The DOL Conflict of Interest Rule is finally here! Some implications....

Implications of the Fiduciary Rule  After months of anticipation and years of debate, the Department of Labor (DOL) “Conflict of Interest Rule” has finally been released.  During the proposal process, the DOL fielded over 400,000 comments, some of which were in opposition to the rule while others were seeking clarification to specific areas within the rule.  The one thing there is little debate about is the intent of the rule.  There may be arguments around the government’s role in this process, or the nuances of what constitutes investment advice, but how do you argue that a rule requiring the industry to act in the best interest of their clients is a bad thing? It will likely take weeks, if not months, to fully dissect and understand the scope of the new fiduciary rule and how the landscape will change as it is phased into implementation.  Here are a few of my initial interpretations and what I think the potential implications are.    Potential Impact on Financial Advisors The registered investment advisors (RIAs) that have already been acting in a fiduciary capacity just saw their marketplace get considerably more crowded.  With the vast majority of advisors now being considered fiduciaries, RIAs will be forced to adjust their value proposition to distinguish themselves amongst their competitors.  My opinion is that the most impactful point of differentiation will be to not only improve outcomes for participants but to quantify those outcomes for the plan sponsors and retirement plan committees. Some broker-dealer registered reps may need to utilize the ‘education carve-out’ to limit or avoid fiduciary status.  However, the carve-out is going to be narrower than it previously was (per DOL Interpretive Bulletin 96-1) and the education provided under this approach will be limited and may be considered unsatisfactory to many plans.  Registered reps who wish to stay in the retirement plan industry using the education carve-out may ultimately need to rely on a very strong fiduciary partner to do so (a view shared by notable fiduciary expert Fred Reish in a recent blog post as an evolving “common solution” for 401k-focused registered reps in the wake of the new fiduciary rule). Potential Impact on Advisory Fees In recent years, fees have been compressing as a result of the DOL’s fee disclosure initiatives and the increasingly competitive nature of the marketplace—something that is expected to accelerate under the new fiduciary definition rule.  It’s also highly likely we’ll see increased litigation over the matter.   However, we don’t believe that there will be a bright-line test on fee reasonableness.  It’s not necessarily about the fee but rather what is being done to earn the fee.  For that reason we believe that an advisor’s business model will need to include greater fee transparency, a prudent documentation and monitoring process, and the ability to quantify participant level outcomes.  Advisors that can accomplish this will be in a better position to justify their fees and differentiate their services in a fiduciary environment where everyone is essentially viewed as an equal. Potential Impact on Compliance Compliance complexity and oversight will greatly increase.  For example, testimony to the DOL indicated in the first year the rule goes into effect financial institutions will have to produce more than 86 million written disclosures and notices.  This does not come without a cost.  Who will pay for this? Potential Impact on Vendors Many major vendors will be exempt from the fiduciary rule or attempt to structure relationships to avoid fiduciary status under the rule.  This means litigation that develops may be between the plan sponsor and the advisor since the vendors may not be a fiduciary—that is unless you are working with a vendor that is willing to accept fiduciary status such as my firm, Unified Trust who not only is willing to accept fiduciary status, we sign on as discretionary trustee, and thus a named plan fiduciary, in the plan document for every plan on our platform. The DOL Conflict of Interest Rule will no doubt have a sizable impact on the industry.  The extent of that impact will unfold over the coming months and years.  We do firmly believe that it will increase the need to have a fiduciary process that is not only accurate but also automated and algorithm-based.  In other words, it won’t be enough to say you’re a fiduciary, rather you will need to show prudent fiduciary processes are in place and in the best interest of the investor.  - Jason Grantz, QPA, AIFA

DOL Fiduciary Rule Set To Shake Up Retirement Marketplace

Myself along with a few others were interviewed last week by LifeHealthPro.com author, Lynn Brackpool Giles.  The topic of discussion on the table was the forthcoming Department of Labor's (DOL) Conflict of Interest Rule aka 'The Uniform Fiduciary Standard'.  Some of the main concerns expressed in the article by the author and those interviewed surrounded the onerous nature of complying with the new rules, the potential aggregate costs associated with advisor compliance and the potential impact, re: shake-up of the retirement plan landscape.  The article is linked here.
 
