401k Advisors: New Potential Pitfall under Proposed DoL Fiduciary Rule


As I have written before, advisers have largely been absent from lawsuits in the 401k arena. But, as the song goes, it appears that times they are a changin’.

In a conversation last week, another opportunity for an adviser to become embroiled in a suit dawned on me: Advisors who cause their clients to pay for services they don’t need could find themselves facing a lawsuit under proposed rules from the Department of Labor.

Currently, providers are finding themselves under the proverbial microscope. Lawsuits are beginning to analyze the correlation between cost and services provided. Suits like the one recently filed by Schlichter, Bogard & Denton against Chevron identify a rate for which the provider is willing to provide a set of services and allege a breach when revenue rises (rising markets and accounts with asset based charges are responsible) without a corresponding increase in services.

The proposed Fiduciary Rule from the Department of Labor is currently with the OMB and aims to make a fiduciary out of any advisor working on a plan. Once the new fiduciary status rule is effective, an advisor will be prohibited from causing a plan to pay for services that are not essential to the operation of the plan or fees that could be deemed excessive due to the advisor’s new fiduciary status. This liability could cover fees related to any recommended service providers as well as the advisor’s own fees.

Quoting Prohibited Transactions of ERISA directly:

(a) Transactions between plan and party in interest Except as provided in section 1108 of this title:

(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect—

… (C) furnishing of goods, services, or facilities between the plan and a party in interest; [29 U.S. Code § 1106]

Section 1108 goes on to discuss the how a plan can engage a service provider under the exemptions to the prohibited transaction listed above, namely only paying for those services which are necessary and paying fees which are reasonable [29 U.S. Code § 1108(b)(2)]. Common examples of services could include recordkeeping, employee education (404.c type services), and fund monitoring.

As a fiduciary to the plan under the new Fiduciary Rule, an advisor cannot cause the plan to engage in a prohibited transaction. Therefore, it becomes necessary for the advisor to understand completely which services the plan needs and differentiate from the services he can provide. The services that are not utilized by the plan fiduciaries or participants should be carved from the offering, and the corresponding fees should also be cut.

While this may seem pretty basic, the twist is that the advisor would be responsible for the reasonableness of his own fees/commissions as well.

Said another way, an advisor could be on the hook for forcing the plan to pay him more than is reasonable given the services provided. What is unreasonable? That is tough, but this post shows what is undisputedly unreasonable.

Failure to properly mitigate unnecessary or excessive fees could be construed as a fiduciary breach by the adviser. Currently, only responsible plan fiduciaries have to worry about this aspect of ERISA. The change of fiduciary status for advisors will open them to potential liability for the same issue. There is no doubt that advisors and their compliance departments should be actively seeking solutions to provide a process for understanding plan level needs as well as the monitoring of the fluid relationship between fees and service.

As usual, I am not an attorney or an accountant, so please take this piece for what it is worth.

This is repost. The original can be found here.

Kicking Hitchcock Out of ERISA Plans


Alfred Hitchcock was a master of suspense. The beauty of his cinema and the reason it still captivates viewers is not what he shows you; rather, it is what he does not show you. Hitchcock left your imagination to do the dirty work. He knew that your imagination could fill in expertly placed gaps.

With his films, we simply get a bit of a start. But when there are gaps left in ERISA plans, we end up with much worse than just a start. We end up with a lawsuit. A quick troll through the Department of Labor website gives us a rundown of enforcement action. Gaps in contributions. Gaps in proper administration.

Lawyers are also looking for these gaps. They look for gaps in logic or action. This lawsuit against MassMutual is the most recent example. No one can know how the suit will end. But, like viewers with their popcorn watching a Hitchcock film, I am sure that compliance departments across the country are on edge. Their minds race to fill in the gaps left between the suit and the practices of their advisers. What other gaps are out there? Could our advisors put us on the hook if they recommended a provider employing a similar structure? Are our disclosures sufficient? Are our policies setting us up for a similar suit?

One of the gaps that continually scares me is the gap in determining the reasonableness of fees for covered service providers. As we are all aware, it is part of a fiduciary’s duty under ERISA to insure that all fees paid from plan assets are reasonable for the level of service being provided. It is commonplace to compare the fees and a checklist of services against those of other plans around the country. Honestly, that scares me. It scares me because checking to see if your answer is the same as someone else’s seems like a poor basis for reasonable. For example, you may be paying the same fee for education services; however, does this standard benchmarking evaluate the amount of education? Or the time spent working with participants on education? The same example holds true for other services as outlined in the fee disclosures mandated under 408(b)(2). I have discussed some of my concerns in another post. And this gap in what is promised and what has occurred is another Hitchcock nail-biter. As we have seen in other suits recently, the potential liability is not in the decision.  Instead, it is in the process.

So how do covered service providers eliminate these Hitchcock gaps?

