Brokers can still claim an edge with their knowledge of DC administrative matters but that's a bowling pin ready for the toppling

February 14, 2013 — 5:36 AM UTC by Guest Columnist Sheldon Geller


Brooke’s Note: For two days I couldn’t articulate to myself why I liked this column so much. We (mostly Lisa Shidler) have written dozens of articles about DOL changes that are ushering in an era of opportunity for RIAs to take over. Quite simply the fiduciary standards are being tightened and enforced in a way that is not as friendly to brokers. But we also always get countervailing comments from real experts who say that RIAs are even less qualified because they don’t really know the 401(k) business. I have always accepted the gray area created by these two views as something that was beyond my grasp as a non-401(k) expert. After reading this column I not only feel I get it much better. I also am convinced that RIAs can close this mysterious gap that supposedly only brokers or 401(k)-only RIAs can fill. Sheldon Geller explains it to us like we have brains.

Many investment professionals appear to market fiduciary services, yet their service agreements routinely disclaim exposure to fiduciary liability and affirm non-fiduciary status.

Many service providers give supposed fiduciary guarantees, yet litigation filings reveal how they immediately disavow fiduciary status and actually place blame back on the plan sponsor.

Or at least these firms lead clients to believe they are greater fiduciaries than they are.

For example, financial professionals often help with developing fund menus for plan sponsors but most of these professionals are not equipped to provide actionable guidance for other fiduciary duties, including those associated with the administration of the plan.

Accordingly, there is wide disparity and confusion in the retirement plan marketplace as to who acts in the best interest of plan sponsors. There are more than 200 designations that financial professionals use when marketing services, very few of which include fiduciary-level status. See: Do 401(k) assets require all fiduciary care all the time?.

With such a dense fog of obfuscation pressing onto plan sponsors’ shores, registered investment advisors are in a unique position to protect their plan sponsor clients.

Up to speed

By stepping up, RIAs can protect America’s employers — and staffs — from fiduciary liability and a mistaken reliance upon non-fiduciary service providers. Plan sponsors do not understand that brokers are not required to make sure that sales and recommendations — guided only a by a suitability requirement — are in their plan sponsor client’s best interest. The suitability standard does not include a legal requirement for a broker to disclose whether there is a better product available at a lower charge. See: The suitability standard, defined.

Registered investment advisors need to expand their practice models to manage plan governance challenges, whether arising from plan investments or from plan administration. See: Why gathering big-time 401(k) assets — and charging regular fees — is well within reach for most experienced RIAs.

This may sounds like a daunting task, but I just witnessed an associate get up to speed in about a four-month period. Essentially what she did was — as I do for all clients — tell vendors to copy her on all e-mails. She then takes responsibility for reading each one and any attachments — and understanding the important points from the plan sponsor’s perspective. All the plans are fairly similar. You can be more expert than most people at service providers in short order.

Understand that you don’t necessarily need to solve conflicts that you uncover. These companies have ERISA lawyers and other compliance experts to address these issues.

Marketplace conflicts

As you get into the role and mindset of plan sponsor advocate, there are some recurring conflicts to be vigilant about:

Biased advice
Non-fiduciary service providers who are conflicted as a result of the receipt of third-party payments assist plan sponsors in the selection of investment funds. These arrangements create a conflict because funds pay at different rates and providers may steer plan sponsors into funds that increase their compensation.

Non-fiduciary status
Non-fiduciary advisors structure their relationships with 401(k) plan sponsors to avoid fiduciary status. Most plan sponsors mistakenly believe that their advisors are fiduciaries and that their compensation does not vary based upon investment fund selection.

Investment education
Although investment advice is required to be in the plan’s best interest, investment education may highlight a proprietary fund or use an affiliate that is in the advisor’s best interest. Having a financial stake in the outcome of plan participants’ decisions will likely result in mediocre performance and higher expenses.

Indirect compensation
Utilizing revenue sharing to offset record-keeping fees is likely to create conflicts if fees and offsets are not clearly disclosed to plan sponsors. Many service providers retain the revenue sharing generated on plan asset investments even when revenue sharing exceeds fees.

Upfront commissions
A broker may receive a substantial upfront payment upon the transfer of plan assets to a new custodial platform. These payments create an incentive to recommend one platform over another, thereby increasing plan expenses.

Actively managed funds
Service providers promote the use of actively managed funds with greater expenses as well as model portfolios with wrap fees supposedly designed to achieve greater diversification. These investments have higher expenses than index funds with which to pay greater compensation to service providers and brokers.

Service providers and brokers may market retail investment products to participants for investment outside of plans, which are more expensive than the institutional investment products available inside plans. There is no legal requirement to disclose the difference in share class expenses between plan investments and retail investments.

Informational advantage
Service providers, as experts in retirement plan products and services, use their informational advantage to serve their own economic agenda. Plan sponsors have been told not to probe too deeply into service provider agreements and to accept industry assurances of fair dealing.

Compliance pitfalls

Enforcement efforts focusing on the receipt of undisclosed compensation may be brought only against fiduciary service providers. However, most service providers are non-fiduciaries and are permitted to maintain conflicts. Accordingly, plan sponsors need assistance to interpret whether there is disclosure and whether the conflict leads to higher plan expenses. See: Erring 401(k) plan advisors seek do-overs from DOL to ward off potentially crippling fines.

The new service provider disclosures are broad and expand the plan sponsor’s obligation to assess the reasonableness of service provider agreements. Plan sponsor compliance with the reasonable-belief standard is necessary before plan sponsors can use plan assets to pay plan fees. See: A 401(k) plan dethroning deferred: The DOL-mandated disclosures may not set any legacy palaces on fire near-term.

