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Will 2012 be the Year of the 401k Fiduciary?

January 04
00:01 2012

Between the new definition of “fiduciary” coming from the Department of Labor to the new Fee and Performance Disclosure Rules scheduled to go effective this spring, 2012 is shaping up to be the Year of the 401k Fiduciary. How will this all 1374790_51882151_2012_stock_xchng_royalty_free_300turn out? Will plan sponsors finally pay more attention to their fiduciary duty, or will “fiduciary” merely become another feature in a service provider’s marketing quiver?

“2012 will be a significant year for the development of plan sponsor fiduciary responsibilities,” says Marc Cahn, Senior Vice President and General Counsel, Diversified Retirement Corporation of Harrison, NY. He predicts “it is not necessarily the regulations themselves that will change the landscape but the threat of the regulations.”

Robert Richter, vice president of SunGard’s wealth management business and also the president of the American Society of Pension Professionals & Actuaries (ASPPA), describes the current situation to this way: “It is important to note the regulatory scheme is primarily focused on providers, not plan sponsors. So, the question isn’t whether plan sponsors will pay more attention to their fiduciary responsibilities. Rather, the question may be whether service providers, including investment advisors, are paying more attention to the fiduciary duties such that plan sponsors do not have excessive fiduciary exposure. Ultimately, plan sponsors have fiduciary responsibility, and the regulatory activity has already heightened the awareness of many plan sponsors of this duty.”

When this anticipated onslaught of regulations emerges, the world will change for 401k plan sponsors. Kyle J. Pifher, Principal, Findley Davies, Inc. of Columbus, Ohio, says, “The new regulations will require more oversight from the plan sponsor than ever before, and places much of the onus on the plan sponsor for disclosure, due diligence, and frequent monitoring of providers for quality services for the fees paid.”

The onus may be more acute for plan sponsors of smaller plans. Kevin Watt, Senior Vice President, Security Benefit Corp. of Topeka, Kansas, points out, “The impact will be most keenly felt and the risks greatest for small and micro plans where plan sponsors may not have the time and knowledge to address their fiduciary responsibilities.” Christopher T. Thomas, a Financial Advisor with Signature Financial Partners, LLC based in Washington DC, adds, “The bottom line is being a fiduciary takes time.” He sees this as “being a huge burden on smaller companies that don’t have full blown HR departments to handle the increased workload and who might not be willing to pay a professional fiduciary.”

Many view the coming events of 2012 as a potential watershed for all 401k fiduciaries. From Lake Oswego, Oregon, Peter Fisher, Managing Partner at Human Investing, says “Based on the number of calls we are getting and the types of questions being asked on RFP’s, my best guess is that 401k plan sponsors and their fiduciaries are taking their roles more seriously. I see the process going from a limited discussion as retirement plan committee’s meet to fiduciary committee’s being formed to address the disclosure requirements.”

Peter Macaluso, Vice President at FM International Services (NY), Ltd. in Melville, New York isn’t quite sure if he’d go as far as to say 2012 will be the Year of the Fiduciary. He does, however, believe “it will be the year plan sponsors finally understand what they are paying.” He attributes this to the coming Fee Disclosure Rule. As fiduciaries, Macaluso explains, “plan sponsors are required to understand the fees. The participants in the plan will make this necessary.”

Others agree with this sentiment. Richard Ohanesian, President & Partner, Ohanesian/Lecours, Inc. of West Hartford, CT, says, “The new DOL fee and performance disclosure rules are much overdue. For years, plan sponsors have had a fiduciary duty to plan participants; however, that duty has not been met by many plan sponsors.”

But, as with other issues, the Fee Disclosure Rule will have different significance for different plans. Again, size is the key. Brooks Mosley, president of Independent Pension Solutions from Jackson, Mississippi says, “The fee disclosure rules should certainly make plan sponsors more aware of who they are paying and what they are paying for. This should actually help small to medium size providers as their fee schedules are typically more straightforward than the larger providers of record keeping and administrative services. Plans that currently use a group annuity contract may be surprised to see the different layers of charges within the contract.” Mosley doesn’t see this as an issue for big companies. He says “they are usually staffed at a level to make sure they are in compliance with all of the rules regardless of who their providers are. So, changes for them will be less obvious.” On the other hand, he warns “for smaller companies, many employers are likely to become discouraged about the amount of liability they have. They have the liability now, but have not had it quite so much at the forefront.”

California based writer and Registered Investment Adviser Errold Moody, PhD, author of Financial Planning Fiduciary Standards Under Dodd Frank says, “There is no question that advisers should/must act as fiduciaries but no matter how this is all played out, it will be more of a marketing ‘gimmick’ until the attorneys for plaintiffs start hammering at the breaches they become aware of.”

Ohanesian adds, “Hopefully all plan sponsors will rise to their agreed to duties and accept full fiduciary responsibilities to plan participants. Will broker/dealers and insurance companies that are heavily invested in the retirement plan industry object to this proposed standard? Yes. Will the proposed regulation be altered? Yes, again. However, many plan sponsors and advisors are committed to providing a fiduciary standard and in those cases participants will benefit greatly.”

But with potentially competing definitions of “fiduciary” due soon from both the Department of Labor and the Securities and Exchange Commission – not to mention a third (and the original) definition borne by centuries of trust law – how will plan sponsors be able to tell the difference between marketing hype and moral ethics? Moody says, “Dodd Frank missed the most important point of being a fiduciary – you have to know what you are doing. There is not now nor has there ever been instruction of the fundamentals of investing taught to Series 6, 7, 24, etc…”

Ohanesian sees fiduciaries as performing a role similar to doctors. “Labels aside,” he says, “actions and perceptions should be the determinate of who is a fiduciary. If the advisor is dispensing advice, the perception by the plan sponsor and participants is that the advisor is acting in their best interests with no conflicts of interest and full disclosure.”

Moody feels at some point trial lawyers “will recognize the violations occurring at the most basic level and then it’s off to the races with (mostly justified) litigation. That can change a lot when the public becomes aware of just how much they have been taken advantage of.”

Perhaps Elle Kaplan, CEO & Founding Partner, Lexion Capital Management LLC of New York, NY best sums things up when she tells, “I am a fiduciary and it’s high time we applied that standard to 401k accounts. I am routinely solicited my 401k ‘managers’ to send smaller accounts their way – and would never [do that]. They are riddled with 12b-1 fees and other hidden commissions. It is high time Americans learned the difference between a broker and a fiduciary. They will retire sooner and safer if they do!”

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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