DOL Fiduciary Rule Set To Shake Up Retirement Marketplace



In addition to the thoughts that I expressed within the article, I thought I’d share some of what didn’t make it in.  Specifically, my opinion is that over time the industry and the advisors will absorb this highly onerous set of rules and a new “business as usual” will result.  We will see new retirement plan business models created. 

One such model that I’ve already started to see take hold is that of the ‘Retirement Plan Specialist’ partnering with unaffiliated non-specialist advisors, almost like an advisor “wholesaling” to another advisor.  These new independent specialists will be those that can run effective conflict-of-interest-free retirement plan practices at a profit without the need to work with individuals beyond the plan relationship.  If they partner with referring or non-affiliated wealth management advisors, a true symbiosis can occur and stay within the boundaries of the new rules.
 
Under this new model, the specialists will need to be scalable and efficient in their business practices, and their plans will need to be designed to be altruistic in nature favoring improving outcomes as the primary goal of the plans. There is nowhere better than Unified Trust in the industry at improving outcomes and we, as Discretionary Corporate Trustee and Named Plan Fiduciary are taking a large amount of the fiscal, investment and monetary burden off the shoulders of the plan sponsor and advisor.  In conclusion, our services enable the advisor to be highly scalable, allows the advisor and employer to demonstrate that their plan is actually driving better retirement readiness and as an added benefit, significantly reduces financial and fiduciary risk for all involved. 

 


-Jason Grantz

What’s in a name?

I received this great piece from a colleague of mine, Joe Reese, who kindly offered to post it on our blog.  Thanks Joe - Jason G.

Recently, we were competing for a law firm and were told by the Plan Sponsor that the insurance company service providers we were competing with “can assume being named the Plan Trustee.”  We are a discretionary plan trustee – it was clear the insurance company service providers were offering a directed trustee solution. While a discretionary trustee and a directed trustee are both trustees and both fiduciaries, they are not one in the same. 

After days of back and forth, reviewing documents, etc. the law firm requested 3rd party information highlighting the difference between a discretionary trustee and directed trustee. The following was our response.

First, some context…

ERISA Section 402(a) provides that a written plan document must include one or more ‘‘named fiduciaries’’ who control and manage the plan’s operation and ad-ministration. ERISA Section 403(a) states that plan assets generally are held in trust, managed by trustees either named in the trust instrument or appointed by the plan’s named fiduciary. Trustees typically have authority to manage and control plan assets unless the plan expressly provides that the trustees are subject to the direction of the named fiduciary or delegates such authority to an investment manager.

Then in the DOL’s own words…

DOL Field Assistance Bulletin 2004-3: Fiduciary Responsibilities of Directed Trustees

http://www.dol.gov/ebsa/regs/fab_2004-3.html

Here are a couple key parts of the above Field Assistance Bulletin:

• The duties of a directed trustee under section 403(a)(1) are therefore significantly narrower than the duties generally ascribed to a discretionary trustee under common law trust principles.
• The named fiduciary has primary responsibility for determining the prudence of a particular transaction, whether the transaction involves buying, selling or holding particular assets. Accordingly, as the courts and the Department have long recognized, the scope of a directed trustee’s responsibility is significantly limited. A directed trustee does not, in the view of the Department, have an independent obligation to determine the prudence of every transaction. The directed trustee does not have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over the management of plan assets and does not have a direct obligation to determine the prudence of a transaction.  See In re WorldCom ERISA Litig., 263 F. Supp. 2d at 761;  Herman v. NationsBank Trust Co., 126 F.3d at 1361-62, 1371 (directed trustee does not have a direct obligation of prudence under ERISA section 404; its obligation is simply “to make sure” the “directions were proper, in accordance with the terms of the plan, and not contrary to ERISA”).

