The Department of Labor announced that it would be re-proposing its rule on the definition of fiduciary due to requests from the public via Congress that the agency provide more input on the rule.
Anticipated changes include but are not limited to:
-Clarifying that fiduciary advice is limited to individualized advice directed to specific parties
-Addressing concerns about application of the rules to routine appraisals
-Clarifying limits of the rule's application to arm's length commercial transactions, such as swap transactions.
-Addressing the impact of the new regulation on current fee practices of advisors and brokers, and looking at exemptions permitting brokers to receive mutual fund, stock, and insurance commissions.
The full article, available through PLANSPONSOR.com, can be seen here.
Monday, September 19, 2011
Thursday, September 15, 2011
How often is prudent to conduct a vendor search?
As a general rule for Plan Sponsors, it is always good to have a market evaluation that is current on hand. This way, you will always be aware of what the marketplace is offering and have a good idea as to whether your plan is current and still in the best interest of the participants. The question is, how current does this need to be and at what point do new services outweigh the financial and time costs of making plan changes.
Historically, this was always a matter of opinion. When asked, I've usually answered every three to five years should be sufficient to gauge what is new in the market and determine if a change is warranted and disclaimed that by saying that more frequent is also fine. However, it appears that this thought needs to be amended somewhat.
It now appears that if a Plan Sponsor wants to be prudent and avoid a litigation risk in the unlikely event of a law suit, that they should adopt a policy of conducting a market study AT LEAST every three years.
In the preamble to its 2010 service provider fee disclosure rules, the Department of Labor (DOL) assumes/suggests plan sponsors conduct an RFP about every three years. While, in general, preambles are not laws, the 2011 Seventh Circuit Court of Appeals decision in George v. Kraft Foods is reinforcing concerns that this is the new normal for a prudent plan fiduciary.
Kraft's 401(k) plan participants sued for breach of fiduciary duty alleging Kraft should have done an RFP every three years and this failure resulted in payment of excessive investment fees to the plan's service provider. A lower court accepted Kraft's defense that it relied on expert outside consultants to ensure fees were competitive when extending that service provider's contract multiple times and granted summary judgment in Kraft's favor. On appeal, the Seventh Circuit rejected that as an absolute defense and sent the case back for a trial, which could end up costing more than settling.
This decision on appeal has lead some to assert that the rule should be vendor search every three years. However, this is not a mandate at this time. Certainly, as an employee of a service provider, I can tell you that it is not in my firm's best interest to have our clients search the market every three years for a possible vendor change. However, as a fiduciary, we would say that adopting a policy of market evaluation periodically is a very good idea. By formalizing a policy and setting a timeframe, whether 3 years or some other, and then following it, a Plan Sponsor would be engaging in a Prudent Process to verify that what they are offering is still prudent to offer.
This would also reenforce the idea that service providers should earn their fees, not just at the time they win a client, but on a continuous basis. This will enforce better competition and ultimately better service for Plan Sponsors and participants.
Historically, this was always a matter of opinion. When asked, I've usually answered every three to five years should be sufficient to gauge what is new in the market and determine if a change is warranted and disclaimed that by saying that more frequent is also fine. However, it appears that this thought needs to be amended somewhat.
It now appears that if a Plan Sponsor wants to be prudent and avoid a litigation risk in the unlikely event of a law suit, that they should adopt a policy of conducting a market study AT LEAST every three years.
In the preamble to its 2010 service provider fee disclosure rules, the Department of Labor (DOL) assumes/suggests plan sponsors conduct an RFP about every three years. While, in general, preambles are not laws, the 2011 Seventh Circuit Court of Appeals decision in George v. Kraft Foods is reinforcing concerns that this is the new normal for a prudent plan fiduciary.
Kraft's 401(k) plan participants sued for breach of fiduciary duty alleging Kraft should have done an RFP every three years and this failure resulted in payment of excessive investment fees to the plan's service provider. A lower court accepted Kraft's defense that it relied on expert outside consultants to ensure fees were competitive when extending that service provider's contract multiple times and granted summary judgment in Kraft's favor. On appeal, the Seventh Circuit rejected that as an absolute defense and sent the case back for a trial, which could end up costing more than settling.
This decision on appeal has lead some to assert that the rule should be vendor search every three years. However, this is not a mandate at this time. Certainly, as an employee of a service provider, I can tell you that it is not in my firm's best interest to have our clients search the market every three years for a possible vendor change. However, as a fiduciary, we would say that adopting a policy of market evaluation periodically is a very good idea. By formalizing a policy and setting a timeframe, whether 3 years or some other, and then following it, a Plan Sponsor would be engaging in a Prudent Process to verify that what they are offering is still prudent to offer.
This would also reenforce the idea that service providers should earn their fees, not just at the time they win a client, but on a continuous basis. This will enforce better competition and ultimately better service for Plan Sponsors and participants.
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