Activity Tracking to Become a Necessity under the DOL Fiduciary Rule


Much has been written about the proposed DOL Fiduciary proposal. Some write in favor of it; some are adamantly opposed to it. But, given the proposed status, very few are offering suggestions on how to abide by the proposal as written. From my vantage point, a couple of things are clear. First, this is going to happen. Second, 8 months is not a lot of time to get a comprehensive process implemented, so it is better to start now and tweak the process as you go. That being said, one piece of the proposal has stuck with me since the Department of Labor first released the proposal in April of last year. In an effort to make the proposal more workable, the DOL has inserted certain exemptions from the regulation. Most notably, standard financial education is categorically exempted from the rule and from the definition of advice. Education would include conversations about general plan information, general financial and retirement information, asset allocation models, and interactive investment materials (options meaning the functioning of the plan, not specific investments as it appears that IB 96-1 will be superseded if the proposal is implemented as proposed). From the DOL comments to the voluminous feedback, we know that the education carve out will not be going away.

For an advisor working in this space, it should be clear that the intent is to make a majority of your actions fall under the fiduciary laws. The key for advisers is how to mitigate potential exposure given the exemptions. As with other exemptions under ERISA, it would appear that the burden of proof will fall on the entity claiming exemption. This means that you will need to keep diligent records regarding your meetings with participants. You will need to track which meetings were fiduciary in nature and which meetings qualify for the education exemption. This tracking should include who was present at the meeting, what topics were discussed, ideally any materials that were used (presentations, literature, etc.), and whether the meeting should be considered educational in nature. Just like a game of chess, you must balance proactively cutting off avenues of liability exposure while actively working to build retirement security for your participants.

Compliance departments should also be interested as the proposed regulations change the exposure for a fiduciary breach. Under the proposal, an adviser can be named in a class action suit at the state level. This represents an unprecedented expansion of legal liability that also includes activities involved in the service of IRA accounts. By isolating activities that are explicitly named as carve outs from the definition, the adviser is limiting his liability exposure. This process can also help to establish credibility to the adviser and his professionalism. While in the past it was potentially advantageous to minimize how much the adviser had in his file in the event of a law suit, the proposed rule will turn that thinking on its head overnight. Compliance departments should be enabling processes that allow advisers to continue their business while mitigating the exposure of the firm.

This tracking is not solely in the interest of the firm. A procedure that is well built will allow the adviser to continue to deliver the services for which they were hired, while protecting the firm. After all, if an adviser is tied up in depositions, arbitration, and court proceedings, then he is not serving his other clients. Clients who do not feel served tend to go elsewhere or look for reasons to complain. And complaints can lead to more suits. Like the loss of a pawn, this chain of events can snowball for the adviser and the firm.

The recent rash of lawsuits highlights the importance of this tracking. Multi-million dollar suits are the norm for fiduciary breaches today. While those are for some of the largest cases out there, it is not going to be long before a sufficient body of case law exists that litigation costs will be affordable enough for smaller players. Due to increased exposure, E&O rates are almost guaranteed to rise as this rule is implemented. (We have had conversations with a specific carrier about how to receive preferential rates using QPSteno; contact me for information:

The chess pieces are in motion. Advisers, broker/dealers, and RIAs should start to protect themselves for the benefit of their clients.

As a 401k Plan Sponsor, You Have a Fiduciary Obligation to Monitor the Activities of Providers


It was almost a year ago that we announced QPSteno, a service that monitors and aggregates retirement plan service provider activities. In that 12 months, I have heard varying reactions. People have told me how great the idea is (“Finally, something to show me exactly what people are doing and what they get paid.”) and people have told me that I am crazy. Recently, I had someone tell me that unless I could provide him with documentation explicitly saying that he is required to monitor the activities of his service providers I could go pound salt.

Well, here it is: straight from the Department of Labor- the reason a Fiduciary has an obligation to monitor the activities of the service providers.

“It is the view of the Department (of Labor) that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring.” (29 CFR 2509.08-2)

First, let us establish a couple of assumptions. The first assumption is that you have outsourced some of the operations of the plan. You have either hired a broker, a TPA, a recordkeeper, or a fiduciary of some variation. You are paying one or all of those parties with assets from the plan. As outlined in the Employee Retirement Income Security Act (ERISA), using plan assets to pay service providers is a prohibited transaction. There are exemptions to that transaction so long as we have determined that the services are necessary for the operation of the plan and the fees are reasonable for the services provided. In order to insure that the services are required and the fees are reasonable, there is a certain level of monitoring required.