And finally, Case Law…

Federal courts have typically held that a retirement plan’s directed trustee can’t be held liable if it followed the investment directions of the plan’s named fiduciary. Below is a summary of cases dealing with directed trustee liability.

Renfro v. Unisys Corp., 671 F. 3d 314 - Court of Appeals, 3rd Circuit 2011

“Fidelity's limited role as a directed trustee, delineated in the trust agreement, does not encompass the activities alleged as a breach of fiduciary duty—the selection and maintenance of the mix and range of investment options included in the plan.”

“As we have explained, a directed trustee is essentially "immune from judicial inquiry" because it lacks discretion, taking instructions from the plan that it is required to follow.”  

Fidelity maintained that it was not a fiduciary with respect to the conduct constituting the alleged fiduciary breach. The trial court granted Fidelity's motion to dismiss, ruling that Fidelity and its related entities were not fiduciaries with respect to the challenged conduct because they did not exercise control over the selection and inclusion of investment options in the plan.

Tussey v. ABB, Inc., Case 2:06-CV-04305, 2010 Document 103

“By the plain language of the Trust Agreement, Fidelity Trust has no responsibility for reviewing the merits of fund choices made by the Pension Review Committee. 

Thus, Fidelity Trust had no responsibility to prevent the addition of the Fidelity Freedom Funds to the Plan’s investment line-up.  For these reasons, the Court finds that Fidelity Trust cannot be held liable for ABB’s breaches under ERISA Section 405(a)(2).” 

Fidelity’s reaction to the Tussey v. ABB court’s decision regarding Fidelity not being responsible as a directed trustee:  “We are pleased with the decision today by the court of appeals,” Vincent Loporchio, a Fidelity spokesman wrote in an email. “Fidelity’s actions were in all respects consistent with our fiduciary duties to our clients and all legal requirements. With this decision on appeal, Fidelity has prevailed on all claims asserted against it in court.” 

In re Cardinal Health Inc. ERISA Litigation, S.D. Ohio, No. C2-04-643, 3/31/06

The US District Court for the Southern District of Ohio dismissed a claim against Putnam Fiduciary Trust Co. as directed trustee of Cardinal Health employees' retirement plan in a case involving company stock investments.  The court found that Putnam was a directed trustee with limited fiduciary duties. The judge also refused to dismiss the employees' claim that some of the Cardinal Health defendants breached their ERISA fiduciary duties by failing to monitor those they had appointed to act as plan fiduciaries, and said Cardinal Health may be liable under the doctrine of respondeat superior for its board of directors' failure to monitor those they appointed to act as plan fiduciaries.

Donovan v. Cunningham14 (S.D. Texas 1982)

This early case briefly discussed the ‘‘limited role’’ of the directed trustee. The court noted that a directed trustee couldn’t be liable for breach of fiduciary duty where its activities ‘‘at all times remained within the limited role of a directed trustee.’’

Maniace v. Commerce Bank of Kansas City18 (8th Cir. 1994)

The Eighth Circuit ruled that a bank serving as directed trustee of an ESOP didn’t violate its fiduciary duties in allowing the plan to continue to hold large amounts of employer stock despite the stock’s declining value. The court found that, as a directed trustee, the bank wasn’t an ERISA fiduciary with respect to employer stock held by the ESOP because it lacked discretion over plan assets. According to the court, ‘‘the obligations of a directed trustee are something less than that owed by typical fiduciaries.’’

Grindstaff v. Green20 (6th Cir. 1998)

The Sixth Circuit ruled that a directed trustee isn’t a fiduciary to the extent it doesn’t control the management or disposition of plan assets. The court rejected ESOP participants’ claim that the ESOP’s directed trustee had a duty to investigate the merits of any directives given to it by the plan’s named fiduciary. The court noted that the trustee had no discretion pertaining to voting the ESOP stock and could only act at the direction of the named fiduciary.

