Notice Overload?
The Department of Labor's fiduciary rule is now in effect. The rule starts today with much of the enforcement of the rule delayed until January 1st, 2018. As a plan sponsor, you have likely received notices from a whole host of vendors that support your plan. It is possible you have received them from your recordkeeper, third party administrator, investment advisor, mutual funds, custodians, etc.
What many of these notices state is who is deemed to be a fiduciary and for what transactions are they deemed to be a fiduciary. Here is an example from Vanguard. They state that they will not act as a fiduciary for plan's line-up construction. They will be sending notices to plan sponsors. They will require affirmative representation of counter-party status from sponsors on plans under 50 million in assets but not ones over 50 million (more on that later). They also highlight that their call center employees will not act in a fiduciary capacity on recommendations for distributions or fund selection. This is the path that most mutual fund families have taken.
The 50 million dollar number comes in because of language in the rule. During the crafting of the rule, there was a "sophisticated investor" exemption for those with over fifty million dollars. Is there any real science to determine that someone working on a plan committee with over fifty million dollars is "sophisticated"? Speaking from experience, I can tell you that no, there isn't any real justification for this but the rule has spoken.
Some groups have taken a different approach. Fidelity has taken on fiduciary status as a "point in-time" fiduciary. What is a point in-time fiduciary you might ask? To be candid, it is a half measure to assuage plan sponsors fears about inherently conflicted transactions. Fidelity would like to continue to offer distribution services via their call center to plan participants. This is a big revenue driver for recordkeepers and to no longer be able to recommend rolling money into an IRA that is invested in proprietary funds would be a big loss for investment managers. By carving out a point in time status, Fidelity is saying they will be adopting procedures to document the appropriateness of the recommendation to use a Fidelity IRA. This is a tricky space to be in.
Taking that a step further, for plan sponsors who don't engage an independent fiduciary advisor, Fidelity will step in and recommend investment platform options via the point in-time carve out. What is unknown is how the monitoring & benchmarking of those investments going to occur? Implementation of recommendations is only one step in a multi-step process. If recommending proprietary options, how can the plan sponsor be sure they are relying on independent advice when it is obvious such advice is conflicted & driven by additional revenue motives?
The last type of notice you might be receiving is likely because you worked with an advisor who wasn't serving in a fiduciary capacity already. These notices come from the broker/dealer firms of advisors (and I use that term loosely) who were inherently conflicted in the advice they provided. These notices state what many of us who focus on qualified plans already knew: 1) They are not serving as a fiduciary, 2) They can not recommend investments, 3) They can not assist in benchmarking your plan, and 4) They can still provide employee education.
The work around that has been created by these firms is to "outsource" the important stuff to a third party. That third party, ex. Mesirow, Wilshire, etc., will put together a line-up and provide reporting. What they will not do is determine what services you are getting, are they of reasonable value, and how they improve results for your plan. As you can tell, we feel like these services are essentially a waste of your employees hard earned money. The non-fiduciary advisor will continue to rake in good money that should be allocated to someone who can not only provide education, but also fiduciary advice. As plan sponsors start to see what little they are getting from these non-fiduciary advisors, we believe more plans will be changing those arrangements in short order.