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What Will 2013 Bring to the World of 401k?

January 08
00:23 2013

Like all other media properties, we spent the last few weeks of Holiday time reliving the highlights or 2012. But, alas, time marches on and, with it, leads a cavalcade of hopes, promises and expectations. The last few years have appeared to offer more talk than action. Will 2013 merely repeat this incessant idle chatter? Or will the new year usher in a new era of confidence, rigor and compliance?

As any good reporter does, for answers to insightful questions like these, it’s best to avoid pondering into the misty glass of some crystal orb and, instead, consult a seer of more profound awareness – the Rolodex. polled some of the nation’s brightest stars of the fiduciary realm to seek their counsel on these and many other important questions. The kinds of questions all 401k plan sponsors, service providers and even plan participants will want to know the answers to.

For Kathleen M. McBride, founder, FiduciaryPath,LLC., New York, NY, the future is bright and clear. She says, “The Labor Department (DOL) has filed its agenda for 2013, and ‘Definition of Fiduciary’ is on it, so I look forward to seeing their stringent fiduciary rule proposed.” McBride tells us “the current (old) DOL definition has big loopholes that allow too many advisors to fall out of the fiduciary requirement.” She hopes the new definition will, “very simply, require any advisor who provides advice to plan sponsors and participants to do so as a fiduciary, putting the interests of the plan’s participants first at all times, acting in utmost good faith, acting prudently, with the skill, care and judgment of a professional, avoiding conflicts of interest, managing unavoidable conflicts in participants’ favor, disclosing those conflicts and controlling investment expenses.”

Duane Thompson, senior policy analyst, fi360, agrees. He says, “The one milestone that I’m confident we’ll see is reintroduction of the DOL’s revised definition of ‘fiduciary’ under ERISA.” Thompson warns, however, this “does not mean it will be adopted this year by the agency.” Still, he sees it nonetheless as a milestone, “given the vast changes in the retirement industry since the original definition was adopted almost four decades ago.” He believes “updating the fiduciary definition will benefit plan sponsors over time by clearing up confusion over the responsibilities of advice-providers. Currently, whether a person claims to be a fiduciary or not, the plan sponsor doesn’t know for sure unless it has the benefit of legal advice. Knowing who is a co-fiduciary and who is not will reduce the plan sponsor’s liability risk.” And reducing fiduciary liability is something all 401k plan sponsors strive to do.

While he also feels “it should be easier and easier for plan sponsors to identify truly high quality advisors with client-friendly business models,” Mike Alfred, Co-Founder and CEO, BrightScope in San Diego, remains unconvinced. “Call me a pessimist,” he says, “but I’m skeptical we’ll see any comprehensive or transformative regulatory step forward on the fiduciary standard in 2013. As it relates to the 401k business, we’ll see more top plan advisors moving to specialized firms with fiduciary business models. The most forward-thinking broker-dealers will carve out special designations and exemptions for their top plan advisors so they can more effectively compete in the marketplace.” Yet, he believes “choosing your golfing buddy or son-in-law has never been prudent, but it will become even harder to justify.”

For the unusually sanguine Knut A. Rostad, president and founder of The Institute for the Fiduciary Standard as well as the Regulatory and Compliance Officer at Rembert Pendleton Jackson, a registered investment adviser in Falls Church, Virginia, “the fiduciary standard is worse off today as compared to four years ago.” Rostad maintains, for all the sabre rattling of the Obama administration in favor of the fiduciary standard, regulators have been brow beaten by the “unsubstantiated” and “dubious” arguments of opponents. Rather than seeing 2013 as a year of milestones, he believes this is a year where proponents of the fiduciary standard will need to regroup.

But, even without any formal changes or regrouping on the part of fiduciary advocates, Alfred sees top asset managers and record keepers as having been aware of these fiduciary trends for years. “The advisor-sold business is mature in many ways but there will still be opportunities for firms that can use data proactively to identify the advisors that are really moving the market and who should be selling their products. Sending twenty wholesalers out in to the field with a steak & golf budget and various generic value-added tools just doesn’t work in an increasingly fragmented market controlled by savvy and experienced advisors who can afford to buy their own filet mignon.” Moreover, according to Alfred, these trends have accrued to the benefit of 401k plan participants. “All of the changes in the marketplace in recent years have been a net positive for participants,” he says, adding, “Plans are getting better and leaner at the same time.” But, he remains cognizant of the fact employees themselves need to be reminded to keep their eye on the ball. He says, “The onus is still on the participants to save though and many folks haven’t yet received the message.”

If, on the other hand, changes – particularly from the DOL – come through as expected, Thompson says, “Some, but not all, service providers will be forced to review their conflicts of interest and make changes. If some who were not previously held to a fiduciary standard of care are deemed fiduciaries under a revised definition, they probably will be required to overhaul their compensation practices and thereby more effectively manage conflicts of interest in favor of the plan.” Thompson says, “There is broad recognition that the workforce is playing ‘catch up’ in saving for retirement.” He feels the new fiduciary rule will be good for 401k investors. “By holding those who provide investment advice to a higher standard of accountability,” he says, “the quality and cost of advice will work to the benefit of participants.  Over time, this can increase the rate of return for workers and contribute significantly to helping them meet retirement goals.”

McBride further explains, “The alignment of interests of advisors and participants means participants, who are of course saving for retirement have a better chance of achieving their retirement goals than participants who are captive in a plan where the interests are not aligned, and therefore a prudent investment process may not be followed, where investment choices may not be optimum, and where investment expenses may be higher — possibly much higher.”

If she could have one “fiduciary wish” for 2013, McBride would like to see “that all investors receive advice that is truly in their best interest, from an advisor who acknowledges their fiduciary duty and truly lives up to that every day. And that financial service companies realize that in the long run, what is in their clients’ best interests will help clients thrive, and ultimately aligning their interests WITH their clients’ best interests is what will help firms grow and thrive.”

Thompson says, “My fiduciary wish for 2013 would be for the academic community to come out with studies clearly documenting the benefits of fiduciary advice. I would prefer to see the SEC propose a robust fiduciary standard for brokers and investment advisers in 2013, but I don’t think it would survive a court challenge without empirical data backing up the cost-benefit analysis.”

Alfred just wants to the word “fiduciary” to be replaced with the phrase “client-friendly” so, as he says, “someone outside of our industry would have some idea as to what we were talking about all the time.”

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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