMA misjudged the impact of the fiduciary duty. Impact on the 401k Plan Sponsor: Probably none.

Second, it goes without saying imposing a fiduciary standard will narrow investment choices. After all, that is the point of the DOL’s rule. The Department wishes to remove, to the extent possible, all obvious conflicts of interest. Any investment that pays the provider represents a classic self-dealing violation long prohibited (or at least highly dissuaded) by traditional trust law (from which we derive our fiduciary standard). Applied correctly, the ERISA fiduciary would therefore need to avoid any mutual funds which pay commissions or 12b-1 fees. Assuming half of the roughly 8,000 mutual funds have loads or 12b-1 fees, that leaves about 4,000 mutual funds to choose from. Will the fiduciary standard “narrow” investment choices? Yes, by eliminating those most likely to hurt investment performance. Will this narrowing matter? No, there are still thousands of funds left to choose from. Impact on the 401k Plan Sponsor: After a slight embarrassment for not monitoring – or worse, allowing – vendor conflicts of interest, there might be an adjustment to plan options as tainted funds are removed and replaced by funds without any conflicts of interest.

This leaves the question of the transition. Having been framed subjectively, this is the most difficult issue to pin down. Have we ever had this experience of transitioning brokers from one business model to another? In fact, it might surprise to learn that, yes, we have. In 2005, the SEC adopted its fee based brokerage account rule. In two years, it garnered one million accounts holding $300 billion in assets. Then what happened? Patricia C. Foster, Esq, PLLC says, “The SEC’s rule permitting broker-dealers to establish fee-based brokerage accounts was struck down by a federal court within two years of its adoption.  In that instance, the court granted the SEC’s request for a 120-day stay of the court’s ruling in order to permit brokerage firms sufficient time to transition the fee-based accounts to commission-based accounts.”

It’s hard to say how similar this 2007 example will be to any fiduciary-related transition. Janice J. Sackley, CFE of Fiduciary Foresight says, “It should not be as big as a transition except for the compensation. There will be logistical issues, issues with acknowledging the broker’s fiduciary status, issues involving documenting the compliance to the fiduciary standard, but compensation is going to be a major issue for reps that make a living selling products.”

Edward M. Lynch, Jr., Managing Director and Chief Retirement Officer at Dietz and Lynch Capital, believes the transition to a fiduciary service (i.e., RIA business model) is already underway. He says, “It’s been a fairly smooth transition in the sense that big firms are putting things into place – identifying small select groups of people that can function in a fiduciary capacity. Those brokers that only have a plan or two are preparing to hand those over. Independent firms are applying sets of standards and overall, the transition has been largely orderly and should transpire pretty systematically.”

Still, Lynch worries the final ruling will only address conflicts-of-interest by way of disclosure, not by outright prohibition. “The only way,” he says “to truly remove conflicts of interest will be to work with an independent party.” He feels in this way, all fees and revenues are truly transparent and will be apparent to the plan sponsor.

Ultimately, the impact on 401k plan sponsors of adopting the proposed fiduciary rule will likely be more subtle than the impact on the brokerage community itself. Sackley says “Broker reps are going to have to be educated on moving from the sales world to a fiduciary world – it’s a totally different culture.” Lynch probably offers the best conclusion for the ERISA plan sponsor: “There’s definitely potential for revolutionary change. It comes down to this: Be an informed buyer and beware.”

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Kevin Condon
    Kevin Condon April 19, 16:31

    The provision of advice to all plan participants will require the leverage of technology to be joined to the regulatory supervision environment, thoroughly and impeccably. Shunting low balance participants into auto-enroll programs with no advice is irresponsible and unfair. To protect their fees, large investment companies will provide portfolio “guidance”, not advice, as automated as possible, in the area of portfolio construction and balancing only. But most retirees need much more help that this. If the strictest fiduciary standards are required by regulators, advice sessions by humans will be required and may even be provided. If the least strict standard is applied, plan participants with small balances and a crying need for advice will suffer. No one looks at this. Interesting times.

  2. Stephen Winks
    Stephen Winks April 26, 10:58

    The transition from brokers having no accountability for investment recommendations after a trade is executed to total ongoing accountability for every recommendation made and every client holding monitored, will require more than nominal effort on the part of the brokerage industry if fiduciary liability is to be professionally managed–making advice safe, scalable and easy to execute.

    The industry does not have an arguement on limiting investment choice (the objective of regulation) or increasing the cost of advice (RIAs routinely charge 50 bps for totally custom client portfolios which can meet a fiduciary standard, to include investment cost, trading cost and adviser compensation versus 130 bps for the average mutual fund which can not be client specific and does not include trade execution cost).

    There is a cost for retooling the industry which is the necessary price for the brokerage industry of literally being in the advisory services business. Up until now, after 70 years of neglect, the brokerage industry has created none of the prudent processes, technology, functional division of labor, conflict of interest management necessary to make advice safe, scalable and easy to execute. The SIFMA observation boils down to “we do not want to act in the best interest of the consumer” which is unacceptable from the perspective of the consumer and the broker. The industry simply must reconfigure itself in support of fiduciary standing which is culturally a different business than product sales. We all are awaiting the principled brokerage industry leadership who will position the broker to act on behalf of the consumer in the consumer’s best interest.


Only registered users can comment. Login is sponsored by…

Order Your 401k Fiduciary Solutions 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.