In an earlier post for ThinkAdvisor, I highlighted the fact that many Americans in the 76-million-strong baby boom cohort are relying on 401(k) plans to fund their retirements. With more than $4.6 trillion in assets, these plans represent a sizable market that is increasingly moving toward the open-architecture model familiar to many independent advisors.
This move toward open architecture is creating new opportunities for qualified advisors to provide investment services to both plan participants and plan sponsors, but "qualified" has become a more rarified concept. New government regulations, part of the 2012 update of the Employee Retirement Income Security Act of 1974 (ERISA), have strengthened the definition of a "qualified advisor" and focus on the industry's "F" word: fiduciary. Now understanding your fiduciary responsibility as a retirement advisor is crucial.
Advisors who are new to retirement plan services may never have been subject to rules mandating fiduciary responsibilities, but ignorance is no excuse — you need to learn all about the F-word to thrive in the competitive retirement plan space.
THE NEW RULES
There are two new sections of ERISA that govern the fiduciary relationship between a retirement plan and a service provider: ERISA 408(b)2 and 404(a)5. For both, service providers are required to disclose in writing whether or not they are fiduciaries. ERISA 408(b)2 requires that all service providers — including advisors — fully disclose their fees to plan sponsors. ERISA 404(a)5 requires the same disclosures to plan participants. These rules are designed to ensure that plan sponsors can determine the cost of services, and that plan participants receive all relevant information concerning the plan's investment menu and related service and administrative fees.
With new fee disclosure and written fiduciary identification mandates, 401(k) plan sponsors now need and desire to work with fiduciary advisors. So, advisors should put into place fiduciary best practices to effectively manage liability for the plan sponsor. These best practices include developing and maintaining an investment policy statement; establishing a documented investment selection process; and evaluating and monitoring, on an ongoing basis, all investment options available to the 401(k) plan.
Advisors also need to be aware of an older, legacy rule, 404(c). This section of the vast ERISA law requires that they provide a diversified and broad range of investment menu choices, with benchmarked performance disclosures.
The fiduciary requirements of ERISA 408 and 404 apply to all 401(k) plan advisors. This creates a problem for registered representatives who want to serve the plan market but are not registered investment advisors. They cannot serve as fiduciaries, which creates compliance exposures for broker-dealer firms. Broker-dealers and their registered reps can comply via outsourcing the fiduciary advice and management components of a 401(k) plan to qualified, competent and well-resourced investment advisors with the requisite level of expertise and resources. In fact, ERISA's "prudent expert rule" implies that plan owners should outsource to independent experts if they themselves do not have the necessary qualifications.
