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Exclusive Interview (Part III): Phil Chiricotti Offers Surprising Comments on the Fiduciary Standard

August 19
00:03 2014

Here’s the third installment of our four-part interview. If you’ve missed any, click the links below:

Part I: Phil Chiricotti to Retirement Industry: Outsource Fiduciary and combine with HSA or Die!

Part II: Phil Chiricotti says Lobbying to Replace 401k is “Lunacy”
Part III: Phil Chiricotti Offers Surprising Comments on the Fiduciary Standard
Part IV: Phil Chiricotti Sees MEPs as THE Fiduciary Solution for Small Plans

Part III begins here:

FN: Many continue to bash 408(b)(2) and all  related disclosures as a failure. They note that it’s too easy for service providers to hide fees through voluminous plan sponsor reports with multiple internet links containing URLs with dozens of characters. What do you think about this?  What can, is, and should be done to correct this?
Chiricotti: Some of the disclosure notices are complex and difficult to decipher. Given that sponsors lack the skills to decode fees and revenue sharing, the need for qualified and independent fiduciaries, advisors and outsourced service providers is obvious.

The question also addresses a DOL issue that top advisors have been making for years. Under current ERISA rules, vendors have limited incentives to price fairly and disclose fees clearly. In the event of litigation alleging excessive fees or improper disclosure, it’s almost always the employer/fiduciary that is found liable. We’ve seen this in numerous rulings, including the Schlichter cases. The vendor is rarely liable, and even when they are, only for a small fraction of the total. Fidelity was found liable for less than $2 million out of a $37 million judgment in the ABB case and even that relatively small claim was subsequently reversed.

The DOL has tried to address this inequity through a procedure that encourages sponsors who fail to receive proper disclosures to notify the DOL. The sponsor is then offered a limited scope exemption from the prohibited transaction tax that would otherwise apply. While the DOL may pursue actions against offending providers, few plan sponsors have used this “notify the DOL of the problem” approach. They are reluctant because they believe the notice could trigger a DOL investigation that would also involve them.

The solution is a more employer friendly DOL or a different statue. Given how antagonistic the DOL has been over the past six years, expecting employers to trust the DOL to act in their best interest may not be reasonable. As noted by Bruce Ashton (Drinker Biddle & Reath), there are some recordkeeping system concerns, but the guide should help. As indicated by Bruce, the guide may indeed help, but it won’t solve the problem. In any event, ERISA needs a statutory fix making it clear that vendors can also be liable for contracts charging excessive compensation, or a DOL that employers can trust. Similar to predecessors, the current regime has made few friends among employers.

FN: You’ve made no secret of your feelings about the adoption of the fiduciary standard. Can you tell our readers where you stand and why?
Chiricotti: Some would disagree, but while we like stirring the pot, the CFDD has never been a missionary zealot for the fiduciary standard or anything else. We have, however, been quite vocal about the need for fiduciaries and advisors servicing ERISA plans to be qualified. I may disappoint you with this response, but unguided fiduciary missiles are not a solution. To assume that one’s ERISA advisory skills are higher due to their registration status is ridiculous.

If you asked me if a qualified registered rep or an unregistered consultant was better suited to serve an ERISA plan than an unqualified RIA/IAR, the answer would be yes. If you asked me if a qualified advisor acknowledging fiduciary status was better suited to service an ERISA plan than a similarly qualified non-fiduciary advisor, the answer would also be yes. In an attempt to level the playing field, qualified non-fiduciary advisors and dually registered advisors routinely align with other fiduciary service providers.

FN: Unfortunately, it appears the fiduciary debate has become nothing more than a lobbyist football. Where do you see the whole thing ending up? What will the SEC and DOL finally say and does it matter?
Chiricotti: I can’t add much to the endless coverage already devoted to this passionate topic. In reality, it is like talking about politics or religion, a no win situation. The re-proposed “Conflict-of-Interest Rule” by the DOL has been delayed again. Assuming there is a vote, it is unlikely before 2016.  Given that 2016 is an election year, passage seems unlikely. On the other hand, the SEC could make a decision this year on whether to move ahead with a uniform fiduciary standard for registered reps and RIAs/IARs.

A high profile investment manager once noted that we have the best politicians money can buy. He may or may not be right, but if an amendment redefining the ERISA fiduciary definition is passed, it is likely to be rules-based and contain meaningful exceptions. Whether passed or not, qualified fiduciary advisors will continue to promote their status and take market share from advisors who don’t provide or “support” fiduciary services in one form or another. In the end, ERISA advisor due diligence should be based on qualifications, experience, scale, resources, services, cost, objectivity, insurance, and bonding.

FN: What do you really think of lobbyists?
Chiricotti: All industries have lobbyist organizations. Those in our industry do a good job and provide some meaningful resources. It is, however, important to note that these organizations exist to support their members. What benefits their members may not be in the best interest of plan sponsors, participants, the industry or the broad advisor community, particularly over the long term.

Click here to go to the next installment: Part IV: Phil Chiricotti Sees MEPs as THE Fiduciary Solution for Small Plans – Phil believes we already have the answer to the real retirement problem – too few plans among smaller companies – and he cites the industry thought leader fire power to support this idea.

Christopher Carosa, author of 401(k) Fiduciary Solutions, will be speaking at CFDD‘s October 15-17, 2014 Advisor Conference on the subject of “Using Proven Psychological Techniques to Motivate Plan Sponsors & Participants to Implement Your Recommendations.” The session will feature an interactive presentation featuring tools mentioned in his new book Hey! What’s My Number? – The One Thing Every Retirement Investor Wants and Needs to Know!

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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