DOL to Reconsider Fiduciary Rules

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.

MEP's - Mediocre Employer Protection.....Just Kidding

Actually, the purpose of this post is in response to those seeking some "opinions" on whether MEP's, Multiple Employer Plans, are a good idea or not. The pros/cons are out there, on the pro's side is potential economies of scale and, theoretically, increased fiduciary protection. It has been this author's contention that the MEP is not a silver bullet (as has been sold by various MEP sales people), but isn't a bad idea necessarily. There is a place for all creative designs in the marketplace.

We believe that with a contained, related group of employers and the proper service providers in place, that a MEP structure can work quite well. Think about that small group of franchise owners who are related, but don't have a good employee benefit while the main franchise has a very strong one. Assuming the vendors can work with the group to allow it to be feasible from a cost perspective, this group could benefit quite well from a MEP structure.

That said, although an Employer who adopts a MEP plan for their employees is giving up 'Named Fiduciary' status, meaning they will no longer be the named Plan Sponsor or the Named Administrator or Named Trustee, we believe they will still be a fiduciary under ERISA and will have some remaining obligations. Specificully, under the definition of a fiduciary, ERISA §3(21) has 3 parts. Two of those parts deal with the ability to or the actual excercising of discretion over plan assets. It is under this formal definition that an employer who adopts a MEP is still a fiduciary. Ultimately, at their discretion they are opting into and may opt out of the MEP and this is an excercise of control over plan assets. Therefore, they are still a fiduciary and still have quite a bit of residual responsibilities and risk.

Recently, a series of opinions and subsequent postings have appeared that provide the user with some cautionary advice on MEP programs. See these two links, one from ASPPA and one from The Law Offices of Ilene H. Ferenczy, LLC.

http://www.asppa.org/document-vault/pdfs/asaps/2011/11-22.aspx

https://app.e2ma.net/app/view:CampaignPublic/id:18861.7106427767/rid:fcf0ab2197415e4f2bd0df8fc3501b8c

Interestingly, these are more from the administrative point of view, but also site DOL opinions and a recent discussion held between members of the DOL and IRS with members of the Govt. Action Committee (GAC) of ASPPA. The result is a stated opinion that many of the so-called MEP programs out there wouldn't qualify as MEPs at all because many of the employers are unrelated and therefore fail to meet the qualification. Under those scenarios, if discovered, those plans would be required to file their own 5500's, test separately, have their own fiduciaries, etc. This is VERY different than the way that these increasingly popular "open-end" MEPs are being sold in the marketplace. I think this is a good case of 'Buyer Beware'. The employers are buying a Panacea or Cure-All for their responsibilities, but in reality they aren't gaining much, if anything.

As always, we welcome any differing view points or clarifications. Please, nothing commercial or it will not be posted.

I'm a Fiduciary, What Are You?

It’s interesting to observe how trends affect one’s life from time to time. Ordinarily when one thinks of trends, they think of it in the context of the social side of life. For example, trends in music, fashion, television, etc. Every now and then trends start to appear in the professional world as well. One emerged trend of the last several years in the 401(k)/Pension business is the trend towards offering fiduciary services. Of course with this comes the inevitable misusage of the term fiduciary and a variety of marketing terms and sales gimmicks intended to take advantage of the trend without actually providing anything in return. Through the course of travel my coworkers and I often get many of the same questions surrounding ‘fiduciary’. Confusion in this area isn’t surprising as there is a lot of market noise, from the marketing terms like Co-Fiduciary or the sales tools like Fiduciary Warrantees to the newest trend, the selling of specific code sections as the different flavors of fiduciary.

We’ve all seen the various new categories of advisor; ERISA §3(38) Investment Manager, Full-Scope §3(21), Limited-Scope §3(21) and so on. On Linked-In there are lively discussions about it, articles are being published on it on Morningstar.com and an unfortunate result is some general confusion from a lot of Advisors of ERISA plans on what all of this is and what they should or should not be calling themselves or doing, not to mention what they’re allowed to do or not allowed to do under their Broker/Dealer contract if they are a registered rep. For that reason, we have created a new piece as an attempt to simplify and consolidate the most recent array of terminology.

Select the following link to view the complete document – Fiduciary…A Different "F" Word.

Fiduciary Delegation - Myth or Reality?

I get asked about this quite often, so I thought it would be a good topic for discussion here. Specifically, the question that I get asked is whether or not Fiduciary Liability (not responsibility or status) can in fact be transferred from a Plan Sponsor or business owner onto another entity or not. Below, I will try and tackle this question appropriately so that it makes sense for all who may be interested.

The notion that fiduciary responsibility and liability cannot be delegated is explicitly false under law. ERISA itself makes this clear, DOL regulations make it clearer, and case law reinforces it. The most obvious way to delegate is simply to hire someone else to be in charge. For example, when one of our clients prudently hires and monitors Unified Trust as discretionary trustee, the client should be able to effectively delegate much of its fiduciary responsibility with respect to plan assets and the client should not be liable for Unified’s acts and omissions as discretionary trustee. The client simply has a fiduciary responsibility to prudently hire and appoint Unified and to monitor our performance as discretionary trustee.

Another path to delegation is through an ERISA investment manager. ERISA section 3(38) defines an investment manager as any fiduciary (other than a trustee or a named fiduciary):

• who has the power to manage, acquire, or dispose of any asset of a plan;
• is a Registered Investment Advisor (RIA), bank or insurance company;
• has acknowledged in writing that he/she is a fiduciary with respect to the plan.

A named fiduciary can appoint and delegate certain plan functions to an investment manager (pursuant to ERISA section 402(c)(3)) and not be liable for the acts and omissions of the investment manager (pursuant to ERISA section 405(d)(1)). Of course, the one caveat is that the appointment of the investment manager must be prudent and this responsibility lies solely with the appointing fiduciary, typically the Plan Sponsor. Click here to read an article previously published in the Journal of Financial Planning that goes into detail on this very topic and how it can benefit Plan Sponsors.

To Summarize:
Myth – You Can’t delegate fiduciary responsibility

• This is false. Delegation is perfectly legal under ERISA……just rarely done in actual practice.
• Several sections under ERISA specifically outline how delegation would occur. These are sections 402c, 403a, 405(c)(1)/405(c)(2)/405(d)405(c)(1)/405(c)(2)/405(d)(1).
  

402(c) – Formally Divides duties among named fiduciaries
403(a)1 – Formally delegate to a Corporate Trustee
403(a)2 and 402(c)(3) – Formally delegate to an Investment Manager
405(c)(1)/405(c)(2)/405(d)(1) – Formally delegate duties of a named fiduciary to another fiduciary (who is not named) – I.E. Independent Fiduciary
405(d)(1)) – “named fiduciaries are not liable for the acts and omissions of other named fiduciaries” if those fiduciaries have been prudently appointed and retained.

• Based on the above if the plan sponsor delegates the role of trustee to a Corporate (fully discretionary) trustee and does so prudently, that plan sponsor is not responsible for the acts and omissions of that trustee. This includes the delegation of prudently selecting and monitoring investments.
• Bottom-Line – No one can fully remove the Plan Sponsor’s fiduciary role or ALL of its responsibilities, but parts of it can be outsourced to professional fiduciaries including the role of discretionary trustee. The client in this environment transfers liability to this discretionary trustee. This is generally a good thing. The client is still the Plan Sponsor and named administrator and thus is still responsible for settler/ministerial functions as well as prudently hiring and monitoring service providers including the outsourced trustee service.