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What does Retirement Plan “Best Interests” Really Mean for the 401k and IRA Fiduciary?

May 05
01:33 2015

There’s a new standard coming to town, at least if the DOL follows through on their proposed new rule. If there was one theme Tom Perez repeated during his press conference introducing the proposal, it was “best interest.” He asserts the new Fresh green vegetable, isolated over whiterule will require brokers to act in the “best interest” of the clients they serve, whether they be institutional or individual.

For all the talk, however, the DOL never really defined exactly what “best interest” means. Indeed, according to the formal release, there is an expectation the term will be defined through class action law suits, which the DOL explicitly encourages. This offers little in the way of help to both 401k plan sponsors as well as the financial service providers that serve them.

Are “best interests” in the eye of the beholder, or is there a standard definition to this new standard. To find out, canvassed retirement plan service providers from coast to coast. Here’s what we discovered:

The term “best interests” can best be described as a huge umbrella that covers a wide variety of issues. Allen Laramy, Financial Advisor at VALIC Peachtree City, Georgia, defines “best interests” as “Everyone is better served through increased participation, more generous employer matching, and lowering of administrative cost while designing a plan that is completely within all the limits set by all testing rules.” In other words, “be the best you can be.”

But is that enough? And by “enough” we mean both in terms of a broad definition and in terms of the specifics of a practical definition. Tom Balcom, Founder of 1650 Wealth Management located in Fort Lauderdale, Florida sees “best interests” as creating a “low cost, solid (well diversified) investment lineup.” When it comes to fees, he specifically cites using “funds without the ‘hidden’ charges associated with 12b-1’s and/or commissions including front/deferred charges.”

Indeed, much of the DOL’s press conference focused on “high fees” and “conflict of interest fees.” At the same time, the DOL, in its 408(b)(2) advisories, has repeated said it’s not about “low” fees or “high” fees, but about the value derived from any fee. “I believe the biggest disservice to this industry is the tremendous emphasis on fees irrespective of value,” says Andy Bush of Horizon Wealth Management in Baton Rouge, Louisiana. “Sure,” he continues, “fees should be reasonable – for the value received. We are in business for profit, not for gouging, but profit relative to value and services delivered. The lowest fee may not be the best situation for the client, yet the emphasis of low fees seems to somewhat abandon value and services received.”

While fees may be a part of it, the “best interests” equation certainly contains other components. Tony Hellenbrand, Owner of Hellenbrand Financial in Green Bay, Wisconsin, says, “It’s too bad that always acting in the best interests of the client has to be forced upon the industry by the DOL. It should be the whole reason an advisor is in business. I think acting in the best interest of the client is as self-explanatory as a definition gets. Any action that does harm, any inaction that leaves a client open to harm, or any action that is not the best possible for the client is not acting in their best interest. That can include everything from slow service, to charging high fees, to a proprietary investment lineup.  It’s commonplace to find a servicing company using all their own fund family in the lineup and consistent/rampant under performance.”

Advisers do, however, need to be careful when trying to incorporate investment performance into any “best standards definition. The DOL has long said it’s not the outcome, but the process, this it is most concerned with. “Best interests means that the investment options will be recommended or offered without weight given to any other factor than the recommendations’/offerings’ investment ‘performance,’” says Norman Pappous, President of located in Galveston, Texas. He says, ‘Performance’ is regarded as the portfolio’s risk/reward profile and NOT the simplistic metric of returns. ‘Risk assumed’ dictates ‘return level.’”

As if coming to a consensus on a single definition of “best interests” isn’t enough, we may find ourselves with two definitions. After all, do the “best interests” of the plan sponsor always overlap the “best interests” of the plan participants? Many believe they do. Joe Gordon, Managing Partner of Gordon Asset Management, LLC in Durham, North Carolina, says “[best interests] means putting the clients first and your interests second and acting with a duty of loyalty to the plan participants. [It] means the same thing for both retirement savers and plan sponsors.”

Warren A Ward, of Warren Ward Associates in Columbus, Indiana, suggests it may not be as cut and dried as this. He says, “Although I’d imagine that all conflicts are being disclosed, it’s hard to see how revenue sharing, pay-to-play fund choices and unnecessary life insurance serve investors’ best interests. Since the fees are often passed on, perhaps this is less of an issue at the sponsor level.”

Stuart Robertson, President of ShareBuilder 401k in Seattle, Washington, says, “Employers must run plans in the best interests of employees.” For retirement savers, he says, “‘best interests’ means presenting clients with options that will best position them to meet their savings goals. For advisers, it is important to analyze multiple plan options and combinations, to deliver a customized solution that best suits the client’s individual situation. Additionally, professionals advising retirement savers can act in the best interest of individuals by advocating for investor education and providing resources that will help savers make the most informed decisions.”

