Money Management Executive
The Pension Protection Act ushered in changes to 401(k) plans, including fiduciary protection for providers using automatic enrollment and default investments, and making higher contribution levels and catch-up contributions for older workers permanent.
One provision advisers are grappling with is whether to take on an expanded fiduciary role by offering advice.
The act provides safe harbor under rules in the Employee Retirement Income Securities Act for advisers that provide advice.
It allows for two types of advice: one where the compensation received by the adviser must be a level fee that is not affected by the advice given, and one where the advice is based solely on a certified, unbiased computer model. The act also requires complete fee disclosure, as another way of preventing advisers from benefiting themselves by steering investors into their products.
However, there are advantages and disadvantages to offering advice, according to a report from Principal Financial Group.
"Regrettably, the new rules are complex and, in some cases, difficult to implement," said Fred Reish, an attorney with the employee benefits law firm Reish Luftman Reicher & Cohen, which reviewed the report for legal accuracy.
Many sponsors will view advice as a valuable asset for their plans, but their ultimate objective is that their employees be well invested, regardless of whether it results from investment advice, life-cycle funds, or managed accounts, the report says. Investment advisers need to decide whether an expanded fiduciary role is the most effective way to accomplish that goal.
One benefit of acting as a fiduciary is an expanded book of business. It can increase an adviser's business from both plan sponsors and participants, said Jack Stewart, a director at Principal and the leader of the Des Moines company's defined contribution national practice.
As advisers work with sponsors, they will gain access to participants, and that will afford them opportunities to sell products outside the plan, Mr. Stewart said.
Advisers are always looking for ways to offer more, he said, and as fiduciaries they can be viewed by sponsors as providing extra.
Downsides to an expanded fiduciary role can include increased exposure to liabilities if an adviser gives the wrong advice or doesn't follow the rules, he said. When they act as fiduciaries, advisers face higher standards and closer scrutiny, Mr. Stewart said.
Additionally, companies take on more risk. Broker-dealers need to grant permission to their advisers to provide advice, as they assume some responsibility when advisers act as fiduciaries, he said.
Currently the industry is not getting many requests for added advice on top of what plan sponsors are already getting, he said.
Plan sponsors offered advice before the Pension Protection Act, but not a lot of participants signed up, perhaps because of the higher fees, Mr. Stewart said.
But his company's report said this may change as workers warm to advice offered by companies that manage investments used to fund retirement plans.
Karl Hicks, a financial planner with Leonard Financial Group of Riverside, Calif., who acts as a fiduciary to his clients, said there is some misunderstanding about a fiduciary's role . But once clients see the added value, they are receptive, he said.
On the other hand, Mr. Stewart said, because the Pension Protection Act allows for automatic enrollment and default options such as life-cycle funds, some sponsors see this as a type of customized service for participants.
However, many 401(k) experts say the options shouldn't preempt advice. Though some sponsors might think that putting participants in a default plan is the end-all solution, as accounts grow participants in default plans will need help allocating their portfolio.
Regardless of automatic enrollment or default options, Mr. Hicks said, participants still need to have their plans professionally examined to get recommendations on how to manage their plans.
Mr. Stewart said that once advisers decide to become fiduciaries, "the main thing" is that they "look at the requirements under the Pension Protection Act and understand them."
Specifically, the Principal report says, advisers should focus on understanding new provisions.
The new requirements include submitting to a thorough evaluation as part of the selection process, entering an Eligible Investment Advice Arrangement with the plan sponsor, abiding by the mandated disclosure requirements, and undergoing an annual compliance audit.
Mr. Stewart said there are other requirements concerning disclosures. For instance, an adviser might have to disclose past advice history and rate of return on advice. Most advisers, he said, are taking a wait-and-see attitude toward taking on an expanded role with clients.
