Solving the fiduciary riddle

Transcription

1 The right choice for the long term An adviser resource for employer-sponsored retirement plans Solving the fiduciary riddle The retirement plan industry is rapidly evolving, driven largely by both recent and as yet anticipated revisions to regulations. As a result, many plan sponsors have grown more conscious of their fiduciary responsibilities and are increasingly turning to others including advisers like you for help, especially when selecting and monitoring their retirement plan s investment lineup. In this edition of Retirement Plan View, we hope to help you answer the question of whether you should serve as a fiduciary and, regardless of your answer, show how you can: Deliver valued services while remaining competitive and differentiating yourself Continue to build and maintain a successful retirement plan practice Read on. Inside Regulatory activity may prompt advisers to reevaluate roles, segment their practice Determine which services matter, and communicate your value 2 4 Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. For financial professionals and third-party administrators. The rise of the third-party fiduciary 6 To thine own [practice] be true 8 Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

2 Regulatory activity may prompt advisers to reevaluate roles, segment their practice Fees and roles are under the microscope Conversations among advisers and employers are likely to change as much by new fee-disclosure regulations (just recently implemented) as they are by anticipated revisions to existing regulations that could redefine who is (and isn t) a fiduciary. Although service providers and plan sponsors may have shared some fee and service details previously, the new fee-disclosure regulations are explicit about what must be shared and, to facilitate comparisons, the format that must be used. Service providers... are required by new regulations [under Section 408(b)(2) of ERISA] to disclose to plan fiduciaries (generally the plan sponsor) details about the services they provide and the fees they charge for them, and to declare whether they are acting as a plan fiduciary Plan fiduciaries... are required by new regulations [under Section 404(a)(5) of ERISA] to disclose to plan participants and beneficiaries details about the fees paid either directly (from plan assets) or indirectly (through the plan investments) Additionally, in October 2010, the Department of Labor (DOL) proposed redrawing the line between fiduciary and nonfiduciary advisers. Our industry and many members of Congress quickly responded, charging that the newly proposed rules were too ambiguous and broad. The DOL promptly recalled the draft, vowing to review and resubmit it at a later date possibly this year or next. For all these reasons, many advisers have good reason to reassess their retirement plan practice model, especially in this tightening competitive market. As a result, many are asking themselves if the full menu of services they offer is valued by clients and, equally important, actually differentiates their practice and enhances profitability. To be, or not to be [a fiduciary] One of the DOL s stated objectives for revising long-standing regulations is to reemphasize for plan sponsors the importance of meeting their fiduciary responsibilities. Consequently, more plan sponsors are asking others often you, as their plan s financial adviser for assistance. As sponsors turn to you for help with selecting and monitoring plan investments, you may be asked to serve as a fiduciary. Whether you decide to be or not to be a fiduciary probably depends on several factors. Page 2 of 8 retirement plan view

3 If you look at the evolution of our practice, not that long ago providing liquidity was a strength, as were open architecture, helping to select funds and providing portfolio analytics. There s no longer strength in those differentiators. Can you serve as a fiduciary? The answer to this question may be no if your firm doesn t wish to serve as a fiduciary. It may also be no if you don t want to risk losing the ability to cross-sell and handle rollovers, which you could lose if you were to serve as a fiduciary. However, some dealers are developing special adviser units to serve the fiduciary role. Should you serve as a fiduciary? If you can serve as a fiduciary, whether you should may depend on the plan and your practice. Is it the best use of your time? Providing the same menu of services to all clients regardless of plan size or participants wealth or needs can prove inefficient and costly. Client needs vary by client. What some require is irrelevant to others. One of the ways advisors can increase efficiency and profitability of their practice, reports Financial Advisor magazine ( Majoring in Retirement, November 2011), is by carefully segmenting clients to help identify those who offer the most potential to grow the business over time. Clients... can have myriad needs requiring a range of products. These complex, disparately varied financial needs can drive an advisor to distraction. Is it worth the responsibility? Put another way, why would you take on added responsibility if a client doesn t value that service or if the competitive situation doesn t require it? Is it scalable? And then there s the Holy Grail: the search for scale the meaningful process and service efficiencies that, if implemented, can enable you to do more business with less effort. A first step in the search for scale is to rank common practice activities by value, which could vary by plan and sponsor. (See page 5 for a practice-segmenting exercise.) For example, if a sponsor highly values participant education, you might choose to personally deliver that service. On the other hand, if that service is not highly valued, it may make sense to find a less labor-intensive way of delivering it. Consider another example: the value of helping sponsors select and monitor plan investments. Clearly, some sponsors will value this service and your role as fiduciary. Others won t. Has it become commoditized? Some believe that selecting and monitoring has become a commoditized service and is no longer a point of differentiation for advisers. If you look at the evolution of our practice, said Edward M. Lynch Jr., of Dietz & Lynch Capital, a consulting firm specializing in investment management, fiduciary planning and compliance services (quoted in InvestmentNews, June 19, 2012), not that long ago providing liquidity was a strength, as were open architecture, helping to select funds and providing portfolio analytics. There s no longer strength in those differentiators. However, it should be noted that few legal problems have arisen from investment selection and monitoring decisions. Rather, the majority of legal challenges have come from unreasonable plan and investment fees and the failure to follow the policies and procedures outlined in the sponsor s own plan documents. retirement plan view Page 3 of 8