So, what do advisers feel are some good “rubber meets the road” examples of “best interests”? Balcom sees “best interests” in action when he sees professionals “providing low cost solutions and guidance on how to select or construct the most appropriate portfolio for each participant.”

Is seems like the infrastructure of the plan itself provides an excellent proving ground for the existence of “best interests.” Along these lines, Mike Woomer, senior vice president at Fort Pitt Capital Group in Pittsburgh, Pennsylvania, says, “By allowing open architecture platforms, with no proprietary funds. By allowing the plan to use Institutional (lower expense funds).” Hellenbrand adds to this with his list of “providing an independent/open-architecture investment lineup, clearly disclosing fees, clear statements, simple performance metrics, etc.”

While costs are always mentioned, “best interests” can include all forms of transparency. Robertson says, “Financial service providers should always remain transparent about costs and risks associated with investments with participants. Communication is a key component in working with both plan sponsors and participants ensuring they are abiding by their ‘best interests’ especially with the [proposed DOL Rule].”

Ward focuses on compliance matters when he says, “Hopefully all plan documents are current, regardless of the sales channel.” Nathan Garcia, Managing Director of Westbourne Investments in Alexandria Virginia, agreeing, noting “best interests” include “providing an investor policy statement and hosting education meetings more than once per year.”

In the end, though, “best interests” might be measured by tying the entire retirement plan complex into the benefit’s ultimate objective: preparing employee’s for retirement. Gordon offers, “A few examples would be: RIAs acting as a fiduciary and following the IPS it crafts for the client providing consistent review of selection process in action; Doing an analysis of both quantitative and qualitative fund metrics and replacing funds when appropriate to do so; Reviewing plan participant data and taking initiatives to get savings rates higher; and, periodically re-enrolling the plan to rebalance back to asset allocation age-appropriate targets.”

Just as important as good example, bad examples often provide an instructive “what not to do” when it comes to “best interests.” Among the most heinous of bad examples includes not being upfront about fees, something that conflicts-of-interest make all too easy. When it comes to something not in the “best interest” of the retirement saver or plan sponsor, Garcia cites “working on a commission basis a.k.a. being paid from the mutual funds based on how much money is put into them.”

Here, Garcia’s reference includes proprietary products. Although they are not de facto contrary to any “best interests” standard, they do pose a potential problem for plan fiduciaries. Woomer says, “Pushing proprietary products or pushing products (annuities) might not be in the best interest of the individual taking a distribution from the plan.”

More generally, though, it is clear certain compensation structures will be raising red flags among regulators (if they aren’t already). “Funds that have big revenue sharing or 12b-1 fees are under greater scrutiny for not being in the best interest of emotes and could put advisors and employers at greater risk,” says Robertson.

Hellenbrand offers a litany of bad examples when he lists, “Hiding/burying fees 30 pages deep in disclosures or even breaking the fees up and sending 3 or 4 different disclosures and ‘amended’ fee disclosures that make it almost impossible to calculate fees; convoluted quarterly statements; short and under-performing proprietary investment lineups; and, holding plans hostage by threatening to end or impair banking relationships if the provider loses the 401k plan.”

Lastly, and this is something that has been severely underplayed to date, is the issue of shelf space – where custodians extract “rents” from mutual funds for preferred seating when it comes to being viewed by prospective investors (including plan sponsors). Pappous say, “Sometimes providers sell shelf space – that is a very real potential conflict of interest if that shelf space is targeting retirement clients that also pay for the provider’s advice.”

Financial professionals can help 401k plan sponsors act in the “best interests” of plan participants. Most directly, Woomer suggests they be “a co-fiduciary on the plan .This way the adviser has some responsibility on making sure the client is doing what’s best for the participants.”

Service providers can help quarterback important disclosures, especially as they pertain to plan costs. Gordon says providers can make sure there is “transparent disclosure of all fees and expenses; benchmark against at least one database; police service provider disclosures under 408(b)(2).”

Robertson goes one step further when he says advisers can help by “surveying employee satisfaction with retirement plan sponsors aid in avoiding misconceptions about what employees need and what plan sponsors think they need. Professionals can help plan sponsors devise a strategy to keep fees low, preventing barrier of entry for employees with financial limitations.”

While all of the above sounds fine and dandy, in reality the definition of “best interests” won’t be based on gut feelings, it will come about through case law. The DOL appears to have purposely described it only the vague terms so as to not constrain employees and plan sponsors from pursuing any questionable actions.  Marcia Wagner, Managing Partner of The Wagner Law Group located in Boston, Massachusetts, says, “ In the DOL’s view, best interest means that an adviser and his or her firm will act with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person would exercise based on the particular characteristics of a retirement investor. Each retirement investor is different and the duty to act in the investor’s best interest shifts with his or her investment objectives, risk tolerance, financial circumstances and needs. Above all, advisers and financial institutions must act without regard to their own interests, be they financial or otherwise. In other words, the interests of the retirement investor must come first.”