In re McKesson HBOC Inc. ERISA Litigation21 (N.D. Cal. 2002)

A California federal district court dismissed ESOP participants’ claim that the plan’s directed trustee breached its ERISA fiduciary duties by allowing plan fiduciaries to continue to invest in employer stock when it allegedly knew that such an investment was imprudent. The court found that as a directed trustee, the trustee was obligated to follow the investment instructions given by the named fiduciaries and thus couldn’t be held liable for any losses that resulted from performance of its duty to follow those instructions. The court noted in a footnote, however, that if the participants could demonstrate that the trustee knew that the investment directives violated ERISA, then the trustee wouldn’t be relieved of ERISA liability by following such imprudent directives.

Lalonde v. Textron Inc.22 (D. R.I. 2003)

In this case, the district court dismissed ESOP participants’ claim that the plan’s directed trustee breached its fiduciary duties by not rejecting the named fiduciary’s directive to invest in the plan sponsor’s stock. The court found that the directed trustee had no discretionary authority, and hence no fiduciary status. The First Circuit subsequently upheld the district court’s decision after concluding that, even if it were to assume that the trustee wasn’t a true directed trustee, there was nothing in the participants’ complaint that would permit an inference that the trustee abused any discretion it might have had.

Yes, discretionary trustees and directed trustees are both fiduciaries, and trustees…but the role they play are not the same. A Plan Sponsor who confuses the two does so at his or her own peril.

Discretionary Trustee vs. Inv. Mgr. or other fiduciary roles

An old colleague and current competitor of mine, and ours at my firm recently put out a very nice blog post articulating some of the nuances of the trustee role in context vs. other fiduciary roles, Investment Managers and directed trustees.  Certainly worth a quick read, linked here.

http://pentegra.com/expertise/current-thinking/misconceptions-about-the-three-principal-fiduciary-roles-in-a-retirement-plan-the-trustee.aspx

Enjoy!
Jason

Not all 3(38) Fiduciaries are alike - Repost

Pulled this brief blog post from Ary Rosenbaum's blog.  Linked below.

http://www.jdsupra.com/legalnews/not-all-338-fiduciaries-are-alike-01959/

In this post Ary discusses one of the current industry trends, the selling of 3(38) services and discusses briefly how they come in different shapes and sizes and he equates many of these new services to getting a meal at McDonald's.  Love his sarcasm.

About 18 months ago, I authored a paper on this topic as well.  It has many of the same themes as Ary's post, but goes a bit deeper into the topic.  Below is a link to that paper.  Enjoy!

https://www.unifiedtrust.com/documents/Third-Party-Fiduciaries-Myth-and-Reality.pdf

Fiduciaries, Know thy Duty!

Good article posted this AM on NAPA.net authored by John Lekel.  Within the article it cites a webinar that was conducted for NAPA in January presented by Dr. Greg Kasten of Unified Trust Company regarding fiduciary duty for retirement plan fiduciaries.  Within the webinar, Dr. Kasten offers a variety of good pointers on best practices and some warnings about what is being sold in the market vs. what clients think they are buying.  Here's a short list of best practices;
___
"Prudence is key, Kasten argued, in exercising fiduciary duty. He offered these pointers:
• consider what information is relevant to the decision;
• obtain the information;
• analyze the information;
• make a reasoned decision that other experts in similar situations would make; and
• document the decision"

Thanks John and thanks Dr. Kasten.

Retirement Plan Business Models - Some thoughts

In early November, I did an interview with a Paula Aven Gladych of benefitspro (http://www.benefitspro.com/), an online media source for all things related to the benefits marketplace.  The topic of the interview was "broker business models for retirement plans".  Very soon after the interview, they posted an article called "Demand Rising for 401(k) advisors".  I was cited in the piece, but a lot of what she and I had discussed was left out, linked below.

http://the401kplanblog.blogspot.com/2013/11/demand-is-rising-for-401k-advisors.html

