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2013 Fiduciary Compliance Semi-Annual Overview – January

Welcome to a new year and a new benefit offered exclusively to newsletter subscribers. Our new Fiduciary Compliance Semi-Annual Overview provides complete coverage of important events, issues and research occurring during the previous six months. Every day the examines both new and old media sources to find the stories most relevant to 401k plan sponsors. We compile this daily research, including a cursory review of every story, into our weekly Trending Topics article, published every Monday morning (Tuesdays when a Monday holiday occurs). This article is available for free on to all readers and doesn’t require a subscription. This Semi-Annual Overview offers both broader insights and deeper analysis and is available only to basic subscribers (this is a free service).

We invite readers to share their own thoughts and comments in the appropriate section following this report.


What Happened: Two big pieces of news hit the industry within this category in the latter half of the past year. First, the last six months of 2012 coincided with the first six months of implementation of the Department of Labor’s new Fee Disclosure Rule 408(b)(2). As a result of this Rule, service providers are required to submit their fees – both direct and indirect – to plan sponsors and plan sponsors are required to replace any service provider that fails to comply. In a companion rule (485(a)5), plan sponsors are then required to include in plan participants’ statement data on actual fees paid (both direct and indirect) in dollar amounts. Your plan should have already done this and no doubt you may have received some questions from employees on this new piece of information that’s now a part of their statement. On the other hand, if your plan is like many other plans, employees may have not asked anything. Most feel it’s too early to tell what the true impact of Fee Disclosure may be, but, because the DOL failed to provide a template requirement and until they do, service providers who have the most to hide will continue to “comply” with this rule by issuing reams of paper with elongated URL links for specific information. While all in the guise of “disclosing” fees, it appears to be more like a variation of “Where’s Waldo” as opposed to sincere fee disclosure. Plan sponsors facing this specific dilemma need to be careful. If they can’t readily understand “disclosed” fees, they may be liable for the vendor’s failure to properly disclose those fees.

Second, Fiscal Cliff negotiations threatened to destroy the golden goose of the 401k. Throughout the year, and accelerating with the rising class warfare of the presidential election, politicians attacked the 401k as lacking the utility of the pension plan. Proposals were floated to reduce or eliminate tax deductions for defined contribution plans and to create a “public” pension plan system (since we’ve done such a superlative job with Social Security). In the end, it ended up being all talk and no action and, when the dust of negotiations settled into a final agreement, the 401k plan remained standing unscathed, alive to fight another day.

What’s Ahead: The DOL promises to be busy in the next six months. Among the initiatives they expect to release is the long-awaited new definition of fiduciary as it pertains to ERISA. You may recall they floated this new definition in late 2011 and sought industry feedback. The lobbyists attacked it and the DOL withdrew the new definition in 2012. Although Phyllis Borzi promised to come out with a final rule, it’s unclear if the resignation of Labor Secretary Hilda Solis might hinder or help this effort. Solis has been a partisan lightning rod while Borzi seems to be above the fray.


What Happened: The bulk of this section has been addressed in the compliance section. The big news is how very little happened once fees began to be disclosed. This suggests one of two things. First, the hullabaloo leading up to the effective date of the disclosures appears to have been much ado about nothing. On the other hand, without a template, there were plenty of places for hidden fees to remain elusive; thus, nullifying the intent of the Rule. On the other hand, we now have the answer to a question “If a fee falls disclosed in a forest of papers, will anyone ever read it?” Judging from the deafening silence of participants, consumer advocates and the main stream press, we can conclude the answer to our philosophical questions is a resounding “No!” On the other hand, we’ve seen increasing evidence that fees in general still steal the 401k headlines. The bad news too much of the news merely regurgitates old myths. The good news, however, is the growing research that exposes the folly of those myths. For example, new analyses suggest the common belief that high mutual fund fees lead to lower performance is found to be true only to index funds.

What’s Ahead: Sooner or later, the dam will burst and the joys of fee freedom will come gushing down the valley of plan sponsors and its tributaries of participants. This will be more likely when the DOL issues a template, even if that template merely require everything to be on one page in no smaller than 8 point type and with no URL links (this is similar to what the SEC requires of mutual fund prospectuses). Unfortunately, we don’t see a template on the horizon, but, who knows, the DOL may have more latitude to surprise this year than last. More importantly, it’s likely we’ll see more independent fee rating services pop-up. We can only hope the fees they charge won’t consume all the fees they’ll purport to save.

Conflicts of Interest

What Happened: Many expected 408b-2 to expose rampant conflicts of interest, especially for smaller 401k plans. So far, nothing. There hasn’t been a lot of chatter of plan sponsors complaining about much of anything. In fact, some reports say plan sponsors are quite happy. These same reports suggest this bliss comes from ignorance, not from actual facts. The required fee disclosure doesn’t include adequate benchmarking, so plan sponsors really have no idea what to compare themselves to.

What’s Ahead: But the DOL had a back-up plan. That would be new definition of fiduciary. Unfortunately, the DOL got cold feet and put the whole thing off until the election provided greener pastures. By the end of year, the DOL had promised to introduce a final rule of its new definition by the end of the first half of 2013. This new Fiduciary Rule (introduced earlier in the compliance section of this report) will measure the muster of the DOL. If the DOL sticks to its original intention and includes IRAs, expect to hear a loud clamor from the brokerage industry and a standing ovation from Registered Investment Advisers. That’s on the fringe. What’s likely to happen is the DOL will broaden the definition of fiduciary to include all manners of service providers – from recordkeepers to brokers. This can be industry shaking – as long as the DOL then doesn’t simultaneously publish a laundry list of exemptions that effectively nullifies the practical intent of the new rule. If this happens, expect to see registered investment advisers to lobby for the following words to be placed at every door leading to the DOL: “Abandon Hope All Ye Who Enter.”