Wagner believes, despite this wide ranging definition, the DOL wants to focus on fees. She says, “From a practical perspective, the major way this standard plays out is that the structure of the compensation an adviser receives for rendering advice to a retirement investor must avoid incentives that would tend to encourage the adviser to make recommendations favoring one investment product over another. Under the best interest contract exemption included in the DOL proposal, an advisory firm can set its own compensation practices, provided it enters a written agreement with the client committing itself to the best interest standard, adopting compliance policies designed to mitigate conflicts of interest and disclosing any conflicts that may exist.”

She offers the following examples of what should be OK, and what might be dangerous: “An example of an adviser acting in accordance with this standard would be the provision of an investment program that allocates assets among a range of asset classes and investment products that fit that investor’s needs without regard to the compensation generated for the adviser. An example of an adviser violating this standard would be one who places a retirement investor in an investment mainly because the investment provider will pay the adviser a commission that is higher than fees available on other products.”

Those might be the good and the bad examples, but the ugly truth is this: legal talent will end up defining “best interests.” We might find a case can be made that conflict-of-interest fees, while obviously self-dealing, may not violate the “best interests” standard based on the “value” they offer. If this is the case, the DOL may be about to institutionalize the very practices it claims to want to discourage.

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. Stephen Winks
    Stephen Winks May 06, 11:18

    Best Interest means the advisor is accountable for their recommendations and responsible for protecting the best interest of the consumer on an ongoing basis. This is the duty of loyalty to the investor essential to acting in a fiduciary capacity. Because it is an ongoing duty representing continuous, comprehensive counsel–there are many ways the advisor protects the best interests of the consumer and the investing public most of which are presently not supported by broker/dealers, whose best interest are primarily being served. The difficulty arises when informed investors understand their reasonable expectation that their broker is acting in their best interest is demonstrably proven not to be the case. This is not the fault of the broker, but the broker/dealer which does not acknowledge or support the broker rendering advice to avoid fiduciary responsibility and liability. Essentially the advisor is responsible and accountable for every recommendation, while the broker is not. Thus the importance of the broker acting in the consumer’s best interest.

    Stephen Winks

  2. Dick Purcell
    Dick Purcell May 06, 18:17

    Stephen, the current fiduciary standard is a cloud of verbal vapor. Under it lurk sellers of credentials teaching misuse of diversionary abstractions with misleading labels, avoiding pursuit of investors’ best interests in favor of mis-trained advisors and Wall Street. Chris’s column exposes how the mis-training leaves well-meaning advisors hopelessly lost. For more evidence, see

    What’s needed MOST is application of the fiduciary standard to the investment training-and-certification trade, with specifics that weed out the misleadingly labeled diversions in favor of investors’ best interests.

    Dick Purcell

  3. Dick Purcell
    Dick Purcell May 07, 16:57

    Chris, you’ve produced a masterpiece, exposing the absurd irresponsibility of promoting the fiduciary standard as just verbal vapor.

    The answer is: best net-purchasing-power DOLLAR results for the investor’s needs and goals of future YEARS. For the unknown future this should be addressed in terms of UNCERTAINTIES, and based on best grounds for underlying ASSUMPTIONS.

    This puts “best interests” in dollars for future years, the purpose clients invest for and they and their advisors best understand. It narrows the client communication challenge to clarifying the uncertainties, for prudent choice. It narrows the questions to be judged to two: uncertainties and grounds for assumptions.

    Dick Purcell

  4. Dick Purcell
    Dick Purcell May 07, 17:04

    Chris, your report is a brilliant expose of the swamp the investment education-training-certification establishment has sunk us in. What you’ve collected is a mile-long scroll-down of verbiage with nary a passable statement of the purpose to be pursued, client’s best interest, exposing current investment training.

    Now, when the word fiduciary is hot, is the time for real fiduciaries to throw out the educators-and-trainers maze of diversionary mathematical abstractions with misleading labels and irresponsible assumptions. Advance the word fiduciary from (a) vaporous cover for that stuff to (b) clear pursuit of client’s best interests: dollars for future years, viewed in uncertainties, based on best-grounded assumptions.

    Dick Purcell

  5. October 07, 08:59

    This is a very well-written piece about some of the challenges of compliance. For example, many investors would give up some future returns to avoid the risk of much worse returns, so just looking at dollar outcomes is not necessarily workable either. There is some comfort in a model that has investment managers investing in the same fund(s) as the investors.

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