Let’s break out the DOL statement into its individual components for better understanding.

Duty to Monitor. We established that plan sponsors who outsource any operation of the plan to a third party and pay with plan assets have a duty to monitor the covered service provider, if for no other reason than to determine that the services are necessary and the fees are reasonable. So according to the Department, the outsourcing of services creates a duty to monitor.

Proper Documentation of Activities. The DOL could have used words like “results” or “output”. But they specifically chose the word activities. It makes sense when you consider what goes into any particular service that is outsourced by the fiduciary. Fund evaluation is not simply printing a report. The report is the culmination of several other job functions. If you read much of ERISA, the term process is used repeatedly. The DOL asks for an Investment Policy Statement (a written process) in its audits. It is clear that the focus is on the prudence of path to get to the destination. In Donovan v. Cunningham, the 5th Circuit Court opined, “[ERISA’s] test of prudence…is one of conduct”. While this case and the quoted Interpretive Bulletin focus on the prudence of the investments, the Court discusses the process, not the result. It should be further considered that the courts consider facts and circumstances when evaluating prudence. It would be difficult to argue a prudent process for a service if you did not have a mechanism to track that the services and associated activities were performed as outlined.

It does not seem that the intent is to have you document every trade of every fund held in your plan as the same Interpretive Bulletin discusses cost benefit analysis of decisions not to proxy vote. Specifically, it is acceptable to forgo proxy voting if the determination is made that cost to prudent do so will outweigh the potential benefits. But the IB explicitly states that the decision and evaluation should be documented. Other services may require close monitoring. For example, many advisors disclose in 408(b)(2) documentation that they provide education to plan participants. If the broker is paid with plan assets through an arrangement like a wrap fee, a responsible plan fiduciary has an obligation to track the activities of that broker as they relate to the service of educating the participant.

In summary, if you outsource any portion of your retirement plan to a third party, you have an obligation to track and document the activities of those parties.

The Grasshoppers of the Fiduciary Proposal


‘Chance favors only the prepared mind’

-Louis Pasteur


As a child, I had a Disney record of stories. I used to sit on the floor with my little Fisher Price record player and listen to that album over and over again. One of my favorite stories was the Aesop’s story of the Ant and the Grasshopper. As a child, I didn’t fully appreciate the story itself; it was the sound effects that primarily caught my attention. The slamming door, the whistling wind, and the shivering of the actors’ voices captured my imagination.

In talking with an ERISA attorney this week, that record popped into my mind.

We were discussing the impending proposal from the Department of Labor that will fundamentally transform the business in a way that we have not seen since the Employee Retirement Income Security Act was passed in the mid-1970s. What struck me about the conversation was the reaction we both had to many financial services firms. There are still a good many that are vowing to fight this issue. There are conversations about suing to have the law thrown out. There are conversations about stripping funding to keep it from passing.

I understand why some firms are opposed to this proposal. The law, as proposed, will demand that broker-dealers tear apart business models and reassemble them in a fashion that is compliant with the new laws. Advisors will need to get trained on the new regulation, the firm protocol, and any new forms that may be necessary. Systems will need to get updated to account for the new policies and procedures. Clients will have to be briefed on any pertinent changes. New forms may be required to be signed by the client. And for good measure, the DOL has deemed that the industry be in compliance within 8 months, if enacted as currently written. That is a lot of work, for no additional revenue, and a great deal of added expense.

However, complaining at this point is a bit like the Grasshopper not preparing for the winter. We know this law is coming. The aggressive time line from the DOL up to this point; the reluctance to extend the comment period; and the public comments from Sec. Perez and Asst. Sec. Borzi: all of these factors underscore that this will happen.

The best thing a firm can do right now is start preparing for these regulations. Here is a quick list of several items that can help to prepare for what we know will hit early next year:

