Category Archives: recordkeeper

Interesting Angles on the DOL’s Fiduciary Rule #70

The Fiduciary Rule and Recordkeeper Services

This is my 70th article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Almost all of my Angles articles have been about the impact of the fiduciary rule on advisors—representatives of broker-dealers and RIAs. However, the fiduciary rule also affects recordkeepers and the services that they offer to plans and advisors. In that regard, most of the work that we are doing for recordkeepers falls into three categories:

  • Acceptance of fiduciary responsibility by recordkeepers for “financial wellness” of participants.
  • Providing investment services and support for advisors, without becoming a fiduciary.
  • Providing investment services and support for plan sponsors, without becoming a fiduciary.

The next few Angles articles will discuss these issues in detail. This article is just to introduce the topics.

Financial Wellness

Financial wellness combines a focus on benefit adequacy with basic budgeting and financial management. Typically, it covers advice on plan participation, amounts to defer, repayment of indebtedness, budgeting and management of regular expenses, basic savings, investment advice and management of participants’ accounts, roll-ins to plans, and rollovers from plans. The objective is to help employees with financial decision-making for the short, intermediate and long terms. Where the recommendations constitute fiduciary advice under ERISA and the Best Interest Contract Exemption, the recordkeepers are accepting fiduciary status.

Investment Assistance to Advisors

The fiduciary rule includes an exception for investment services provided to “independent fiduciaries with financial expertise,” or “IFFEs.” Those fiduciaries include broker-dealers, RIAs, banks and trust companies, and insurance companies. In turn, where those financial institutions are willing to serve as fiduciaries with their advisors, recordkeepers can provide investment recommendations to the advisors without becoming fiduciaries. That is because the financial institution and the advisors are considered to be independent and knowledgeable fiduciaries who can evaluate the recordkeeper recommendations on behalf of their plan, participant and IRA clients.

Investment Assistance to Plan Sponsors

While recordkeepers have great flexibility to provide investment advice to advisors (who qualify as IFFEs) without becoming fiduciaries, the same is not true for advice to plan sponsors. (The IFFE provision also applies to some larger plans.)

However, there are some exceptions of general application for providing investment information to plan sponsors. The most useable exception is for responding to requests for proposals (RFPs) and requests for information (RFIs). But, even that exception is limited. The investment list provided by the recordkeeper can only be based on the size of the employer or the size of the plan, or both. For existing plans, it could be based on the current investment line-up.

A Prediction About Future Directions

As a prediction, recordkeepers will increasingly take advantage of the IFFE carve-out. That means that they will be providing suggested investment line-ups to qualifying IFFE advisors. The advisor will then need to evaluate the line-up and decide whether to present it to the plan sponsor. If an advisor then gives that investment line-up to the plan sponsor, the law will treat it as the advisor’s fiduciary recommendation (and, therefore, not as a recommendation by the recordkeeper).

That is the only meaningful exception for individualized non-fiduciary investment recommendations by recordkeepers. The RFP/RFI exception will also help, but it provides, by definition, a generic list of investments.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.


Interesting Angles on the DOL’s Fiduciary Rule #62

Is It Possible To Be An Advisor Without Being A Fiduciary?

This is my 62nd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Under the new fiduciary definition (that applied on June 9), an investment “suggestion” is fiduciary advice. That includes suggestions about a range of issues, including investments, insurance products, investment strategies, other investment advisors and managers, IRA transfers, and plan distributions.

Because of the breadth of the definition, it is almost impossible to be an advisor to a plan without becoming a fiduciary. Under the old rules advisors would provide investment information that, at least arguably, was not fiduciary investment advice. However, under the new definition, where an advisor provides information about investments, it’s possible, perhaps even probable, that the advisor would reasonably be viewed as having suggested that the plan sponsor, participant or IRA owner choose the investments. Otherwise, why provide information about those specific investments . . . unless it was a suggestion that the retirement investor select one or more of them?

