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Fred Reish Unravels Washington Regs and Explains 401k Plan Sponsor Fiduciary Liability

March 10
01:06 2015

We all know Fred Reish. Sure, some know him as a partner at Drinker Biddle & Reath, LLP in Los Angeles where he serves as Chair of the Financial Services ERISA Team. To others, he’s one cool cucumber when it comes to untying the 1217009_62584795_knot_stock_xchng_royalty_free_300confusing knots of the regulatory jungle. For all, though, he’s the go-to guy at many an industry confab. In fact, if you happen to be at the fi360 Annual Conference in Orlando this week, you’ll be happy to know he’ll be presenting not one, but two sessions. The first is titled “ERISA Update: Litigation and Government Guidance that Affects Advisers” and the second is “Participant Success in 401k Plans through Adviser Practices.” So, when given the opportunity to sit down and talk turkey with this powerhouse, how could we say no?

So much to discuss, but where to begin? Why not with the topic that is on everyone’s mind of late: the DOL Fiduciary Rule. A lot of ink has been spilled on this “new” rule. In fact, Fred has a rather interesting take on this whole “new” thing. “While we don’t know exactly what the proposed regulation will say,” he says, “it appears safe to conclude that there will be little, if any, change to the requirements faced by RIA fiduciary advisers when they provide investment advice to 401k plans. As a result, RIAs can continue to be 3(21) non-discretionary investment advisers and/or 3(38) discretionary investment managers. That will almost certainly remain the same. Furthermore, the prudent man rule will continue to apply and, as a result, RIA fiduciary advisers will need to engage in a prudent process for selecting and monitoring the investments that are offered to participants. Finally, it does not appear that any of the prohibited transaction rules, or the exceptions, will materially impact the way that advisers practice. As under the current rules, RIAs will provide their fiduciary services for level compensation (such as a level percent of the assets that they advise or a flat-dollar amount). Assuming that there is no other compensation paid to the adviser from any source related to the plan or its investments (or, alternatively, that any such additional compensation, such as 12b-1 fees, is offset against the adviser’s stated compensation), the rules for receiving and retaining compensation will be the same under the proposal as under current law.”

The lack of “newness” doesn’t dissuade the opponents of the pending Fiduciary Rule from vehemently issuing their challenges. But while this big Wall Street firms are busy arguing how many angels can dance on the head of their business model, the real advantage of the Rule goes unreported. What’s lost in this digressionary debate is the potential impact the Fiduciary Rule can have on plan sponsor fiduciary liability.

“Hiring a fiduciary provides material assistance to plan sponsor fiduciaries in a number of ways,” says Fred. “First, the courts allow plan fiduciaries to place substantial reliance on “experts” who consult with the plan fiduciaries. Thus, an experienced and knowledgeable adviser provides a degree of safety to plan sponsors when they make their investment decisions (even though the rules say that plan fiduciaries cannot ‘blindly’ rely on their advisers). Second, since an RIA fiduciary adviser is held to the same standards as the plan sponsor fiduciaries, there is no gap in their levels of care or standards of conduct. Stated slightly differently, if the adviser is held to a lower standard of care, it is possible that the adviser could meet his standard of care, but the advice would be below what is required of plan sponsors. In a nutshell, that is the essence of the debate between the ‘suitability’ standard and the ‘fiduciary’ standard. Third, since an RIA fiduciary adviser charges a level fee, the adviser is free of financial conflicts of interest. Since ERISA requires that plan sponsor fiduciaries evaluate and mitigate conflicts, the fact that an RIA fiduciary adviser does not have any conflicts obviously helps the plan sponsors fulfill that responsibility—by eliminating the issue. There are other benefits, as well, but that summarizes some of the most important.”

The big news in the “new” Rule, though, isn’t in 401k land, but in the universe of the IRA. The DOL wants the same fiduciary standard that currently applies to RIAs serving 401k plans to apply to all financial service professionals serving IRAs. Some argue the DOL is overreaching. But as Fred tells it, “This is a complex issue. But, let me try to explain the basics. ERISA and the Internal Revenue Code contain a number of similar concepts. For example, they have similar prohibited transaction rules. And, both laws need a definition of ‘fiduciary.’ Several years ago, the White House issued a Presidential Delegation Order that divided these similar issues into those that ERISA could write regulations about and those that the Treasury Department could write regulations about. The concept was that it did not make any sense to have differing definitions in the two laws. In other words, if plans needed to satisfy both laws, as they do, it didn’t make any sense to use conflicting definitions that would imposed a greater administrative burden on plan sponsors. As a part of that Delegation Order, the Department of Labor was assigned the responsibility for the prohibited transaction rules and exemptions and for the definition of fiduciary.”

This duality has led to the confusion we’re seeing now. Says Fred, “the DOL has the responsibility for writing the regulations under the Internal Revenue Code (and ERISA) for the prohibited transaction rules and exceptions and for the definition of fiduciary. However, while the DOL can write those regulations for the Code, it cannot enforce the Internal Revenue Code. Only the IRS can do that. In other words, the regulations and the enforcement of those regulations are split (with the exception of SEP and SIMPLE IRAs, which are considered to be ERISA-governed plans). Because of that history, the DOL wrote the current regulations in the Internal Revenue Code defining fiduciary and implementing the prohibited transaction rules and exceptions. So, while many people consider the DOL’s new proposal to be a change, it is not. They are simply amending the regulation that they had previously written . . . and the regulation applies both to the Internal Revenue Code and to ERISA.”

