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Officials urge careful steps in dealing with fiduciary rule

Lori Lucas said the rule means big changes for some sponsors.

Read the fine print and keep asking questions.

That's the advice defined contribution plan consultants and ERISA attorneys are telling clients so they are comfortable with the Department of Labor's fiduciary rule and how their record keepers are responding to it.

“For some sponsors, there will be a big change in the fiduciary model,” said DC consultant Lori Lucas, referring to the varied approaches record keepers are taking to distinguish between providing non-fiduciary education vs. fiduciary advice.

The fiduciary rule, also known as the conflict-of-interest rule, took effect June 9. It was delayed by two months from the original starting date of April 10. The reason: President Donald Trump issued an executive order in February for the DOL to review the regulation to determine if it “has harmed or is likely to harm” investors or is likely to increase costs to investors and retirees.

“Sponsors seem to be underestimating how much they need to ask record keepers on how they are going to comply” with the rule, said Ms. Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan Associates Inc. “We haven't seen enough of that.”

Like all others interviewed for this article, Ms. Lucas didn't comment on specific clients or record keepers.

Referring to service contracts that might be revised due to the fiduciary rule, Ms. Lucas said sponsors “need to follow through and monitor that (the contract) is what they think it is.”

Ask about terms and costs, she said. For example, “If I agree to one participant experience model today, but change to a different one later, what are the potential fee implications?” Ms. Lucas said.

Or, “If I agree to amend my contract to accept the new participant experience, but it turns out I am not satisfied with the new participant experience, what contract termination fees might apply?” she added.

Some sponsors are taking a wait-and-see attitude about the regulation and the prospect of record keepers assuming additional fiduciary duties, said Michael W. Kozemchak, managing director at Institutional Investment Consulting, Bloomfield Hills, Mich. Some are waiting for more guidance and more explanation from record keepers.

Still, the regulation's complexity has meant some sponsors “are not as engaged as we'd like them to be,” he said. “Investment committees are resource-constrained.”

Sometimes, that means “if a vendor asks them to sign off (on an amended contract), they will,” Mr. Kozemchak added.

“Sponsors could always change their decision” to allow or reject allow additional fiduciary services after June 9, said ERISA attorney David Levine.

He emphatically tells clients: “You have to understand what the fine print says. You have to understand what you are receiving and what you are agreeing to.”

Some plan fiduciaries are “struggling” because they have received letters that say they must sign new or amended contracts that expand their record keepers' fiduciary services — or risk having some services reduced or eliminated, said Mr. Levine, a partner in Groom Law Group, Washington.

“This is what we'll be doing, and if you don't agree we'll have to drop some services,” said Mr. Levine, describing the tone of these letters. “Some sponsors say they won't sign.”

Such action by record keepers “is extremely common in mid and large market plans — even the super-jumbo (plans),” he said.

Smaller plans are receiving the same treatment, said Jason Chepenik, managing partner of Chepenik Financial, Winter Park, Fla., which provides corporate retirement and health-care services as well as individual investment planning services. His clients have DC plan assets as high $400 million with most in the $10 million to $50 million range.

Sponsors are subject to “fear-based selling” by record keepers, who talk of reduced services if they don't approve amended contracts. “That doesn't always lead to the best outcomes,” Mr. Chepenik said.

The fiduciary rule's complexity is such that “most people don't really know what it means,” he said. “So, they go with their record keeper because they know them.”

If they are asked by record keepers to sign an amended or new service agreement, some sponsors “don't seem to be aware that signing off is a fiduciary decision.”

If record keepers want to expand fiduciary responsibilities based on the regulation, “they are generally asking (sponsors) for updates for their service agreement,” said Steven C. Dufault, the Chicago-based senior consultant and defined contribution practice leaders for DiMeo Schneider & Associates LLC. “We advise clients to consult with their ERISA attorney to discuss the fiduciary rule and (service) contract modifications.”

Some providers have suggested to some clients that services available before the fiduciary rule took effect “could be modified” if sponsors didn't accept the providers' offering of additional fiduciary services, he said.

“Sponsors understand there is a higher level of fiduciary responsibility for their partners that may not have been in the past,” he added. “Ultimately, sponsors make the determination.” And when they do, they must document their process to protect themselves because “ERISA is a process-driven regulation.”

This article originally appeared in the June 12, 2017 print issue as, "Officials urge careful steps in dealing with fiduciary rule".