Let’s delve into that a little more deeply . . . in the context of a 401(k) plan. It is possible that for a new plan or for a plan changing recordkeepers, the recordkeeper would provide a list of investments in response to an RFI or RFP. If properly done, the list will not be fiduciary advice—because of a fiduciary exception for recordkeepers. In turn, if the advisor does not comment on the list, either favorably or unfavorably, the advisor would not be viewed as having provided fiduciary advice.

Then, at future meetings with the plan sponsor, the advisor or the recordkeeper could simply provide information about the existing investments. However, is it feasible that an advisor would not make comments about poorly performing investments which could be viewed as “suggestions” that they be removed? If those suggestions are made by an advisor, it could be fiduciary advice. Similarly, if an investment is removed, a plan sponsor needs to select a replacement investment. Who will provide the potential replacement investments to the plan sponsor? If the advisor does, that could be a suggestion, or fiduciary advice, that one of those replacement investments be used.

Alternatively, some broker-dealers may decide that their advisors can only use recordkeepers that include fiduciary advisers on their platforms. Those platform advisers would then recommend or select a plan’s investment line-up (and, in the future, would remove and replace investments, as appropriate). That might work. However, the recommendation of a third party fiduciary investment adviser or manager is also a fiduciary act. So, while the advisor would not be a fiduciary for the recommendation of investments, the advisor could be a fiduciary for “suggesting” that the plan sponsor use a fiduciary on the recordkeeper platform.

Unfortunately, these issues have not been tested in the courts or in FINRA arbitrations . . . so, it’s almost impossible to tell where the line will be drawn. As a result, broker-dealers and RIAs need to decide whether they will take the position that they are not fiduciaries—and be subject to risk, or whether they will take a conservative position and clearly be compliant.

While these rules apply to both ERISA retirement plans and IRAs, the issue is particularly acute for plans. That is because a service provider to plans must state, in its 408(b)(2) disclosures, whether it is serving as an ERISA fiduciary. If it is not, then it can remain silent on the issue. However, if the firm and its advisors will be acting as ERISA fiduciaries, that must be affirmatively stated in the 408(b)(2) disclosures. (Note that, during the transition period, recent DOL guidance permits the firm to describe its fiduciary services in the 408(b)(2) disclosures, but does not require that the firm specifically state that it is an ERISA fiduciary . . . with one exception. If a firm has previously said in its 408(b)(2) disclosures, that it was not acting as a fiduciary, that must be corrected by affirmatively saying that it is now acting as a fiduciary.)

The new rules have a number of unforeseen applications. With the likely delay of the applicability dates of the exemptions, including of the full and final Best Interest Contract Exemption, this is a good time to think about how these rules apply and what changes need to be made.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.


What’s Hot . . . in the First Quarter of 2015?

Over the last few months, the most common questions asked by clients . . . and most of my work . . . have been about three issues:

  • The DOL’s new fiduciary proposal . . . not surprising.
  • Capturing rollovers from retirement plans. Again, not surprising because of the large amount of money coming out of plans and in light of the attention being given to rollovers by the SEC, FINRA, DOL and GAO.
  • The use and allocation of revenue sharing in 401(k) plans.

I will be writing about the first two points in the future, so let’s focus on the third one now.

For about 20 years, mutual funds have paid revenue sharing to 401(k) recordkeepers for services provided to the mutual funds. That includes 12b-1 shareholder servicing fees, 12b-1 distribution fees, and subtransfer agency fees. The view was that the money was paid for services to the mutual funds . . . and only incidentally involved the plans. However, that is changing—at least partially because the 408(b)(2) regulation treated those payments as compensation to the recordkeeper for services to the plans. Because of that change, there is a growing perception that the revenue sharing payments belong to the plan, and not to the provider.

Regardless of those perceptions, the DOL’s position, and the 408(b)(2) regulation, treat the payments as compensation to recordkeepers for their services related to the plans and their investments. As a result, if the total compensation from revenue sharing exceeds the reasonable cost of recordkeeping services, the plan sponsor has a fiduciary obligation to be aware of that and to recoup the excess compensation for the benefit of the participants.

