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These Four Quick Fixes for ERISA Can Reduce 401k Fiduciary Stress

September 03
00:03 2014

(This is the first installment of a two part series.)

The Washington D.C. air boiled hot and muggy that waning summer day of that fateful year in American history. And this doesn’t refer to the political atmosphere, the day in question being less than four weeks after the tortured resignation of 1440696_41488279_sun_stock_xchng_royalty_free_300President Richard Nixon. No, with a high temperature of 90°F and a dew point of 65.4°F, the world outside of office air conditioning was harsh, forbidding, and downright dangerous. Had they possessed the sophisticated techniques of today’s meteorologists, the weathermen of that day, September 2, 1974, might have warned of “sunstroke, muscle cramps, and/or heat exhaustion is possible with prolonged exposure or physical activity.”

But the most famous physical activity that particular day was neither prolonged nor did it occur outside. Newly installed President Gerald R. Ford, in his first legislative act upon assuming the position, picked up a pen, signed his name, and made retirement plan history as he placed the writing instrument down. What he had signed was the Employee Retirement Income Security Act of 1974 (“ERISA”). “ERISA was designed to protect the financial interests of employer-sponsored retirement plan participants and their beneficiaries while helping working Americans increase their level of retirement readiness,” says Robert Kaplan, National Retirement Consultant for Voya Financial (formerly ING U.S.) based in Windsor, Connecticut.

Some would say the financial services profession has failed to live up to the true intent of ERISA. “ERISA has long been overlooked and under-utilized by our industry,” says Colin Fitzpatrick Smith of The Retirement Company in Wilmington, North Carolina. “As noted in ERISA, education, whether of (for) plan participants or plan sponsors, is critical to allow the plan participant(s) to gain sufficient information to allow them to make informed choices. In too many cases, the number of plan options available, without education, prior to enrollment and during their participation, precludes the possibility of acquiring a portfolio, as mentioned in ERISA, that is sufficiently diverse so as to avoid the probability of large losses. Too many choices….too little participation….too little accumulation to allow for a comfortable retirement.”

Yet there are many who believe, despite the best of original intentions, ERISA has become outdated and is in need of a major overhaul. “I feel ERISA was developed and designed to protect the interest of employees (and their beneficiaries) enrolled in health & welfare benefit plans and employer sponsored qualified retirement plans,” says William Peartree, Principal, Director of Retirement Services at Barney & Barney in San Diego, California. “While I believe the intent to protect employees and their beneficiaries is there, I also believe that ERISA has become so complex over the years that it leaves too much to be interpreted and I would argue that was not how it was originally developed.”

Kaplan says, “Retirement plan types and offerings available in the marketplace have evolved over the last 40 years. In particular, the defined benefit system has given way to an ever-increasing defined contribution system. The laws and regulations under ERISA have evolved (some would say not fast enough) to adapt to these changes.”

The sometimes Byzantine labyrinth of rules and regulations have often left the plan sponsor bewildered, wondering if, in the end, it’s worth the personal risk to continue offering these lucrative retirement plans. “Although ERISA still satisfies its original intention,” says H. Grant Perry, Managing Principal & CEO at Pinehurst Capital, Inc. in Pinehurst, North Carolina, “it has become onerous for employers and their employees. Every year since its inception, Congress and the Department of Labor (DOL) have piled on more and more regulations, mandates, and restrictions. These excessive requirements make it exorbitantly expensive for the employer to provide the benefit, and less attractive for the employee to contribute, because the increasing cost of reporting and compliance for the employer has forced them to back off on matching and profit-sharing contributions.”

For all the structural problems of ERISA and its attendant IRS and DOL regulations, there are opportunities to address some issues sooner rather than later. FiduciaryNews.com conducted a series of virtual “man on the street” interviews with retirement specialists across the nation. We asked them to tell us the most important “quick fixes” they believe can be put in place today with little or no effort. Here’s what they had to say:

1. Make it Easier for Smaller Employers
With a recent report suggest nearly a third of the American workforce does not have access to a 401k savings plan at work, there is a clear crisis when it comes to saving for retirement in this country. “Overall, employers need to offer some sort of plan to their employees,” says Ben Hodge, Retirement Consultant for Retirement Benefits Group in San Diego, California. “This would be much less expensive than offering everyone health care (which is where we’re headed with the Affordable Care Act), but the fact is that most employees are not saving enough to provide for themselves in retirement.”