First, it is important to recognize that liability that is already out there cannot be put back in the bottle. Rather, we must seek to systematically eliminate the liability going forward. Recognizing that reasonableness of fees is under scrutiny right now, you should employ a process that definitively measures committed resources relative to fees. Comparing your fees to the guy’s down the street does not insure reasonableness.

Second, employ a process to insure that you have done and are doing what you promised you would do. Comparing a list of activities performed for your clients compared to a list of services stated in 408(b)(2) disclosures is a good start. Any discrepancy between the two is a Hitchcock gap that will leave compliance sleepless and lawyers licking their chops.

Finally, employ a system to utilize exemptions in the proposed Department of Labor Fiduciary Rule. For example, the proposal exempts education from the scope of fiduciary. Use the exemption. Track your activities that fall under that provision. But remember, all of your documentation can also be used against you. As a former mentor used to say, “If you don’t want it on the front page of the Wall Street Journal, leave it out.”

In short, QPSteno can help with all of these strategies. If there is anything that I can do to help, please reach out (jbaltes@qpsteno.com). Remember: With a complete plan, there is little to fear.

Why Your 401k Adviser May Be Underpaid

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I have had the opportunity to speak to several business owners since the news broke that Anthem 401k was being sued for “Vanguard being too expensive.” I’m not going to touch the nuances of the case that are missed in this statement. Rather, I want plan fiduciaries to dive deeper into who is getting paid for work on their plan and what real value those professionals add. The knee jerk reaction of many has been that if Vanguard isn’t cheap enough, “Who else is leaching off my plan and how do we stop it?” For years, the retirement plan business has seen costs fall precipitously, partially due to competitive pressures. But it is also due to realized efficiencies through technological advancements. However, I think we’ve hit a point where many 401k advisers may be underpaid. The following is a quick list of several reasons that your 401k adviser may be worth more than you are paying him:

  1. They have to know all of the things that a standard financial advisor knows…in addition to everything retirement plan related. To be skilled with retirement plans, it is imperative to be proficient in all aspects of financial services and planning. In servicing a plan, invariably participants ask questions about all kinds of things. Retirement plans involve tax benefits, investment allocation, time value of money, determination of personal risk tolerance, and implementation of solutions to meet investment goals. Oh, and that all has to happen within an ever expanding framework of laws. The Pension Protection Act of 2006, for example, gave us an additional 900 pages of laws to govern how retirement plans work.
  1. They commit to improving themselves to better serve you. The popular Certified Retirement Plan Specialist (CRPS) designation requires 16 hours of continuing education every two years. For perspective, that is almost as much CE as is required by the state of New York for CPAs and is in addition to standard CE requirements for investment licensing. The Accredited Investment Fiduciary (AIF®) requires an additional six hours of CE every year for those who also hold that designation. Both have a Code of Ethics that requires them to act in a professional manner with a higher bar than may otherwise be required. This is additional training that most brokers won’t bother undertaking. Many advisers will engage training through the American Society of Pension Professionals and Actuaries (ASPPA), all of which is retirement plan specific. It helps your adviser better understand the mechanics of the plan (testing, plan design, etc.) which in turn helps him better serve your plans needs. Many 401k advisers also have the CFP or ChFC designations that you may see in traditional wealth management advisers. Their continued investment in themselves provides direct benefits to you.
  1. They have a serious time commitment.
    1. Illustration of a million dollar plan. Let’s break out the commitment on a million dollar plan where the advisor is making .50% (50bps). While higher than what we typically see in the market, it gives us round numbers which I like for examples. That works out to roughly $5,000/year. According various sources, financial advisors make between $150-400/hour. Let’s use $250/hour as a rough average. On your $1 million plan, you are paying for roughly 20 hours over the course of the year ($5,000 divided by $250/hour). Let’s break out that time. If your adviser is doing quarterly fund analysis and enrollment meetings, those activities normally take an hour each with an hour prep time each. With just those two pieces, you have exhausted 16 of the allotted 20 hours, not including any follow up work. That leaves a scant 20 minutes per month for the advisor to answer questions about loans, hardship distributions, asset allocation, current economic trends, Roth vs. Traditional, beneficiary designations, fee disclosures, summary plan descriptions, distributions, Social Security…you get the idea.
      1. Let’s throw in another wrinkle. The adviser doesn’t get 100 cents of that dollar he is paid. Part of it goes to his firm, rent, office supplies, office expenses, professional designations and dues, and technology to help deliver a better service to you. And that is all before taxes.
    2. Other projects. Some plan sponsors utilize their advisor for other events related to the plan. This can include RFPs (to determine if your plan is getting a “good deal”) or preparing for a government audit. Each of these have the potential to tie up hundreds of hours, some of which may fall directly on the shoulders of your advisor.
    3. Time that goes into a vendor switch. If you switch your third party administrator or recordkeeper – really any vendor – the adviser will invariably have extra time tied up in learning the new process employed by that vendor such as who to call when, preferred contact methods and times of the day, proper form submission. All of these facets take time to learn and understand. And they all represent a time commitment.
  1. They will have a fiduciary liability. The Department of Labor has a current proposal that would hold your 401k advisor to a fiduciary standard. Currently, many retirement plan advisors are held to a suitability standard. That means that they are only required to show you a product that meets your needs. However, the advisor or his firm could derive more benefit from the sale of the product than you derive from owning it. The DOL posits that advisors should be held to a standard where the advice they render is in the best interest of the client, before that of themselves or their firm (this is a very simplified version). Under the proposed laws, your advisor has an increased legal liability for serving as your adviser. Of note, some advisers already voluntarily act under a fiduciary standard. This higher standard, in addition to its benefits to you, also carries higher professional liability insurance and stricter compliance procedures, both of which have to be paid for somehow.