The “new news” is that some providers and some plan sponsors are allocating all of the revenue sharing back to the participants and then charging participants’ accounts for the recordkeeping costs. Why? The general answer is because it is seen as being fair. The more detailed answer is that fiduciaries have a duty to oversee the use of revenue sharing by the recordkeeper and, when they delve into the matter (in order to understand the issues and fulfill their fiduciary responsibilities), the fiduciaries often determine that the equitable allocation of revenue sharing, and then proper allocation of plan costs, produces a result that is fair and that manages the fiduciary risk.

That raises the obvious question . . . what fiduciary risk am I talking about? The risk is that there is no guidance from the DOL on the proper use and allocation of revenue sharing. In other words, plan sponsors, advisers and ERISA attorneys are operating in a vacuum. We are making educated guesses about what will ultimately happen in terms of DOL guidance or ERISA litigation. When “walking on thin ice,” it is often preferable to take a relatively conservative position. In this case, the conservative position is to allocate the revenue sharing back to the participants.

To give you an example, think about a large plan where 50% of the participants’ money is in revenue sharing mutual funds, 40% of the participants’ money is in non-revenue sharing mutual funds, and 10% is in a company stock fund (that does not pay any revenue for recordkeeping). In this case, the 50% of the participants in the revenue sharing mutual funds are carrying the cost of the whole plan. Expressed slightly differently, half of the participants are in the plan for free, because the other half are paying the cost of recordkeeping. If we assume that the half of the participants in the revenue sharing mutual funds are paying higher expense ratios, then the problem becomes obvious. Not only are those participants paying for the plan, but they are bearing a financial burden to do that.

A similar case could occur where some of the participants (probably high-compensated ones) are in stock brokerage accounts, while the rank-and-file employees are in mutual funds that pay revenue sharing. The brokerage accounts aren’t paying anything to support the plan, while the rank-and-file employees are bearing the full cost of the plan.

The fundamental question is, how should your plan sponsor clients be positioning themselves in light of the lack of DOL guidance and the potential risk?



Aging Boomers and Rollovers to IRAs

As baby boomers approach retirement in a defined contribution world, the regulators are focusing on distributions and rollovers to IRAs. The SEC, FINRA, DOL and GAO have all spoken on the subject. Their conclusion appears to be that plan fiduciaries, advisors and recordkeepers need to reconsider their current practices and, in some cases, change their practices.

Why? The reason is relatively straightforward. As large numbers of 401(k) and 403(b) participants approach retirement, regulators are becoming increasingly aware that they will be moving from a plan environment where they are “bubble wrapped” by plan fiduciaries . . . and have the benefit of being able to select from investments that have been vetted by the fiduciaries and that are, as a result, good quality and relatively low-cost investments. Based on current practices, most of those participants will rollover into IRAs with investments and advisors that are using retail pricing.

In addition, participants will go from a fiduciary environment that is protected from conflicts of interest into a retail environment that allows conflicts of interest. (Note that there is a difference between a conflict of interest and “succumbing” to a conflict of interest. In my experience, most—but not all—advisors provide good advice at reasonable costs.)

The regulators are asking, “Does it make sense for participants to leave the protected environment of retirement plans and go into the retail environment of IRAs?”

To create a worse-case scenario, imagine a 401(k) participant who is defaulted into a target date fund and stayed there during his working career. In effect, the participant has never selected an investment, and it is possible that the participant never learned anything about mutual funds. At retirement, that participant is encouraged to rollover his money into a retail market.

So, where does that leave us? For plan sponsors, I think that it means that they should consider allowing participants to stay in the plan, even after retirement, and should provide flexible distribution alternatives through their recordkeeper. For advisors and recordkeepers, I think that it means that they need to create meaningful educational materials and help participants make the right decisions, depending on the participants’ needs and preferences.

This is just the beginning of this story. There is too much at stake for it to end here. For example, it is estimated that over two trillion dollars will become eligible for distribution between January 1, 2014 and December 31, 2018.


