Santa Claus and the Fiduciary Standard

At this time of the year, when Santa Claus is making his list of who has been naughty and nice, optimists rub their hands in glee, anticipating a stocking full of goodies. Pessimistic believers resign themselves to something worse. In pension land, if you embrace fiduciary change, the incoming head of the U.S. Senate Finance Committee may be about to hand you the proverbial lump of coal.

According to Washington Bureau Chief Melanie Waddell, Senator Orrin Hatch intends to push anew for the passage of his Secure Annuities for Employee Retirement or "SAFE" Act. He spoke about pension reform and the "pension debt crisis" on July 9, 2013 in his "Introduction of the SAFE Retirement Act of 2013."  His objective is to "stop the Department of Labor from writing fiduciary rules for individual retirement accounts" and "over-regulating IRA investment advice." See "Sen. Hatch's 2015 Priority: Torpedo DOL Fiduciary Efforts" (Investment Advisor Magazine, December 15, 2014).

Put forward as a Conflict of Interest Rule-Investment Advice, the U.S. Department of Labor seeks to "reduce harmful conflicts of interest by amending the regulatory definition of the term 'fiduciary' set forth at 29 CFR 2510.3-21(c) to more broadly define as fiduciaries those persons who render investment advice to plans and IRAs for a fee within the meaning of section 3(21) of the Employee Retirement Income Security Act (ERISA) and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account current practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as changes that have occurred in the investment marketplace, and in the ways advisers are compensated that frequently subject advisers to harmful conflicts of interest."

As with any mandate, if approved, some will be impacted more than others. In its "DOL 2014 Fall Regulatory Agenda," ERISA attorneys Fred Reish, Bruce Ashton and their Drinker Biddle & Reath LLP colleagues assert that broker-dealers and their registered representatives will likely bear the brunt of new rules. They write that "Adoption of an expanded definition will likely affect both the status for broker-dealers as fiduciaries and their compensation (due to the fiduciary prohibited transaction rules of ERISA). In response, these broker-dealers may need to develop RIA fiduciary programs for advisors who focus on retirement plans and decide how to manage the plan business of those who do not."

Whatever your holiday preference may be, keep a look out for the "gifts" that 2015 has in store for plan sponsors and their service providers.

Registered Investment Advisor (RIA) Fiduciary Liability Risk

According to "Do plan advisers understand their risks?" by Rich Fachet (Investment News, October 8, 2012), some financial careerists may be woefully unaware of the risks they face as ERISA fiduciaries. The author, team leader with The Travelers Cos. Inc., goes on to say that the U.S. Department of Labor is serious about enforcement with $1.38 billion having been collected in 2011 "through prohibited-transaction corrections, restoration of plan benefits or the voluntary fiduciary-correction program." He adds that RIAs face both personal and professional liability. Whether tasked with discretionary authority over how to allocate an ERISA plan portfolio or giving advice with limited control over assets, these investment professionals have a lot to lose. Fachet lays out what kind of information should be gathered as a step towards mitigating fiduciary risk. The list includes, but is not limited to, the following tasks:

  • Assessment of the nature and magnitude of liability, taking new regulations such as ERISA 408(b)(2) into account and the potential cost of non-compliance;
  • "Lessons learned" from lawsuits that plaintiffs' counsel has won;
  • Determination of ERISA 404(c) "safe" versus "unsafe" harbors and how to counsel a plan sponsor as a result;
  • Review of "plan participant  options and models" as well as asset allocation percentages; and
  • Analysis of insurance gaps to include a review of adviser errors and omissions, professional liability, fiduciary liability and/or ERISA bond coverage.

Gary J. Caine, FSA, with Multnomah Group, Inc. addresses the flip side, i.e. that ERISA fiduciaries must carefully vet investment advisers before they are hired and thereafter. In "Fiduciary Reliance on Registered Investment Advisors," he suggests that plan sponsors need to minimally ask about qualifications such as education, experience in assisting plans, professional designations and securities licenses. Conflicts of interest, liability insurance coverage and compensation arrangements are other areas to investigate.

Notwithstanding the need to carefully assess which registered investment advisers are appropriate partners for ERISA pension plans, merger and acquisition ("M&A") activity in this sector continues. According to a new study produced by Schwab Advisor Services, "year-to-date assets under management (AUM) for M&A deal activity reached $42.3 billion at the end of the third quarter, which nearly eclipses last year's AUM total of $43.9 billion.". See "New Clients Drive Steady Growth for Independent Advisors in Face of Uncertain Economic Environment, Say 2012 RIA Benchmarking Study From Charles Schwab" (July 17, 2012 press release).

With Retirement Savings Week just wrapped up on October 27, 2012, experts write that many individuals are still woefully unprepared for post-employment life. In "Retirement 'Savings Week' highlights savings gap," Market Watch reporter Elizabeth O'Brien describes a study from the Employee Benefit Research Institute ("EBRI") on October 22, 2012 that says that 44 percent of simulated "lifepaths" bolsters the reality of inadequate income for one's "golden years."

A glaring take-away from all of this is that registered investment advisers will have a large client base as long as people need help with retirement planning.