Right on the heels of the White House bid to promote a new Fiduciary Rule focusing on reducing conflicts-of-interest came the celebrate Tibble v. Edison Supreme Court case. Several commentators speculated the timing was more than coincidental as the Tibble case began as a fiduciary breach case due to harmful conflicts-of-interest. “Despite the publicity that the Tibble v. Edison case has received concerning institutional share classes,” says Fred, “the actual issue before the Supreme Court dealt with the affirmative defense of the statute of limitations. In other words, how far back can a lawsuit go before the statute of limitations cuts it off? But, it’s more interesting than that. The defense (that is, the plan fiduciaries) argues that there is no requirement to monitor investments unless there has been a ‘significant’ change from the reasons why the investments were originally selected. So, if more than six years have gone by, and there has not been a significant change from the information evaluated at the time of selection, then the defense takes the position that a lawsuit should be thrown out of court because it is ‘stale’ or, in other words, because the statute of limitations has run.”

Well, that’s one side of the story. But there’s a flipside. Fred says, “The plaintiffs (that is, the participants), on the other hand, argue that there is an ongoing duty to monitor and that the duty arises every year regardless of whether or not there has been a significant change. As a result, the plaintiffs argue, the failure of the Edison International committee to remove the investments within the six years preceding the lawsuit was in and of itself a fiduciary breach that is actionable.”

The case excited many as they expect the plaintiffs to prevail. Once that happens, goes the popular meme, then watch out! But Fred thinks otherwise. “While some people predict that a victory by the participants will open the flood gates of litigation, I don’t think that’s the case,” he says. “I say that for a couple of reasons. The first is that most plan sponsors are doing a good job of prudently selecting and monitoring their investments. For example, at the end of last year, I worked with a very large plan where the expense ratio for the S&P 500 Index Fund was 2 basis points. That is a far cry from a retail mutual fund. In other words, I think that most large plan sponsors are not using retail mutual funds . . . and those that are using mutual funds are making changes as quickly as possible because of this litigation.”

It seems the recent talk we’ve been hearing may be nothing more than an exaggeration. The fiduciary rule isn’t the radical change some paint it to be, and Tibble v. Edison no longer represents the norm. So, what’s all the excitement about? The two popular stories may not be related like many expect, but they’re still related. Tibble v. Edison arose from the existence of hidden conflicts-of-interest. That particular “hiding” strategy may no longer be useful. Others, however, may come about, especially if the lack of an effective Fiduciary Rule continues to persist and the playing field remains unlevel. The duties of the 401k plan sponsor continue to be multifaceted and exceedingly difficult.

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s every 401k plan sponsor and service provider wants and needs to know.

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. His new book Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort is available from your favorite bookstore.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Joanne Jacobson
    Joanne Jacobson March 11, 10:12

    I’m confused. First you say that there’s no change to RIA fiduciary advisers to 401k plans (paragraph 2) and then you say essentially the same thing in paragraph 4 regarding the potential impact the Fiduciary Rule can have on plan sponsor fiduciary liability. What is the difference between paragraph 4 and paragraph 2 and what is the impact on plan sponsors?
    Thank you.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author March 11, 23:48

    Joanne: I think you nailed the meat of the problem. According to Reish, the new Rule will represent no change for RIAs and the plan sponsors who use RIAs. The change will be for non-RIAs who are not acting as fiduciaries. Plan sponsors who are not currently using RIAs will benefit because the non-RIAs will now be held to the same fiduciary standard as RIAs.

  3. Dennis Myhre, AIC
    Dennis Myhre, AIC March 19, 10:44

    During the 2008 financial crisis, conflicts of interest and self dealing seemed to be the rule with service providers, costing plan participants billions of dollars. Why do the federal agencies not enforce fiduciary standards for these guys. It appears the states have failed to do so, likely do to a lack of expertise or manpower to enforce their own regs. And If the service provider is a haven for thieves, how is the Plan Sponsor or the Adviser to know this fact.

    Teresa VOLLENWEIDER March 21, 08:45

    What about all the many, many small (less than 100 employees) businesses? How is that small business owner supposed to figure all this out? Wouldn’t that small business owner be best advised *not* to have a 401k plan, as there is absolutely no way that small business owner has the skills or the time to manage a 401k plan.

  5. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author March 21, 09:24

    Teresa, thanks for your comment. You bring up a very valid point. Small businesses often have a disincentive to start 401k plans. Orin Hatch has a solution for this: broader access to MEP plans. Right now, the DOL (although not the IRS) limits the applicability of their use. Allowing greater use of MEP plans (provided the appropriate fiduciary protection is in place) will be the greatest single factor to solve our so-called “retirement crisis” (which is probably better called the “retirement readiness crisis”).

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