Unbeknown to me, the author had intended a second piece which was published on 12/27 entitled "Brokers begin to break into 401(k) market".  More of what she and I had conversed about appears in this article.  In it, I discuss a couple of different service models that can work, the widening gap between "retirement pros" and beginners and how both can succeed in selling and servicing retirement plans.  Please enjoy it, linked below.

http://www.benefitspro.com/2013/12/27/brokers-begin-to-break-into-the-401k-market

Third Party Fiduciaries - Myth and Reality

Well, I put together a little opinion paper discussing a recent trend we've been seeing in 401(k) products over the last year or so, the so-called "Third Party Fiduciaries".  The idea behind the paper was to share our views to our Advisor Partners and their clients to help them gain a better understanding of the limitations of arrangements that are being oversold to a degree.  Unbeknownst to me, the paper was picked up by 401khelpcenter and put online today.  So, since it is available publicly anyway, I figured I'd link it here for any to see.  Happy reading.

http://www.unifiedtrust.com/Documents/Third_Party_Fiduciaries.pdf

Open MEPs - Another Nail in the Coffin....

As previously discussed on this blog last summer (July and August, 2011 and then again earlier this year in April), the DOL has officially released a formal opinion, DOL 2012-04A dealing with the concept of the Open MEP or unrelated employer Multiple Employer Plan.  The letter can be found here:

http://www.dol.gov/ebsa/regs/aos/ao2012-04a.html

I'm going to refer to this letter as the Toth Letter - as he is the party it is addressed to.  The questions posed in the request by Mr. Toth were as to whether the 'Advantage 401(k)' operated by 401(k) Advantage LLC and TAG Resources would be viewed by the DOL as a single "employee pension benefit plan" even though it was to provide services to multiple otherwise unrelated employers. 

Please peruse the letter for the details, but the result of this letter is that this plan (and assumingly others like it) would not be considered a single plan, but rather a group of individual plans.  It also reaffirms the notion that adopting employers of MEP programs are still considered to be fiduciaries under the meaning of ERISA.  From this author's point of view, this is not surprising news, but rather reaffirming of what we've been saying all along. 

Nonetheless, it does give a viable source opinion to refute any assertion that Open-End MEP programs are a "magic bullet" for employers.

The Value of Working with a Named Fiduciary, A Discretionary Trustee

Two of the major trends within the retirement plan industry are the promotion of fiduciary services and liability immunization for the Plan Sponsor or other fiduciaries. You’ve likely heard us say that ERISA specifically permits the delegation of responsibilities and the allocation of fiduciary duties to third parties. Of course, the natural side effect of this delegation is a reduction in exposure to fiduciary risk. We discussed this very topic in a June 2009 email entitled, “Fiduciary Delegation – Myth or Reality.” (available here)

As the marketplace evolves and new ideas are born, they are molded into various product offerings, and all too often “oversold." A great example of this is the (now old fashioned) fiduciary warranty. We are now seeing these evolutionary processes at work with the advent of ERISA §3(38) Investment Managers as a service built into certain products. When faced with the choice, conventional wisdom suggests that is better to utilize these services in hopes of better plan management and lessened fiduciary risk. The issue we see is that services of this nature are marketed and sold identically as comprehensive shields from liability for the plan sponsor, which they simply are not.

Earlier this week, Forbes.com published an article (available here) featuring a hypothetical deposition between an attorney and a Business Owner/Board of Directors. The article helps illustrate the notion that businesses typically do not consider their retirement plans to be a primary function of their business. As a result, retirement plans are rarely given the requisite attention from business owners/board members needed to fulfill their fiduciary responsibilities. A common assumption is that those under the employ of the owner will operate the plan and maintain responsibility over its compliance. Unfortunately, this can be detrimental to the success of the plan and problematic for plan fiduciaries that are personally liable for the plan’s operation.

We observe that being a fiduciary, and meeting the Prudent Fiduciary Standard of Care, is very complicated, even for those with experience in the field. It would be a monumental undertaking for any business owner or board to develop a technical expertise with qualified plans, which is something they are expected to have simply by choosing to sponsor a plan.