Advisory Opinion 2013-03A

In Advisory Opinion 2013-03A, the Department of Labor said: “This letter also does not address any fiduciary issues that may arise from the allocation of revenue sharing among plan expenses or individual participant accounts . . .”

In effect, the DOL was saying that it has not issued any guidance—and is not prepared to issue guidance—concerning the allocation of revenue sharing. That is a reminder that there isn’t any explicit guidance on how to allocate revenue sharing. As a result, fiduciaries need to engage in a prudent process to make that decision.

In most cases, revenue sharing is used to pay the cost of recordkeeping. In effect, it is arguable that, when the recordkeeper keeps the money, it is a pro rata allocation among the participants’ accounts. That is because the most common way of allocating expenses (for example, recordkeeping or RIA charges) among participants’ accounts is the pro rata method. So, when a recordkeeper keeps the revenue sharing, participants benefit on a pro rata basis. (“Pro rata” means that amounts are allocated among the participant’s account balances in proportion to the value of the account balances.)

A consequence of the 408(b)(2) disclosures and the DOL’s guidance on revenue sharing is that fiduciaries need to pay more attention to revenue sharing. For example, do fiduciaries want the recordkeepers to keep the revenue sharing or do they want to allocate the revenue sharing to participants (along with the charges for recordkeeping)? Should part of the cost of recordkeeping be allocated to participants who are invested in individual brokerage accounts or who hold company stock . . . or should the participants who invest in mutual funds bear the full cost of the recordkeeping for the plan? Those are fiduciary decisions. In the past, most plan fiduciaries have simply accepted the method used by the recordkeeper. However, even then, that was a fiduciary decision. It’s just that the fiduciaries didn’t, in many cases, know that they were making it. Going forward, there undoubtedly will be greater accountability for these fiduciary “decisions”. . . since fiduciaries have been provided with information about revenue sharing as a part of the 408(b)(2) disclosures. Forewarned is forearmed.


Responsible Plan Fiduciaries and Disclosure Issues

The 408(b)(2) regulation requires that its service, status and compensation disclosures be made to “responsible plan fiduciaries” or “RPFs.” In the rush to make the 408(b)(2) disclosures, most recordkeepers, broker-dealers and RIAs sent their disclosure documents to their primary contact at the plan sponsor. In at least some of those cases, the primary contact was not the RPF. As a result, we added language to our clients’ disclosures to the effect that, if the recipient was not the RPF, the written disclosure should immediately be forwarded to the RPF.

The regulation defines RPF as “a fiduciary with authority to cause the covered plan to enter into, or extend or renew, the contract or arrangement.” In other words, it is the person or committee who has the power to hire and fire the particular service provider, e.g., the broker-dealer, recordkeeper or RIA.

Because of the work involved in making mass disclosures, any inadvertent errors in properly identifying the RFPs may be excusable. However, going forward, it may not be. Because of that, all future agreements, account opening forms, and so on, with ERISA plans should specify that the person signing on behalf of the plan is the RPF. Furthermore, we recommend that service providers obtain the email address and other contact information for the RPFs (and that they contractually require plan fiduciaries to inform them of any changes of the RPFs).

We do that for two reasons. First, as covered service providers bring in new plan clients, the documents need to be executed by the RPFs and the disclosures need to be delivered to the RPFs. Second, the information is also needed for existing clients. Fiduciaries who have already received disclosures, they will need to be provided “change” disclosures in the future within 60 days of any changes. And, it is likely that more requirements will be imposed on service providers in the future and, therefore, providers will need to have an efficient and effective way of communicating with the RPFs.

Now is the time to put these new procedures in place.


Mass Mailing to Plan Sponsors About Excess Fund Fees

This article was prepared by Fred Reish, Bruce Ashton and Josh Waldbeser.

