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Will New DOL Rule Contain Fiduciary Surprise for 401k Recordkeepers?

Will New DOL Rule Contain Fiduciary Surprise for 401k Recordkeepers?
November 10
00:03 2015

Is a 401k recordkeeper a fiduciary under ERISA? According to § 2509.75-8 Questions and answers relating to fiduciary responsibility under the Employee Retirement Income Security Act of 1974, the answer is “probably not.” This section states “Only persons who perform one or more of the functions described in section 3(21)(A) of the Act with respect to an employee benefit plan are fiduciaries. Therefore, a person who performs purely ministerial functions… is not a fiduciary because such person does not have discretionary authority or discretionary control respecting management of the plan, does not exercise any authority or control respecting management or disposition of the assets of the plan, and does not render investment advice with respect to any money or other property of the plan and has no authority or responsibility to do so.”

In plain English, per the DOL’s Frequently Asked Questions About Retirement Plans and ERISA, “The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan.” In general, 401k recordkeepers have been flying safely under the fiduciary radar for some time now.

But is all this about to change?

While all the attention regarding the DOL’s proposed new Fiduciary Rule has focused on its impact within the brokerage industry, there may be a more pervasive impact. There are many brokers out there and most brokerage firms are well versed in navigating through the legal landmines wrought forth by the heavily regulated environment in which brokers exist. No doubt more than a few of those firms will quickly discover how easy it is to circumvent the new DOL rule and maintain their business models (see “DOL Fiduciary Rule as Proposed May Not Stop Investor Losses as Claimed,”, October 6, 2015).

Such may not be the case with the 401k recordkeeping industry. First, there are far fewer recordkeepers than there are brokers. Second, the recordkeeping industry has relatively limited experience working an intense regulatory atmosphere. Some feel, should the DOL go ahead with its proposed new rule, the world recordkeepers have known will disappear forever. And that may have a greater impact on 401k savers than the alleged impact the rule with have on IRA savers.

Are recordkeepers even aware of what may be coming at them in a few short months? It’s possible their current avoidance of a fiduciary designation may make them less prepared than they should be. “Under current DOL rules,” says Joan McDonagh, Senior Director, Legislative and Regulatory Affairs at Empower Retirement in Syracuse, New York, “recordkeepers would generally not be considered ERISA fiduciaries when performing routine recordkeeping tasks.”

Of course, there are certain recordkeepers that do serve as a fiduciary. “Generally speaking, 401k recordkeeping is considered a ministerial and not a fiduciary function,” says Eric C. Droblyen, President of Employee Fiduciary, LLC located in Saint Petersburg, Florida.” A recordkeeper could be a ‘functional’ fiduciary if they inadvertently exercise discretionary authority or control over a plan.”

An example of this might be when a recordkeeper provides additional services that might fall under the definition of plan administration. § 2509.75-8 says “a plan administrator or a trustee of a plan must, be the very nature of his position, have ‘discretionary authority or discretionary responsibility in the administration’ of the plan within the meaning of section 3(21)(A)(iii) of the Act. Persons who hold such positions will therefore be fiduciaries.” These recordkeepers will (and should) designate themselves as 3(21) fiduciaries within their agreements.

But there are several popular service features undertaken by recordkeepers that today exist in a cloudy gray area as to whether they can be classified as a fiduciary function. Droblyen lists these as instances where recordkeepers: “Recommend a financial advisor to help a plan pick funds; Recommend a ‘managed account’ provider (e.g. Financial Engines) to help participants with asset allocation; Recommend a financial advisor to help participants with rollover decisions; Provide educational materials to participants that include actual plan investments; and, Discuss investment rebalancing frequency with participants.” He says these actions, which regularly occur at a recordkeeper, could become ‘investment advice’ under the DOL proposal.”

Of particular concern is the role recordkeepers sometimes play in lieu of independent investment advisers regarding directing employees regarding investments. “What we’re most concerned with is the impact on our ability to help participants prepare for a successful retirement,” says McDonagh. “We engage in over 4 million conversations annually with plan participants through our call centers. In many of those conversations the participant is seeking information about the investments available in their plan, investment tools their employer has made available to them, how to access money in their account while still employed, or what do with money in their account when they become eligible for a distribution. Under current Department of Labor rules we can provide that assistance without concern about it being treated as fiduciary activity. Under the proposal any communication about investing or about taking money from a plan that might be viewed as a suggestion to take or refrain from taking a particular course of action will be fiduciary activity. There would no longer be a requirement that the advice be provided regularly or that there be a mutual understanding about the advice being fiduciary in nature. The proposal does contain some ‘carve outs’ for providing educational information, but in our view it will be almost impossible to engage in fluid conversations with participants and provide them with the help they’re looking for without falling outside the education carve out. We believe this curtailment in our ability to help participants through our call centers and other customer service portals will have a negative impact on the likelihood of their retiring with sufficient funds to last a lifetime. For example, we have data showing that there is an 18% decrease in participants cashing out their plan account (in other words, moving it from a retirement savings vehicle into funds available for current spending) when they have spoken with one of our call center representatives.”

Droblyen doesn’t see the DOL’s proposed rule has having a profound impact on the recordkeepers offering plain vanilla services. He fears, though, some value-added services might no longer be offered. “I don’t think recordkeeping services per se will be affected by the DOL proposal much,” he says.” That said, recordkeepers will probably be less likely to refer sponsors to financial advisors when asked for fear their referral will be considered investment advice. That would be unfortunate. Recordkeepers often know which advisors do a good job at a reasonable price.”

McDonagh, on the other hand, foresee dire consequences. She says, “The proposed rule as it stands today will have a substantial impact on recordkeepers. In addition to the call center concern mentioned above, we are concerned with the impact of the proposal on our web based planning tools. Under current DOL rules advice that is not individualized to a person is not considered fiduciary. Under the proposal any communication that is specifically directed to a person can be considered fiduciary, which would include these targeted communications on the web as well as any phone call, e-mail, letter, or other communication directed to a specific person.”

We won’t know the extent of any impact until the DOL releases the rule in its final form. We do know the actual impact will depend on the business model employed by the recordkeeper. “I’m not aware of any means by which the proposed DOL rule increases a recordkeeper’s fiduciary liability as long as they stick to their ministerial work,” says Droblyen.

While this may be true for so-called “plain vanilla” recordkeepers, the same cannot be said for those currently pushing the envelope. McDonagh says, “Causing recordkeepers to choose between making hundreds of their employees fiduciaries and accepting those risks and training responsibilities, or ceasing to provide the support they provide today in order to avoid fiduciary status, is likely to result in either a decrease in support to plan sponsors and plan participants or an increase in plan costs.”

Will those recordkeepers be prepared?

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


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