If you don’t believe that your adviser is doing all of this work behind the scenes, use our service for a year; contact me for information (jbaltes@qpsteno.com). I guarantee that you will be dumbfounded by everything that is going on that you didn’t realize. Our services can give you the same insight on your recordkeeper and third party administrator as well. This list is not meant to be all-encompassing. Rather, it is meant to give you a peek inside the tent of what it takes to be a retirement plan adviser and why yours may be worth more than you are currently paying him.

Advisors Have Mostly Been Absent in 401k Litigation; A Fresh Look at One Document Could Change That

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A rash of lawsuits in retirement plans continues to ravage the industry. It seems that a week can’t go by without some development like this littering the headlines of trade publications. While most of the suits have been leveled against plan sponsors, it seems the litigious eye has been looking for ways to crack other service providers. Advisors have dodged the bullet for the most part. But I think that could change, especially as suits work their way down market.

As lawsuits and settlements continue to file in, plan sponsors are beginning to sit up in their seats. Those that have had their turn in the barrel are looking for better ways to make sure they don’t end up back for a second turn. And those who have not been named are looking for ways to avoid even a first trip in front of a judge. While fiduciary processes continue to evolve, eliminating avenues for opportunistic legal counsel, there are still process shortcomings to be fixed.

Advisors have largely missed being implicated in most of these suits. However, it appears that the lawyers are busy looking for the next opportunity to exploit short comings in the fiduciary process. I see one such shortcoming that could drag advisors into the fray and potentially end up with suits filed against their firm.

At the crux of this issue are the 408(b)(2) and 404(a)(5) disclosures. Commonly referred to as fee disclosure documents, these disclosures list to the participant and the plan sponsor, respectively, the fees assessed by a covered service provider. Specifically in the plan sponsor version, the CSP articulates the services performed for the stated compensation. While their effects were much feared before their arrival in 2012, their impact on the market seemed relatively muted. But that could quickly change.

Here is the potential issue: How does a plan sponsor correctly assess that the services are being performed as outlined in the fee disclosure documents? Or how does the advisor’s compliance department confirm that their representative is performing the stated services? As we have mentioned in other blog posts (Duty to Monitor), plan sponsors absolutely have a duty to monitor activities associated with plan operation. And monitoring is worthless if you can’t prove that the monitoring happened, especially should you find yourself in a court of law. As we prepare for the DOL’s Fiduciary Rule to be made public, it is important to note that advisors face increased legal liability under the rule as proposed.

The suits under the scenario above could be pretty ugly. The original suit, as I see it, would be a breach of fiduciary responsibility for the responsible plan fiduciary failing to insure reasonableness of fees. They paid for services that they did not receive, for example. This could include engaging in a prohibited transaction by paying for services with plan assets. A secondary suit, filed by the plan sponsor, could be leveled against the advisor for failing to deliver on stated services as outlined in the 404(a)(5) Fee Disclosure and for, potentially, causing the plan sponsor to engage in a prohibited transaction.

However ugly the problem may seem, the solution is pretty simple. By employing a system that tracks activity of a CSP and services stated in the 404(a)(5) disclosure, a responsible plan fiduciary can efficiently display that they have monitored and documented that a CSP has delivered the stated services for which they have been compensated. Additionally, a compliance department can use the system to monitor that the services to which their representative has committed have actually been performed. A continual monitoring process of this nature, while more time consuming than a year end sign off, also affords the CSP the opportunity to rectify potential lapses before they become issues.

It is imperative that broker dealers, registered investment advisors, and their representatives take action now to implement policies to insulate themselves from potential future litigation resulting from services promised but never delivered. If you employ a 3(16) Fiduciary to monitor covered service providers, it is worth asking him how he intends to address this potential issue. Lawsuits of this nature are a black eye that the retirement plan industry cannot afford. I believe that a vast majority of the advisors out there are performing their duties appropriately. However, we all know that it only takes one case for a feeding frenzy to start. As always, if you need help, reach out to me (jbaltes@qpsteno.com).

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.