  1. Train. Many advisors have not been held to a fiduciary standard before. The single best thing that a firm can do right now is to start exposing reps who have 401(k) or IRA business to this way of thinking. Training courses like the Accredited Investment Fiduciary (AIF) from fi360 are a great start. For those that already have the AIF, look into the Accredited Investment Fiduciary Analyst (AIFA) from fi360 or the Global Fiduciary from 3Ethos. Training and education is a lifelong process.
  2. Look for plug-and-play technology support. There are several technology vendors right now that can help to streamline the compliance process for this new reality. Aligning with those vendors now does a couple of things. First, it insures that you don’t have to wait in line with the rest of the Grasshoppers. Second, it allows you or your brokers to get familiar with the tool before the laws take effect. Products like G-MAP+ from the Pension Resource Institute can provide a prudent framework for qualified plan business. QPSteno can provide a great documentation process to comply with the new education carve outs and cover your backside in the event of a lawsuit (important to note that the potential legal ramifications have changed under the proposal).
  3. Consult with an attorney. I have had conversations with several ERISA attorneys who have some creative solutions. While we don’t have the final regulations yet, we can operate with 90% certainty on most features. It will be easier to tweak a policy than to try to create and implement one on the fly.
  4. Talk to your clients about it. I saw an interesting study recently that many investors are unaware of what a fiduciary is. While we are obsessing over the regulations, our clients are largely unaware of their potential impact. We have seen similar situations with Fee Disclosure (404a5 and 408b2) and the Pension Protection Act of 2006. In both cases, the advisors I saw who fared the best were the ones who got ahead of it. They began having conversations with their clients about those proposals and how it could affect their relationships. If your client is well prepped, the final regulations should be a non-event.

The preparation does not stop at the firm level. As advisors and professionals, you owe it to yourself and to your clients to continually reinvest in yourself through education. It doesn’t matter what industry you examine: the best always strive to be better. The coming Conflict of Interest rule gives you an opportunity to continue to “sharpen the saw”.

I am well aware that there are firms that have already started down this path of preparation. My hat is off to you. For the rest, don’t get caught by the coming winter. And now that I am thinking about it, I wonder what ever happened to that record…

Deliberate and Transparent, a case study


“Experience without theory is blind, but theory without experience is mere intellectual play.” –Immanuel Kant

“Time is the most valuable thing a man can spend.” –Theophrastus


As a wholesaler, I heard most financial advisors tell me that they didn’t work in the qualified plan business because it was a lot of work for not a lot of money. Most of them ran screaming from start up plans for that exact reason. They viewed the plan with traditional soft dollar arrangements as a time waster unless the business owner was a close friend or client.

Recently, I was able to show an advisor how to structure a plan so that it was worthwhile for them while controlling costs in the long term for the client.

The advisor did a great job of working with the client to understand their needs. The client had a SIMPLE plan but the principals of the company and most of the participants didn’t understand what it was. When it came to retirement plans, all they knew was 401k from media coverage. The advisor took the time to educate the plan fiduciaries about the differences; the pros and cons of both types of plans. He then took a considerable amount of time to understand what the plan sponsor wanted under a new arrangement.

The plan sponsor was paternalistic. He wanted to take care of his employees whom he viewed as family. He wanted to make sure that the plan had low costs with great service and superior fund offerings. Many advisors would have choked at this point. How do you have a cheap plan with great service? Most plans use the assets of the plan to negotiate lower fees from the advisor and the record keeper. That was not an option in this case as the SIMPLE assets were tied up with surrender charges from the VA provider.

I was able to work with the advisor to think about this plan a little differently. Instead of structuring this plan with a soft dollar arrangement like all of the other proposals, this advisor decided to build the plan with a hard dollar billable to the company. This allowed the company to show its paternalistic nature and maintain low costs to the participants. Further, the advisor set up an arrangement through which he would bill the plan only for the time spent. The advisor prepared an outline of education that would be made available to the participants in a group setting and an estimate of how much time he thought it would take to service the plan quarterly. The cost was higher initially, relative to the other proposals being considered. However, walking the plan out three or four years, the costs were considerably lower than the other proposals’ because they were not growing with the assets. This point was further accentuated when including roll-overs from the old SIMPLE that would become surrender charge free. Most imporantly, the costs were reasonable based on the level of service committed by the adviser.

By thinking about the plan in terms of “how much time do I need to commit and what is my time worth,” the advisor was able to sell a small plan that covered his costs. Though it was more expensive initially, it was cheaper in the long term. Most importantly, it met the needs and the culture of the client.

