Managers, sponsors set for changes from final fiduciary rule

Retirement service providers and managers are nervously bracing for a whole new world in the coming weeks when the Department of Labor is expected to release a final conflict-of-interest rule. But for some plan sponsors, it can only mean good news.

“We're ready and we think it's the right thing to do,” said Robin Diamonte, chief investment officer at United Technologies Corp., Hartford, Conn., and a past chairwoman of the Committee on Investment of Employee Benefit Assets, Washington, whose members manage $2 trillion of retirement plan assets.

“I don't think it's going to be a big burden on the plan sponsor, but I think it will help us keep our participants. We spend our whole lives trying to help people save for retirement, and there are so many people trying to lure them away, a lot of the time with inaccurate information,” said Ms. Diamonte, who oversees $24 billion in defined benefit assets and $20 billion in defined contribution assets.

The main focus of the new rule, which covers anyone giving retirement investment advice, is the lucrative individual retirement account market and efforts by brokers and other advisers to entice plan participants to roll out of employer plans upon retirement. “A lot of these broker-dealers are going to have to understand what it is to be a fiduciary. You don't have to be right; you just have to be thoughtful. And that's what they should be doing anyway,” she said.

Labor Department officials are pushing to put the finishing touches on the rule while President Barack Obama, who personally stumped for it, remains in office. After thousands of comment letters, four days of public hearings and countless meetings to address concerns, officials say they are trying to make it as workable as possible.

Still, said Timothy Hauser, deputy assistant secretary of labor for program operations, “it's going to be a big adjustment. This is intended to be a significant reform. People giving advice are going to be operating in an environment where their interests are aligned with their clients. All of that is going to take work.”

While many industry officials warn that the expected eight-month effective date is unrealistic, Mr. Hauser said in an interview that the initial focus will be on compliance assistance, “as long as people are making a good-faith effort.”

One thing DOL officials were “very sensitive” about, Mr. Hauser said, was not limiting retirement plan participants' access to education if service providers become nervous about being tagged as fiduciaries.

“We were at great pains to outline all the different ways to educate (participants). I think it will help the plan sponsors,” he said.

That has some employers anxiously waiting for the final version, said Kent Mason, an attorney with Davis & Harman in Washington who represents service providers, some plan sponsors and other companies that will be affected.

“What I am hearing from the large employers that have focused on this proposal is that they're very worried that they're going to have more potential liability and cost, due to the need to monitor call centers and other service providers, as well as their own employees, and the possibility of being liable for missteps by such service providers and employees,” Mr. Mason said.

Financial institutions already have begun telling retirement plan sponsors that their call centers will be providing much more limited services, especially with respect to investments and distributions, he said.

Groups representing financial services and asset management firms, concerned that the stricter standards will limit access to retirement products and advice, are working with some members of Congress on bipartisan bills that would offer alternatives to the Department of Labor approach. Given the tight timeframe, those groups also are exploring possible legal avenues for challenging the rule-making process after the rule comes out.

How the final rule addresses sponsors' litigation exposure while allowing them to continue to provide education will be key, said Jean-David Larson, director of regulatory and strategic initiatives at Russell Investments in Seattle. “One of the things we will be looking for is how it addresses education to further encourage (sponsors) to provide even more advice. It is such a pivotal role that employers can play,” he said, especially on the defined contribution side where there is more direct engagement with participants.

A green light on educating participants could bring positive changes, some predict.

“We can provide, hopefully, more education, more options,” said Ms. Diamonte of United Technologies. “If plan sponsors see that retirees and others stay in their plans, then hopefully they are going to be creating more lifetime-income options. What can you do to make a DC plan more like a DB plan?”

That will help sponsors, too, said Kathleen McBride, New York-based chairwoman of The Committee for the Fiduciary Standard, a group of investment professionals and fiduciary experts supporting a strict fiduciary rule.

“The changes are part of a trend already taking place, and are accelerating because of the discussion around the rule this past year. Plan sponsors will have more access to genuine, fiduciary advice, at a reasonable cost, truly benefiting participants and beneficiaries. They'll also have access to more reasonable or low-cost retirement platform investment choices. Some plan sponsors will be stunned at how much of a difference in participant costs and better outcomes this will make,” said Ms. McBride, who predicts more cost-effective products to help sponsors tackle the distribution phase.

“And they will be wildly popular. That's a place where there is vast need, and it will replace high-cost annuities to a large extent,” she said.

A new fiduciary regime could also see revenue-sharing practices fall out of favor.

“It picks winners and losers on the asset management product. As plan sponsors look at their fund lineup, revenue sharing either has to go into participants' pockets or it has to go away,” said Chad Carmichael, U.S. retirement practice leader for North Highland Consulting, Charlotte, N.C., a management consultant for some retirement services firms.

“There will be fee compression, but the managers of the best of these products will thrive because their (assets under management) will grow faster,” said Ms. McBride. “Without the high costs embedded in the products, they'll perform better. Revenue sharing and other conflicted types of compensation will fall out of favor.”

Mr. Carmichael is hopeful that a new standard “actually leads to an opportunity for providers or sponsors to build trust with their participants, because when they do, there will be higher participation rates and more retirement readiness. Use this as an opportunity to improve your relationship with participants,” he said.

Added Ms. McBride: “The forward-thinking progressive firms across all models are getting ready. This is the first time in many years that I can see there is going to be a race to the top instead of a race to the bottom when this rule happens.” n