A Yale law professor is sending letters to many (perhaps thousands of) 401(k) plan sponsors telling them they may have breached their fiduciary duties because they are offering a potentially high-cost plan.   For example, in one letter, he said:  “Among plans of comparable size (measured by total net assets), your plan ranked worse than 78 percent of plans.”  He then added, “We wanted to inform you that we are planning to publicize the results of our study in the Spring of 2014.  We will make our results available to newspapers (including the New York Times and Wall Street Journal), as well as disseminate the results via Twitter with a separate hashtag for your company.”

His allegation is based on a study using data compiled by BrightScope, though we understand that BrightScope did not participate in the study.  Based on what we have heard, this professor’s reliance on interpretation of the BrightScope data may have been materially mis-placed, and the study fails to take into account a number of relevant factors, such as the quantity and quality of services being provided and the complexity and design of the particular plan.

The impact of the professor’s study could be unfortunate, possibly leading to participant complaints, Congressional inquiries and even litigation.  Recordkeepers, advisors and plans sponsors should take this seriously and take appropriate action.  Recordkeepers should consider communicating with their plan clients about the issues and inadequacies of the analysis it applies to specific plans, and should be prepared to respond to inquiries from plan sponsors about the costs of their plans.   Advisors should be talking with their plan clients about these letters and the study – and should be prepared to answer questions about their fees and the costs of the investments they recommend.  And if they have not already done so, plan sponsors should obtain benchmarking data on the cost of their plans and determine if the fees and costs are reasonable relative to the services being provided.


Managing Plan Costs

Many recordkeepers and bundled providers charge plans based on the number of participant accounts. Many others do not explicitly charge on a per-participant basis, but incorporate the number of accounts (and possibly the average account balances) into their pricing. It is likely that this practice will increase in the future . . . due to the new 404a-5 participant disclosures, which must be made to every eligible employee, as well as to every participant of an account balance.

With that in mind, advisers, recordkeepers and plan sponsors should consider mandatory distributions of small account balances (that is, $5,000 or less) to manage plan costs.

If a plan has the required provisions, and if the provisions have been appropriately communicated to eligible employees and beneficiaries through summary plan descriptions, plans can make distributions of account balances of $5,000 or less. If the participants don’t take those distributions, then the plans can directly roll the money over into IRAs for them. In either case, the effect of the mandatory distributions will be to improve the pricing for the plan . . . either because it reduces the number of accounts or, alternatively, because it increases the average account balance (due to the elimination of small accounts).

As you might expect, both the IRS and the DOL have issued guidance on how to do that. The combined effect of the guidance is that plan fiduciaries essentially have a safe harbor for making mandatory distributions of small accounts . . . if they follow the rules. Unfortunately, there are too many requirements for a short email like this. However, my partner, Bruce Ashton, and I have written a white paper that describes the requirements.

In writing that white paper, we took an approach that I think will be helpful to advisers and plan sponsors. The body of the white paper is a discussion of the benefits of mandatory distributions . . . in terms of plan pricing. Then, there are three appendices: the first two discuss the IRS and DOL guidance, respectively; and the third one covers adviser compensation related to a mandatory rollover program.

If this subject is interesting to you, you may want to look at the Inspira white paper. It is located at


408(b)(2) Violations and Service Provider Correction Program

The failure of a covered service provider (for example, a broker-dealer, RIA or recordkeeper) to provide adequate 408(b)(2) disclosures results in a prohibited transaction . . . for both service providers and plan sponsors. While the regulation has an exemption for plan sponsors (if they follow certain steps), there is no similar exemption for covered service providers.  Continue reading 408(b)(2) Violations and Service Provider Correction Program


When are AAMs Considered DIAs?

There is an emerging issue under both the participant and plan disclosure rules concerning the information that must be provided for asset allocation models (AAMs).

It appears that some DOL officials are of the opinion that asset allocation models—at least under certain circumstances—are “designated investment alternatives” or DIAs. If AAMs are classified as DIAs, they are subject to disclosure requirements under both the plan and participant disclosure rules. As a practical matter, it may be impractical or even impossible for recordkeepers, broker-dealers and RIAs to provide that information.

Continue reading When are AAMs Considered DIAs?