5 Reasons You Need an Education Policy Statement


An article was recently written for that seem to give a number of reasons that education policy statements are not catching on or shown by professionals in the qualified plans arena. Many valid concerns were voiced, but the article seemed to miss a counterpoint illustrating why it makes sense to have education guidelines (or an education policy statement). Here is a quick list of 5 reasons why this strategy is more appropriate than the article may suggest:

Fail to plan; plan to fail. This is the time of year that the retirement plan industry is in a frenzy trying to convert prospects to clients for the coming year. A culmination of closing sales funnels; this is the time of finalist presentations. Having been a part of hundreds of these presentations, I frequently heard, “We will increase participation/deferral rate”. And I always wondered, “And how exactly do you plan to drive that increase?” Without a plan for educating participants on how the plan works, why it makes sense, or other financial literacy topics, how can you realistically expect to drive those results? Or how can you demonstrate that any increase was a result of your work (reasonableness of fees?) instead of some outside factor. Doctors have plans for treatment to drive outcomes. Accountants have strategies for lowering tax liability. Teachers have plans for educating their students. Builders have blueprints. Why would you not have a plan in place for organizing education?

3:1 ROI. In the article, one of the quotes addressed presenting the business case for financial education. The individual correctly said that you would have to show an ROI that made business sense. Interestingly enough, I have sold cases using this strategy. Dr. E. Thomas Garman has done several studies on financial education and the benefits that it has to the employer. His studies found an ROI of 3:1 for financial education. He further found that the benefit to the employer was about $2,000 per employee per year. Included in that number is savings of employer paid health care costs of about $450/employee/year and increased productivity of about $350/employee/year. I have sold cases simply by passing the CFO a calculator and having him run the simple math of $2,000 x number of employees, then asking if he wanted to learn about how we could provide increase output and decreased employer costs with a target of those numbers. Guess how many told me no? None that I can recall. Because employers hate increases that come with health care renewals. And they want efficiency to maintain/improve margins. In fact, the Kansas City Fed issued a piece several years ago that had similar finds about financial education. They found increased participation, decreased use of loans, among other benefits. The business case exists.

Real Retirement Readiness. The industry is all abuzz over retirement readiness. Providers tout improvements like increasing replacement income percentages, increasing account balances, minimizing leakage, etc. The financial services industry focuses on getting participants to retirement with a pot of money that should be able to last them through retirement. That makes sense. But a quick look at lottery winners and former professional athletes reveal how short sighted that approach is. A look at those two demographics finds a staggering rate of bankruptcy. Why? Because it turns out that when you turn people loose with more money than they have ever had but no additional education on how to make it work or last, they blow through it. The GAO has most recently explored the topic here. This trend is not surprising as financial education is not widely taught in school. Very few states require that a personal finance class be offered as part of a high school curriculum-let alone be required. Let’s try an analogy: the current system is working to give keys to a Ferrari to a kid who hasn’t had driver’s education yet. He’s not even ready for keys to a Toyota Camry. I ask wouldn’t our energy be better spent making safer drivers?

Redefine Value in the Face of Auto-Everything or Face Obsolescence. As technology continues its march forward, the traditional value proposition of a financial adviser specializing in qualified plans is changing. If his value is “picking funds”, why couldn’t a plan simply purchase the fi360 software for less than it pays its adviser? If participants are automatically enrolled, or automatically escalated, or only have target date funds as a choice, what does the adviser do? It makes me think of a scene from Office Space about serving as an intermediary between customers and engineers. All of these developments have a profound impact on the traditional value proposition. In short, we are seeing a commoditization of the services provided by an adviser. Now, the Department of Labor is looking at making everyone a fiduciary (oversimplification, I know; but we all know where it is headed). There is another reason that an adviser is not as unique as he once was. And the market movements of late have another reason to redefine the adviser’s value proposition. If the markets are going to move regardless of how well you can pick funds/investments, why wouldn’t you disconnect yourself from an aspect over which you have no control?

Be on the Cutting Edge. One part of the article made me chuckle. “When’s the last time you heard a DOL auditor asking to see the education policy statement?” There was some concern in the article that an education guideline or policy statement has been around and hasn’t been embraced. True. It isn’t a new concept. But until recently, the technology has not been available to help make it as efficient or flexible as the market would like. Digital photography was around for decades before technological advances finally made it a viable alternative, and we all know how that worked out for Kodak (who owned the rights, failed to pivot, missed the opportunity, and went bankrupt). Let’s also think about how long the Investment Policy Statement was around before it was broadly requested by the DOL during an audit. Final thought on this: millennials are changing the way markets work. Continuing to sell to them the way that you sold/engaged boomers seems to be a recipe for disaster. Studies continue to show that they embrace planning more than boomers do and that they want to understand why a solution works. Some firms are starting to tailor their marketing around this fact.

As I said at the start, there are some legitimate concerns expressed in the article. But there is another side to the argument.