The primary problem arises, particularly for that third mentioned above, when smaller companies find it too burdensome to create 401k plans for their employees. “Over the past several years,” says Peartree, “I’ve had more clients look me in the eyes and ask me why they should continue offering retirement benefits if the regulations are so difficult to comply with and very illogical. Again, while ERISA has protected the employee, it’s made it very difficult for the employer.”

Kaplan would like to see immediate changes that “encourage wider coverage in workplace plans by lessening regulatory burdens on smaller employers.” He envisions these companies, or other, independent providers, being able to “create simple workplace savings vehicles with limited burden and risk to the employer in order to increase coverage.” While he does not mention it outright, Kaplan appears to be describing the “Multiple Employer Plan” (MEP) version of a 401k.

Although fully permitted by the tax code, the DOL continues to place obstacles to a broader implementation of MEPs. Currently, only bonafide business associations can offer them. The DOL has legitimate concerns and, given the fact this is one of the few issues we see rare bipartisan agreement on, industry observers like Phil Chiricotti feel it’s only a matter of time before we see MEPs as a standard offering. The MEP is the ultimate vehicle for companies seeking to dramatically reduce fiduciary liability.

2. Establish a Strong Across-the-Board Fiduciary Rule
The DOL has been sitting on this one for several years, and there’s no promise anything will ever come of it. Peartree says of 401k advisors, “if you can’t state that you are a fiduciary to the plan, you shouldn’t be able to be the advisor or broker on the plan.” Still, there are no rules that currently prohibit a non-fiduciary from offering advice to a plan.

Kaplan also likes this idea. Although less forthright than Peartree, he does advocate the adaptation of “the fiduciary rules to a more reasonable structure so plan administrators would be able to provide meaningful financial planning advice to participants.” Unlike today, with a clearly defined Fiduciary Rule plan sponsors can rest assured that they know they will be automatically delegating a portion of their fiduciary liability no matter what type of provider they select.

3. Streamline Disclosure
This “quick fix” represents the colossal failure of the DOL’s 408(b)(2) Fee Disclosure Rule. By not providing an easy-to-read template, the DOL has left the door open for obfuscation via “disclosure overload.” This is where plan sponsors receive a core dump of data with the simple promise that “they’re in there” when it comes to locating the fees they are paying. Perry wants the DOL to “require full disclosure of all fees present in employer-sponsored retirement plans.” He says, “The current requirement allows plan providers to mask the truth.”

Kaplan sees this issue as beyond just the DOL. He wants regulators to “coordinate governmental agency efforts to streamline and increase the effectiveness of employee disclosures and communications.”

Most important, though, are the loose nature of the disclosure rules. In particular, Peartree laments the use of the word “reasonable.” He says, “Without some parameters, the term ‘reasonable’ doesn’t mean anything. For example, when the DOL says, ‘Your plan fees should be reasonable.’ What does this mean?”

Presently, 401k plan sponsors are left to their own devices when it comes to analyzing disclosure. They know they’re one the hook, but, short of paying yet another third party to decipher the original third party provider’s fees, there’s no simple to implement definition for plan sponsors to rely on.

4. Prohibit Revenue-Sharing
This problem has been around for some time and it has only grown in intensity. It is related to the fiduciary issue, the disclosure issue, and the reason why smaller companies often can’t afford to create 401k plans. On the other hand, it may also provide the avenue for the DOL to accept more broadly defined MEPs.

Perry says we should, “prohibit revenue-sharing between plan providers and the plan trustee. Currently, kick-backs to plan trust companies from investment companies for sending investors their way are not required to be disclosed to the employee plan participants.”

Eliminating this conflict-of-interest opportunity would remove the self-dealing concern the DOL has previously expressed regarding MEPs. It will, especially through proper disclosure, also force these hidden fees into the intense light of day, (perhaps even as intense as the Capital’s hot summer sun on September 2, 1974) . In addition, it will remove one of the greatest fiduciary risks to 401k plan sponsors.

These are the quick fixes. They can be implemented today with a simple flick of the pen on the part of regulators. But these alone will not provide enough to upgrade to ERISA 2.0. We’ll discuss the more involved changes in our next and final installment “These Six Structural Changes to ERISA Can Improve Employee Retirement Readiness.”

Interested in learning more about 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.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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