4 Determine which services matter, and communicate your value Determine which services matter Fortunately, whatever your fiduciary status, you can deliver a long list of valued services, as the worksheet on the next page suggests. Take, for example, an industrywide issue now driving service objectives: Sponsors clearly need help when it comes to fulfilling the new fee-disclosure regulations and delivering the required disclosure notices. In a 2011 survey of 500 small-business 401(k) plan sponsors, Wakefield Research found that: 83% 63% 45% have more questions about what the fee disclosures mean were not prepared to answer employees questions about 401(k) fees thought 4% was a reasonable fee to pay for a 401(k) plan When identifying services that matter, you ll also find that some services can promote loyalty to you as a plan s adviser. What is the primary driver of loyalty? Valuable insight comes from the 2012 edition of Retirement Planscape by Cogent Research. Plan support, reports Cogent, is the primary driver of loyalty (among sponsors) to financial advisers. That is, sponsors are more loyal to advisers who are accessible to them and their plan s participants as consultants about general plan design, service and features. (See sidebar on page 6 for another finding on loyalty.) Communicate your value In whatever capacity you serve, a key to your success will be to effectively communicate your value, your personal brand. In our industry, the most common way to share adviser brand attributes is through a value proposition statement. A carefully crafted proposition effectively conveys your value and, indirectly, justifies your compensation. The best way to make your value proposition statement effective is to ask your best clients and prospects what they really need and value in retirement plan services. By asking those types of questions, says Richard Weylman, an adviser coach and founder of the Weylman Center for Excellence in Practice Management, clients talk from their own point of view and emotional perspective. Look for common themes, he says, and build them into your value propositions. And if you segment your practice (see next page), consider creating a different value proposition for each segment to reflect the various approaches to service you ve developed to meet each segment s needs. Remember: A cardinal rule for developing strong value propositions is to be as explicit about what you won t do as what you will do. In other words, your relationship with a sponsor probably won t hinge solely on your service as a plan fiduciary, but rather on the value (as perceived by plan sponsors and their plan s participants) of other, nonfiduciary, services you promise and deliver. Page 4 of 8 retirement plan view

5 A practical exercise for segmenting your practice As you consider practice segmentation, use this or a similar worksheet to list the universe of services you are able and willing to provide. Distinguish between the services that are highly valued, which you should personally deliver, from those that have become commoditized or are no longer highly valued, which you should probably outsource, either to a junior associate or to a third party. Fiduciary adviser services Importance to client? Outsource? Recommend investment managers and plan investments Monitor investment managers and plan investments, and recommend replacements Provide investment advice to participants Nonfiduciary adviser services Importance to client? Outsource? Investments Educate about types of investments Help gather information about investment benchmarks and results Help determine if the plan is Section 404(c) compliant Fees Review and educate about plan fees Help compare plan fees to industry benchmarks Educate about 408(b)(2) service-provider reports Gather information from covered service providers, such as 404(a)(5) fee-disclosure documents Plan operations Suggest plan service providers, such as recordkeepers, trustees and TPAs Suggest ways (such as automatic enrollment, deferral-rate escalation, match arrangements, safe harbors) to improve plan participation and appreciation of the plan Review distribution options and procedures at separation of service Participant education Find ways to improve the effectiveness of the participant education program Educate about general investment, asset allocation and retirement planning principles Explain fee-disclosure documents and quarterly statements retirement plan view Page 5 of 8

