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materials (options meaning the functioning of the plan, not specific investments as it appears that IB 96-1 will be superseded if the proposal is implemented as proposed).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.