This is my sixth article about interesting observations “hidden” in the preambles to the fiduciary regulation and the exemptions.
In some cases, the concerns about the scope of the fiduciary rule are overblown. For example, there have been some statements that advice about minimum required distributions for IRAs would be fiduciary advice. That is not the case.
In the preamble to the fiduciary regulation, the DOL explained:
“With respect to the tax code provisions regarding required minimum distributions, the Department agrees with commenters that merely advising a participant or IRA owner that certain distributions are required by tax law would not constitute investment advice. Whether such “tax” advice is accompanied by a recommendation that constitutes “investment advice” would depend on the particular facts and circumstances involved.”
So, basic advice about tax requirements and consequences is not fiduciary advice. However, if the adviser recommends which … Read More »
The DOL’s fiduciary rule has been published in the Federal Register. Based on our review of the regulation and conversations with our clients, here are some overview thoughts about the regulation and the two “distribution” exemptions (84-24 and BICE).
The Fiduciary Definition
The rule is much as expected. The definition of fiduciary advice continues to be very broad, capturing almost all common sales practices for investments and insurance products. It includes investment recommendations to plans, participants and IRA owners, as well as recommendations about distributions from plans and transfers and withdrawals of IRAs. All of those will be fiduciary activities.
As a result, those recommendations will be subject to the fiduciary standard when made to plans or participants, and subject to the Best Interest standard of care when made to IRA owners (if the adviser needs the prohibited transaction relief provided in … Read More »
[embeddoc url=”http://fredreish.com/wp-content/uploads/2015/06/Duty-of-Prudence.pdf” download=”all” viewer=”google”]
The allocation of revenue sharing in 401(k) plans is a fiduciary decision. We explored that issue in detail in a recent white paper. We also looked at the concept of lowest “net” expense ratios. We concluded that there were fiduciary risk management benefits to “equalizing” revenue sharing (that is, returning it to the participants whose investments generated it) and for using the lowest net expense ratio for investments (i.e., the lowest net expense ratio after offsetting revenue sharing). A copy of that white paper is here.
Little has been written about how a plan fiduciary should prudently select insurance companies and guaranteed retirement income for participants. There’s a DOL “safe harbor” regulation, but it doesn’t give fiduciaries a checklist for compliance. To address this, Lincoln Financial hired us to work with an insurance consultant to develop a set of criteria that fiduciaries or their advisors can use to make those decisions. Bruce Ashton and I have written an article about the checklist that can be found here: Did you know…About the Fiduciary Requirements for Selecting a Lifetime Income Provider? The article has links to the white paper and the checklist.
As I review investment policy statements for participant-directed plans, I see a number of common deficiencies. This email is about one of those—the selection and monitoring of target date funds (“TDFs”).
In my experience, most IPS’ say little or nothing about the criteria to be applied to TDFs. For example, an IPS might be completely silent on the issue or may simply say that they will be selected and monitored. But, in neither case is there a robust set of criteria. That is problematic.
One reason is that TDFs are capturing an increasingly large percentage of 401(k) assets. As more plans automatically enroll, that percentage will continue to grow. I can imagine a day, in the not-so-distant future, where over half of the assets in 401(k) plans will be in TDFs. That leads to the unfortunate conclusion that, based on the current … Read More »
Fred Reish was quoted in a New York Times article on June 21. The article, titled, “Limiting the 401(k) Finder’s Fee” takes a look into the fees behind employee’s 401(k)’s as they begin to replace pensions.
A series of lawsuits are making their way through the courts, which have raised questions about whether employees are being overcharged for their accounts. The lawsuits and new federal rules have helped bring fees down to a more reasonable level. While some employers have begun to adopt arrangements with less fees that more clearly separates what they are paying for, fees that workers pay can still vary widely and be hard to recognize or understand.
“It’s unfortunate that it took litigation to focus attention on costs, but it has,” said Fred.
The link to the article can be found on the Drinker Biddle website, here.
Periodically I will be posting information or materials from external resources, such as government agencies, that I think will be useful. This is the first of those posts. These materials will be linked on the blog to the “External Resources” page of the blog.
The GAO just issued a report on IRA rollovers. The title is: “401(k) PLANS: Labor and IRS Could Improve the Rollover Process for Participants.” You can find a copy of the 71-page report here.
While the GAO Report recommends a number of changes to improve the rollover process and experience for participants, it is remarkable for the comments that it makes about the IRA rollover services of some providers. For example, at one point, it states: “Plan participants are often subject to biased information and aggressive marketing of IRAs when seeking assistance and information regarding what to do … Read More »
Fred Reish was profiled in the April 24, 2013 alumni newsletter of The University of Arizona James E. Rogers College of Law. To see the full feature, click here.
On July 30, the DOL reissued its Field Assistant Bulletin (FAB) concerning participant disclosures. The FAB was reissued because of the controversy about the DOL’s position on individual brokerage accounts.
The new FAB deletes the old, and controversial, Q&A 30 and replaces it with a new Q&A 39.
While some of the controversial provisions were removed, some remain. For example, the DOL states:
“…in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raising questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty.”