Courts may go beyond the new service provider regulations to require disclosure that is appropriate if it is material to the plan sponsor’s decision-making process. These courts may require communications to plan sponsors and plan participants on a broad range of issues beyond compensation, plan fees and fund expenses.

Registered investment advisors must help plan sponsors make reasoned decisions pursuant to a deliberative and documented process. In-house ERISA fiduciaries must act as would an independent ERISA fiduciary expert and thus for the exclusive benefit of plan participants. In-house fiduciaries must monitor the delegation of authority and service provider performance.

Industry practices and clever marketing attempt to convert blatant self-interest into illusory fiduciary protection. Plan sponsors almost universally lack complete information related to the economic arrangements of their service providers and brokers.

Non-fiduciary service providers are not bound by the exclusive benefit, loyalty and prudence rules, which would otherwise protect plans against excessive fees, hidden compensation and high investment expenses.

Registered investment advisors can add value by becoming subject matter experts and enhancing plan sponsor fiduciary performance. Fee-only advisors have, by their choice of compensation, eliminated most, if not all, conflicts inherent in the marketplace.

Sheldon M. Geller is Managing Member of Stone Hill Fiduciary Management, LLC, an independent fiduciary and registered investment advisor.

Share your thoughts and opinions with the author or other readers.


Robert G Guerrero said:

January 19, 2016 — 1:20 AM UTC

What is the difference in a 401K and an RIA I know that the 401K the employer contribute. The RIA we buy 5,000 per year. Can you explain please. THANKS


Scott said:

October 8, 2015 — 8:36 PM UTC

Under DOL’s proposal, will they change how advisors to 401(k) plans are paid? If so how?


Elmer Rich III said:

February 26, 2013 — 4:38 PM UTC

Exactly. Because a prudent man cannot and does not have to be a prudent expert. Dave Wray, formerly of the Profit Sharing 401k Council PSCA, taught me this.


Jerry Kalish said:

February 26, 2013 — 1:12 AM UTC

Let me put what Elmer is saying is this pre-ERISA fiduciary context: The Prudent Man hires the Prudent Expert.


Elmer Rich III said:

February 17, 2013 — 2:34 PM UTC

Good lord! Professionals should be picking the funds, not a company employee – part time. That is very dangerous and probably presents legal liabilities.

How can an employee of the company ever rationally justify “pricing and changing the 35 choices” on which the life savings of all employees are dependent – using Morningstar!!?? How can a responsible, professional business person ever justify doing such a thing!?

The illusion of do-it-yourself, amateur retirement plan investment administration is mistakingly fostered by the companies selling it and amateur employer investors.

This person should only be making decisions for their own investment account not every employee land their family’s life savings. There is a reason for professional roles, division or labor, delegation to professionals, etc.

The only real benefit any advisor has to offer this company and it’s plan is that the selection of investment options will not be one unqualified, employee doing it part-time. Would this person select medical treatment for his fellow employees as well, or give legal or accounting advise, perhaps plumbing.

Here is the question — why is amateur investing of 401k plans felt to be not only acceptable but preferred and a “right?”

BTW, recent research shows plan administrators just as susceptible to amateur investing mistakes, eg chasing performance, as employees with very harmful consequences.

Who’s “clueless?”


Brooke Southall said:

February 16, 2013 — 9:26 PM UTC

One reader submitted these thoughts directly to my email:

Interesting article. I’m not sure how plan sponsors get themselves tangled up in the eight conflicts. You have to be slow witted. Having made that pronouncement, our company has used ADP as its 401k provider since day 1. ADP did our payroll and their 401k solution look more than adequate, so we went with it. When you are running/doing Finance, HR and Administration for a 70 person company, it is much easier to only deal with one provider for payroll, 401k, COBRA, FSAs etc. ADP offers over 300 mutual funds to choose from (you get to choose up to 35) and also is very strict (too strict!) in adhering to federal regulations. They provide onsite education, a decent web based interface for employees and a B+/A- handholding on setting up your plan. I do have to say that I do my own work in picking and changing the 35 choices. I down load all the performance and fee info from ADP, add in a bunch of Morningstar info, then slice and dice the 300+ funds to come with choices that could span the spectrum from cash to small market China funds.

So, if an RIA came calling on me, they would have to have something really special to offer to convince me to change. Does the RIA in your article cater to small firms with clueless owners, go after firms with 5-15M+ in 401k assets, or go for the big boys who have the capability of managing separate providers for their payroll, 401ks, FSAs etc.


Elmer Rich III said:

February 14, 2013 — 9:59 PM UTC

DC plans are insti-individual. Institutional purchase and oversight of services but individual/retail investment decision making. What has always been missing is professional investment management expertise.

It is a system that was, literally, cobbled together, ad hoc from the retail mutual fund model. We were there to see this happen. That has been very profitable for the fund families but left the investors and plan sponsors on their own. Plan sponsors are neither qualified nor should legally be giving investment advice, of course.

In the DC world, Morningstar is considered “investment advice” — it’s not.

There are strong incentives for mutual fund and investment providers to not support pro, independent investment advice to the plan or investors – marketing statements not withstanding.

Independent, professional, institutional level investment advice is needed for ALL retirement plans, accounts and asset pools. All of them. We are talking about people’s life savings. Losses are likely permanent and a tragedy.

Advisors are the only group available and trained to do this work. However, likely only TPAs and plan sponsors will support this work. For the fund managers and bundled providers – the incentives point in an opposite direction.

As the author points out, you have to be a genuine geek and have a head for “boring” technical matters to work in the DC market but the services are desperately needed. Today!

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