Due Diligence

What Happened: With all the talk of fees and fiduciary, little precious ink has been wasted on the area of investments. What ink has been wasted on investments was wasted on promoting ongoing fads, as if people will believe any lie as long as it’s told often enough. Of course, on the flip side, a lie told too often becomes a cliché, and clichés are usually ignored. So, here we have it. Are Target Date Funds lies or clichés? Are ETFs lies or clichés? Is the apparent superiority of index funds lies or clichés? In the process, we heard of the death of mutual funds, the rise (if not downright requirement) of annuities and yet more fables from the era of the Modern Portfolio. To be honest, much of the academic work has shifted from the fallacy of Modern Portfolio Theory to the promise of Behavioral Finance. In fact, the most important study published in the second half of the year was one done by Wharton. It provided a surprising conclusion: The real dollar difference between the average 401k asset allocation and the optimal 401k asset allocation is simply made up for by working an additional 4 more months. And that’s given an average annual return that makes the difference almost non-existent in practical terms.

What’s Ahead: So, are investments dead? As long as there are stocks to be bought, investments and investing will remain important. For long-term investors, the availability of good – not great, but reasonable – will remain. There will always be a great debate as to which type of investment yields the most consistent returns. For years, this debate was centered on value vs. growth investing. With the advent of index funds, the debate has shifted to passive vs. active investing. The fact is, neither side is right or wrong. There are always periods when one form of investing will beat another form of investing. For example, last year, passive investing did better than active investing. Expect to see a lot of stories about that, especially ones linked to fee issues. And the passive investors will have lots of firepower, since any performance period ending in 12/31/12 will likely show passive beating active. So, for the first part of the year, passive will take the headlines. But then the backlash will occur. It’s been almost ten years since the “snapshot-in-time” anomaly was discovered, and this fact will expose the folly of those passive articles. It won’t say active always beats passive – the facts don’t support that – but the facts also doesn’t support the hypothesis that passive always beats passive. Like the old growth vs. value debate, it’s really just a flip of the coin (although value did always have a slight advantage). The secret to success is sticking with the same investment philosophy and avoid switching (which too often leads to a buy-high sell-low result). On the other hand, who knows? Maybe new research will when it makes sense to switch from passive to active and vice-versa.

Aside from this, expect to see more stories on traditional “one-portfolio” investment options. These aren’t asset allocation funds, Target Date Funds or balanced funds, but traditional “profit-sharing plan” type all-equity multi-cap funds. This will become the new generation of “default option” available in 401k plans.


What Happened: That same Wharton article the exposed the insignificance of asset allocation also displayed the importance of education. It’s becoming clear, as the Wharton study concluded, investors have much better control over what really impacts long-term investment success – and it’s not investment performance. The three factors outlined in this research include: 1) when you start an investment program earlier; 2) How much you contribute; and, 3) when you retire. This trio of elements are more important to success than your investment decision (well, that’s assuming you’re at least in the ballpark and no investing 100% in money markets or Lotto tickets). Of all the happenings in all five of our categories in the last six months, the conclusions of this single study will have the greatest impact on retirement investor, their plan sponsors and their service providers.

What’s Ahead: Plan sponsors have already begun to emphasize general retirement planning education over investment dog and pony shows. This means it’s more likely educational seminars will be conducted by teachers and other independent fiduciaries as opposed to brokers and investment salesmen. Education will therefore focus on matters similar to what were brought up in the Wharton study, with plan participants completing worksheets (on paper or on electronic devices) that help them plan an appropriate savings program. With the increasing use of default options, employees will more of their time working on their retirement plan and not on sifting through investment options. This will be a good thing. It will encourage more and greater participation and will lead to more retirement success stories.

Alas, for some service providers, this will not be a good thing. Traditional investment sales professionals will find themselves shutout from education programs unless they radically alter what they’re talking about. Unless they can break from the Style-Box mentality, this may prove a challenge too great to take on. Could this be the beginning of the financial disintermediation we had all expected following the market meltdown of 2008/2009? If it is, why did it take so long?



  1. Katrina Hawker
    Katrina Hawker January 16, 17:20

    It may be surprising to know that, not only are your articles read by people from all states in the US, but people from other countries. I really enjoyed this summary of activity in your industry last year. You have certainly bogged yourselves down in the fiduciary versus suitability debate. Here, in New Zealand (I wonder how many people REALLY know where that is), we have a Code of Professional Conduct. The first Code Standard requires all providers of financial advice (including brokers) to put the interests of their clients first. All Advisers must tell our Financial Markets Authority how they do that in a written Adviser Business Statement and all advisers are subject to audit by the FMA. Its straight forward, unequivocal and, though only a couple of years old, helping to sort an hitherto largely unregulated market. Take a leaf!

  2. Ozzie Fishman
    Ozzie Fishman January 17, 11:25

    Read the conclusions of the Wharton study, then read them again. It sort of says it all and that concept should govern all particpant education.

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