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More liability could fall to sponsors as fiduciary rule tweaked

Bill McClain, principal, Mercer
Bill McClain said the DOL’s action puts plan sponsors ‘in limbo’ during the transition period.

Recent efforts by the Department of Labor to clarify the fiduciary rule and delay some key provisions signal relief for retirement plan service providers, but potentially more work — and liability — for plan sponsors.

"I think the bottom line for plan sponsors is, the days where you could just ignore those kinds of (record-keeper) transactions are over," said Bill McClain, a Mercer LLC principal based in Seattle. "You need to know what's on the (service provider) website, listen in on a call. You as a plan sponsor should know what's going on there."

The new rule went into effect June 9 after a two-month delay, but provisions that apply to "best interest" contracts and other arrangements between investors and service providers are scheduled to take effect Jan. 1.

On Aug. 3, Department of Labor officials released a list of responses to frequently asked questions that addressed, among other things, what service providers have to disclose to plan sponsors about their fiduciary status, and when.

To streamline the transition to the new rule, the FAQs said providers don't have to specifically affirm they are fiduciaries, as long as they describe specific functions or take other steps to identify fiduciary activities, compensation and possible conflicts of interest.

Financial services groups opposed to the new rule were further encouraged Aug. 9, when the Labor Department asked the Office of Management and Budget for permission to delay the applicability date for the remaining portions of the rule until July 1, 2019.

"To some extent, plan sponsors are in limbo for this transition period. It's one thing to let things float along for six months, but two years is a long time," said Mr. McClain. "Two years from now, it might be something entirely different from what it is now."

Pushing for clarity

The FAQs also clarified that some types of recommendations to plan sponsors, such as ways to increase plan participation or rates of contributions to 401(k) plans, would not count as fiduciary investment advice. Such recommendations could be specific to a plan or an employer, as long they don't touch on specific investments. Service providers are pushing for clarity around the issue.

A hold on enforcement during the transition period, detailed in the FAQs, is also less ​ than reassuring to plan sponsors.

"The FAQs don't have any bearing on litigation," said Mercer's Mr. McClain. As plaintiff lawyers find creative ways to challenge employers' 401(k) decisions and fees, "I think plan sponsors can expect that these law firms are going to be looking for these opportunities," he said.

Charlie Nelson, Voya Financial Inc.'s CEO for retirement, New York, sees the anticipated litigation as an outsourcing of enforcement.

"We think that the movement of enforcement from DOL to plaintiffs' attorneys is not optimal for participants or the industry," he said.

He also would like to see a more coordinated approach to disclosure, "so we don't have duplication and we don't bury participants and sponsors in paperwork."

Shifting the burden

While the FAQs were largely aimed at service providers, they shift the burden back to sponsors, at least for the next two years. If service provider disclosures under the new standard do not spell out a provider's fiduciary status, employers must verify it themselves, plus monitor regularly and document those efforts.

For many plan sponsors, those are new roles, which involve learning more about service provider practices, including call center operations, and revenue sources beyond record keeping.

"It should not be a black box," said Mr. McClain of Mercer, who recommends that sponsors examine call center scripts and other customer service tools to learn more about service provider practices. "Once you understand that, then you can take a wider role."

That is particularly true when it comes to plan participants being advised by others, including subsidiaries of record keepers, to roll over their employer-sponsored accounts to individual retirement accounts, without the benefit of institutional pricing or investment oversight.

Regardless of where the DOL fiduciary rule ends up, "at a minimum, all of this has been a positive from our members' perspective for a focus on IRA advisers and providers. That's what our members have really been asking for," said Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets in Washington. CIEBA members are chief investment officers of major corporations that manage $2 trillion in retirement plan assets.

"We are confident that at least the spotlight has been shone (on rollover advice) and we will continue to shine the light," he said.

While there might be further changes as far as how the Department of Labor addresses rollovers within the context of the fiduciary rule, "overall, the standard has been raised. We would like the law to hold them to stricter standards. We already are," Mr. Simmons said.

That could lead to more retirement assets staying in employer-sponsored plans, although the advantages, such as lower investment costs for sponsors and participants, and disadvantages like additional administrative burden, vary by company.

"We try to educate plan sponsors on all the pros and cons," said Mr. McClain. "Oftentimes, that leads to more of them keeping assets in the plans."