6 The rise of the third-party fiduciary Educating sponsors about their fiduciary duties can pay off However you choose to help your clients select and monitor plan investments, you may find encouragement from a recent survey of plan sponsors. Chatham Partners found that helping to educate plan sponsors about their fiduciary obligations, whether delivered in person or facilitated through a third party, resulted in higher sponsor loyalty (by 6 percentage points) and a lower risk of losing the plan (by 4 percentage points). This may be particularly important considering the recent DOL announcement that it plans to substantially increase the number of ERISA compliance audits it conducts each year. That announcement may strike fear into the hearts of many HR professionals, particularly those responsible for this area, reports Human Resource Executive Online. While experts and advisors don t believe that companies or their staff members are deliberately doing things incorrectly, they do believe that significant opportunities for error and audit exist. As noted earlier, deciding if you ll serve as a fiduciary depends on a number of factors. If you re able to serve as a fiduciary, is it a service that: All your plans will value and need? Is scalable so you can continue to build your retirement plan practice efficiently? You should spend your limited and highly valuable time on? If the answer to any of these questions is no, it may make more sense to operate as a nonfiduciary and align with a third party to provide fiduciary investment selection and monitoring services. Since many advisers are turning in this direction, our industry has seen the rise of third-party fiduciaries who are willing to take on this role. In a nutshell Providers who offer these services are considered investment advisers and, as such, act as fiduciaries. They typically serve in one of two capacities: Nondiscretionary investment adviser The investment adviser makes recommendations, but the sponsor must make the decisions and approve the recommended changes Discretionary investment manager The investment adviser has full discretion and thus serves as the final authority over the plan investment decisions In short, the key difference between a 3(21) and 3(38) fiduciary is who retains discretion over investment lineup decisions. In either case, it s important to note that the named fiduciary typically the plan sponsor or an investment committee is never completely relieved of fiduciary responsibility. Choosing a fiduciary is, in itself, a fiduciary act that requires prudent selection, monitoring and evaluation of services provided and the fees paid for them. Page 6 of 8 retirement plan view

7 Evaluating, selecting and monitoring third-party fiduciary services Although third-party fiduciary services may appear to be similar, a closer look can reveal important differences. How the contracts are arranged, the pricing methodology and, most important, the investment screening methodology can vary substantially. To assist you in helping sponsors conduct their own due diligence when assessing third-party fiduciaries, consider the following pertinent questions and commentary. Service provider How long has the provider served in this capacity? What depth, strength, experience and accreditation does its staff have? Is the third party affiliated with a broker-dealer or other sales organization? Investment screening Can you explain the investment screening methodology? Is that methodology too focused on the short term? Basing investment decisions on short-term results can be imprudent and disruptive. Too-frequent changes in the investment lineup could force participants to buy high and sell low (as investments come and go) and can add to the administrative burden. Pricing How is the service priced? Pricing for most third-party fiduciaries is asset-based, which means the cost escalates as plan assets grow, even though the services provided haven t changed. This will likely be a topic of discussion each year when the plan sponsor reviews the now-required service-provider fee and service disclosure. Possible bias or conflict of interest Who pays the third-party fiduciary? If the sponsor pays the plan provider, who may have proprietary funds in the plan, could it be considered a conflict of interest? Fiduciary coverage What does and doesn t the service cover? Generally, third-party fiduciary services indemnify the plan for losses (including reasonable attorney s fees) attributable to a breach of fiduciary duty. For example, if investment recommendations are deemed to be imprudent, financial judgments against the plan would be covered. These services, however, won t indemnify the plan for judgments against platforms, plan operations, fees, participant education, qualified default investment alternatives (QDIAs) and participant notifications. Plan support and benefits Does the fiduciary service offer a fail-safe option? A 3(21) program with an automatic-execution option helps avoid lapses of coverage if the plan sponsor inadvertently fails to act on the service provider s recommendations. Does the program have a carve out feature? A program with a carve out feature permits inclusion of noncovered investments in the plan lineup without voiding the entire agreement. How difficult will it be to make the transition to the fiduciary service? Does the program offer an accurate mapping process to make it easier to move assets from the current plan lineup to the new, covered plan lineup? Ask if the provider can map current investments to like investments during the transition to help reduce the administrative burden. Is the cost of the service buried in the recordkeeping fees or investment expense ratio? If so, plan sponsors who don t subscribe to the fiduciary service are, in effect, subsidizing those who do subscribe. retirement plan view Page 7 of 8

8 To thine own [practice] be true For some advisers, the decision not to serve as a fiduciary opting instead to help meet a plan sponsor s investment selection and monitoring needs through a third-party fiduciary may be based on restrictions associated with broker-dealer policies or preferences. For others, the decision may be driven by the plan sponsor s preferences, or practice needs or requirements. Fortunately, the rise of third-party fiduciary service providers has added even more diversity to the repertoire of services you can draw upon to meet more plan sponsor and participant needs. Since not all plans will need or value all services, it may be worthwhile for you to develop a customized value proposition statement for each practice segment. And it must only follow, as the night the day (to quote Shakespeare once more) that as the retirement plan arena continues to evolve, practice segmentation will become increasingly important. American Funds can help To assist you in helping plan sponsors select and monitor plan investments, American Funds makes available an independent third-party fiduciary-services program through Wilshire Associates, Inc. ( Wilshire ). American Funds also offers a comprehensive library of literature and a suite of Web-based tools to support your efforts. Put our solutions and services to work. 800/ americanfunds.com/retirementplans retirement plan view Page 8 of 8 Lit. No. RPGEBR P Litho in USA CGD/9642-S American Funds Distributors, Inc. The Capital Group Companies American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust