Brian H. Graff - The American Society of Pension Professionals and Actuaries (ASPPA), the National Association of Independent Retirement Plan Advisors (NAIRPA), and the Council of Independent 401(k) Recordkeepers (CIKR) - 4p
<WishList> - A recent survey of plan sponsors reported that 60 percent of small business plan owners indicated they received investment advice on the plan. Well if that's ERISA investment advice, what are we all arguing about? That would mean that almost two thirds of small plans are getting served by a fiduciary advisor.
Of course, what we believe is that the investment advice most of these small business plans are receiving is actually non-ERISA investment advice, whatever that means--which is exactly the point.
When a broker/advisor is helping a small business owner set up a 401(k) plan and says to the owner "these are the 20 investment options that you should offer in your plan," that owner naturally thinks he or she is getting advice. If you never heard of the current 5-part definition, wouldn't you? In our members' experience, small business owners are rather surprised when they are informed that the "advice" they have received for their ERISA-covered 401(k) plan is not actually ERISA-covered investment advice.
Marketplace confusion about the roles and responsibilities of brokers/advisors is not a new issue and is definitely not limited to retirement plans. The SEC recently issued a study recognizing that recipients of advice are often confused about the duties and obligations of the persons providing advice.
The issues and implications of advice given to ERISA plans are very different than retail-level advice. For instance, advice given to a plan sponsor directly impacts other individuals, namely participants, and thus it is appropriate for the Department to develop standards specifically designed for ERISA
plans.
In these instances, what we believe is most important to be disclosed to recipients of advice are three things:
1) that the broker/advisor is NOT acting as an ERISA fiduciary and thus the advice given is not afforded the protections of ERISA;
2) that the broker/advisor's advice may not be impartial since he or she is compensated by the provider of the investment options being considered and the amount of the compensation may be affected by the investments selected; and
3) the amount of compensation the broker/advisor is reasonably expected to receive based on the investments selected, which ties into what will already have to be disclosed under the Department's new ERISA section 408(b)(2) regulations.
We believe what we are suggesting would address the current confusion of plan sponsors and would level the playing field between those providing advice that are currently ERISA fiduciaries and want to be and those that are NOT ERISA fiduciaries and don't want to be. In other words, if a broker/advisor provides to a plan what any layperson would think is advice, the broker/advisor will either:
1) be subject to the duties and responsibilities of an ERISA fiduciary; or
2) disclose they are not acting as an ERISA fiduciary and that their advice may not be impartial due to compensation received from the investment providers.
That’s it. What could be more clear and certain than that!
APPLICATION TO IRAS
The proposed regulation, as currently written would apply to IRAs. Further, the proposed regulation asked for comments on whether the definition of investment advice should extend to recommendations related to taking a plan distribution, namely IRA investments. We strongly recommend that the regulation should not apply in either case.
If the Department decides to extend these regulations to IRAs this is what will happen. Players in the retirement industry who are more formally regulated with extensive compliance departments, like the firms represented by my colleagues on this panel, will comply with the rules, and those less formally regulated, who know there is no practical enforcement of the rules, will choose not to comply. While responsible firms will have limitations on their ability to distribute IRAs, less responsible firms will practically have free reign giving them a competitive advantage on an uneven playing field. Consumers will be exposed to significantly greater risk as a consequence.
Further, if the Department chooses to apply the definition of investment advice to plan distributions, including distributions to IRAs, retirement plan service providers who already have existing relationships with participants will be severely hampered from discussing IRA options with them. These service providers have done an excellent job building programs to work with employees approaching retirement to encourage them to rollover their retirement savings and prevent leakage from the retirement system. The IRAs they offer have investment options that are generally consistent with those available to the employee in the plan, are high quality and have reasonable fees.
If these service providers are effectively precluded from offering IRAs to employees, that means participants will be potentially left exposed to less responsible vendors. Making it easier for some vendors to offer retirees IRAs invested in viatical settlements is not a result anyone should want.
Some people in our industry have described the IRA market as the Wild West. If you apply these regulations to IRAs, you will, metaphorically speaking, be taking the guns away from the good guys leaving only the bad guys with guns. Forgive me, but that wouldn't be a fair fight!
With Americans’ retirement income needs in mind, we applaud the Department for moving to update the definition of fiduciary. In particular, Aon Hewitt wishes to focus its testimony this afternoon on the question that the Department posed in the preamble to the proposed regulation:
“Whether and to what extent the final regulation should define the provision of investment advice to encompass recommendations related to taking a plan distribution?”
As discussed in our comment letter, we believe that the Department should include in the definition of investment advice any recommendation made to a participant to take a plan distribution of the assets in his or her account because:
A participant’s decision to take a plan distribution is comprised of two significant decisions affecting a participant’s plan assets, namely:
(1) whether to liquidate current investments, and
(2) how to manage the distribution of the funds; and
Failure to include distribution advice under the final regulation may result in the unintended consequence of creating a bias towards a recommendation to take a distribution because an advisor could both avoid ERISA fiduciary status and also recommend an investment in which the advisor has a financial interest.
A decision to take a plan distribution is comprised of two smaller but significant decisions.
First, the participant must decide whether to liquidate current investments. Investment decisions to buy or sell a particular plan investment option are at the core of a participant’s management of his or her plan account.
Second, a participant must decide how to manage the distribution of the funds from his or her plan account, including the time, manner, form, and future custody of the plan distribution. The decision of where to invest assets outside of the plan and to whom a participant should entrust with custody of those assets is a critical component of the participant’s decision. A participant must make this decision, prior to the actual distribution, while the funds are still plan assets.
In Advisory Opinion 2005-23A (December 7, 2005), the Department decided that a recommendation to take a distribution does not constitute investment advice because the assets will be invested outside of the plan.
However, at the time the advisor provides a distribution recommendation the assets in question are still plan assets.
Therefore, differentiating between a recommendation to invest in plan options or to invest outside of the plan creates an inconsistency in the application of the ERISA fiduciary rules.
Why should the advice to liquidate an investment position and reinvest in another investment option within the plan be treated any differently than a recommendation to liquidate an investment position and then take a distribution to be invested outside of the plan? This inconsistent position appears to create a potential bias toward a recommendation to take a distribution because an advisor could both avoid ERISA fiduciary status and also recommend an investment in which it has a financial interest.
In short, we view the application of fiduciary standards to advisors who recommend plan distributions as a logical application of ERISA’s fiduciary rules, and certainly in the best interests of participants and beneficiaries.
Costs and Benefits Related to a Comprehensive Definition of Investment Advice
By extending the regulation to include the recommendations to take a distribution from the plan, we believe the associated costs would be minimal and that the benefits to participants and beneficiaries would greatly outweigh those costs.
We also anticipate that treating all recommendations relating to the application and management of plan assets consistently may result in more participants retaining their assets in their employer-sponsored plans because the level of steerage and inappropriate advice will be reduced.