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Category: ERISA (Page 2 of 2)

Fiduciary Avoidance Through Mixed Messages

The public at large has been inundated with marketing messages that herald individualized advice that is highly personalized and based on the client’s interest. However, when this message is substantiated in a mutual agreement it is completely disclaimed in the form of a footnote so that it doesn’t serve as the primary basis for investment decisions.

Other times advisors clearly receive compensation for recommending specific products though that guidance is considered “general education.” Confused by mixed messages and the regulatory structures that govern retirement assets?

Internal Revenue Code provisions state that any person paid to provide advice on the investment of IRA assets is a Fiduciary. The rulemaking authority is the Department of Labor and the enforcement authority is the IRS.

ERISA pertains to Retirement Plans and states that any person paid
directly or indirectly to provide plan officials or participants with
advice on the investment plan assets is a fiduciary. Both the
rulemaking and enforcement authority is the Department of Labor.

Are these messages mixed?

Fiduciary Simplicity

“Under ERISA and the Code, a person is a fiduciary to a plan or IRA to the extent that the person engages in specified plan activities, including rendering ‘‘investment advice for a fee or other compensation, direct or in direct, with respect to any moneys or other property of such plan.”

“In particular, under this standards-based approach, the Adviser and Financial Institution must give prudent advice that is in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.”

Is there any reason why a person seeking retirement guidance, from someone receiving compensation for providing that guidance, should have some other expectation?

Why The DOL Fiduciary Regulation Was Revised

The Employee Retirement Income Security Act of 1974 (ERISA) was established as a federal law. One of its intents was to provide a sense of Fiduciary Responsibility for those designated as Fiduciaries defined, in action, as those who have a role in managing and controlling Retirement/Pension Plan assets. It also defined a plan Fiduciary to include anyone who gives investment advice for a fee.

In 1975, the Department of Labor (DOL) looked to elaborate on “investment advice” and issued a 5-part regulatory test that provided some structure to the meaning. About 40 years later, the DOL started to recognize that it actually enabled Financial Advisors, Brokers, Consultants, and Valuation Firms to:

. Avoid Fiduciary Status
. Disregard Fiduciary Obligations
. Disregard prohibitions on “disloyal and conflicted transactions”.

In effect, Employer Sponsored Retirement Plans became a platform for Financial Advisors, Brokers, Consultants, and Valuation Firms, to steer Retirement Plan Participants to investments based on their own self-interest. This type of intent is prohibited by ERISA.

These advisors represent a whole generation of people who have no idea as to what the spirit of these laws are, no Fiduciary awareness, and no fear of accountability under ERISA. This is what the Department of Labor is trying to remedy.

An Introduction – Understanding Fiduciary Obligations

Although there should be no confusion about it, the role and accountability of a Financial Advisor/Consultant has always been rather fuzzy. This lack of clarity is especially purposeful to Independent Broker Dealers, Wire-houses, and Insurance Companies because it allows them to limit their potential legal liabilities behind the interpretation and accountability of “suitability”.  The regulatory interests that define and monitor this are FINRA and ERISA.  The relationship between the firms that benefit from presenting products via suitability and the regulatory interests can become quite strained and adversarial at times and that has materialized recently in the Department of Labor’s recent Fiduciary Duty ruling.

Acting in the best interest of the client, proper security selection and portfolio construction supported by meaningful insights and analytics to make the best solutions visible to a client, has always been a fundamental obligation. In fact, I’m not really clear as to how anyone can provide investment advice in the client’s best interest any other way.  It does require, however, a unique set of skillsets that must be learned in theory and honed through experience.  Clients should expect you to act in their best interest and fiduciaries need to honor this expectation.  This obligation, which should be rather intuitive, is no different for the legal Employer Plan Sponsor of a Retirement Plan and those designated with discretion in administering and managing it.  Both FINRA and the DOL make it very clear that it is in one’s actions and responsibilities that manifests the role as a Fiduciary.

After reviewing and reverse engineering the 5500 tax filings of many large sponsors (and having many conversations with HR benefit representatives, some on the sponsor’s administrative committee) it is clear to me that they do not understand their fiduciary responsibilities. It also seems as if many Plan Sponsors justify their actions via ERISA’s definitions and not the DOL’s.  In fact, I don’t believe that most are even capable of acting in the participant’s best interest because they are not trained money managers, product specialists, and cannot apply the proper techniques and analytics to do so.  This, in itself, is a breach of fiduciary responsibility because there is no way to supervise the Administrator, Record-keeper, Investment Advisor, Auditor, and all other partners being compensated to implement and execute the Retirement Plan. This, to me, inhibits oversight which is the primary causation of  fiduciary breeches.

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