It was in 2010 that the Department of Labor first proposed regulation to amend its 1975 five-part test for identifying who is a fiduciary to qualified retirement plans, participants and beneficiaries.
Its reasoning was that this test so narrowed the statutory definition of a fiduciary in the Employee Retirement Income Security Act of 1974 that many consultants, broker-dealers, insurance salesmen and others had proved able to skirt fiduciary responsibility with respect to 401(k) plans, a vehicle that did not exist until after the test was adopted. As a result, the DOL lamented that non-fiduciaries could give retirement plan clients imprudent advice, put their own interests before those of clients, and act in ways prohibited to fiduciaries.
On April 8, the final DOL regulation — “Definition of the Term “Fiduciary”; Conflict of Interest Rule — Retirement Investment Advice” — was published, effective April 10, 2017.
That it took six years and several hundred pages, including six exemptions, to interpret a single ERISA provision is testament to the power of non-fiduciaries wanting to preserve their ability to transact business with retirement plans and individual retirement account holders with as few concessions as possible to a fiduciary standard of care. That challenges will follow is to be expected.
The new rule is criticized by the U.S. Chamber of Commerce and various industry groups such as the Securities Industry and Financial Markets Association as being beyond the DOL's powers, for being too complex and vague, and for increasing both compliance costs and the prospects for new fiduciary breach litigation. So, one wonders what has been gained?
With the new rule, are plan sponsors better equipped to identify advisers they can trust? Are plan participants' retirement income prospects improved? To each, the answer is probably not.
Indeed, since the focus of the DOL for the last six years or more has been to broaden service provider and participant disclosures and to stretch the scope of fiduciary status, one could argue from a participant's perspective that the DOL's devotion has been a waste. New disclosures have been pretty much ignored by participants and the new fiduciary rule may rein in larger swaths of the financial service industry, but it has little direct impact on participant retirement income prospects.
Don Trone, founder and CEO of 3ethos Inc., whose focus includes fiduciary leadership training, is a man highly regarded by many for his fiduciary insights. He has repeatedly criticized the new rule and the DOL's efforts to improve participant outcomes and retirement income. He calls for plan sponsors to focus on the core principles of leadership and stewardship. Consistent with these principles, there is much that plan sponsors can do.
A prudent plan sponsor, generally acting through an investment committee appointed by the board of directors, will establish an investment policy statement containing criteria and other guidelines to steer the investment process and will hire an investment consultant. Together, they will prudently select and monitor a diverse menu of investment options to allow participants to meet a broad range of risk and return objectives, and they will control and account for plan expenses.
The plan sponsor will likely do a good job of stewardship. But how would participants know? They are told nothing of the plan's investment policy, of the plan sponsor's due diligence in selecting and monitoring investments, or of the steps taken to ensure that only reasonable costs are paid.
The entire investment process is conducted behind a veil of secrecy and participants are delivered a menu of investment options as if handed down by the Oracle of Delphi. If participants should have the temerity to enquire about investment selection or how fees are justified, or should they ask for a copy of the investment policy statement, they are likely met with denial, serving only to instill mistrust.
From the viewpoint of participants, a 401(k) plan is nothing more than an investment vehicle to help them replace their paycheck when they retire. Yet they have no knowledge of matters that are key to their ability to evaluate the quality and suitability of their plan. Armed with little more than an enrollment package, they are expected to take on faith that their employer has done right by them. However, is that faith justified? Given the increasing volume and success of fiduciary breach litigation and the noise about who is a fiduciary, participants are entitled to a healthy dose of skepticism about their plan. It is time for plan sponsors to give participants reason to trust them and the investment vehicle that the plan sponsor created.
For example, consider the growing use of target-date funds as a plan's default option. A report issued in August by the Government Accountability Office — “401(k) Plans, Clearer Regulations Could help Plan Sponsors Choose Investments for Participants” — showed that up to 72% of employers are selecting TDFs as the default investment for their defined contribution plans. These are complex investments with a wide variety of architectural decisions to be made by the plan sponsor, including: the use of a “to” or “through” strategy, passive or active management, and proprietary or non-proprietary funds as well as how submanagers are hired and fired, the fee structure and its transparency and, perhaps the structure of the “glidepath” and the portfolio volatility around the target date.
The plan sponsors' resulting decisions are important to participants. Why should discerning participants be deprived of an explanation?
Accordingly, it is time for plan sponsors to make the investment policy statement available and answer participant questions. This transparency is essential to protecting and advancing participants' interests, and so doing represents a practice that plan sponsors should adopt. Arguably, such practice would be consistent with trust law, although common sense and fairness is ample justification.
The general consensus appears to be that 401(k) plan participants are ill prepared to replace their paycheck when they retire. So many participants will have to stay in the workforce beyond retirement to the potential disadvantage of younger generations.
Giving participants reason to trust their 401(k) plan would likely be an incentive for increased contributions. Why would plan sponsors and, for that matter, regulators, not want to get behind that effort?