Why the Change in the Definition of Fiduciary Will Be The Greatest Change of All

2011 is a year of change for the retirement industry. Fee disclosure, the definition of fiduciary, and changes in the marketing of target date funds are on the minds of everyone in the industry, including yours truly.

So much has been written about all of the proposed changes and what kind of impact that they will have in the retirement business. While so much has been written about fee disclosure and target date funds, I believe that the proposed changes to the definition of fiduciary, if finalized, will have the greatest impact on the retirement plan industry.

While some have stressed that fee disclosure will be the greatest game changer in the industry since the advent of daily valued 401(k) plans, fee disclosure in my mind is overrated. Fee disclosure is like the Internet, all it is, is the release of information. If a plan sponsor takes a fee disclosure statement from their plan providers and puts it in the drawer and never looks at it again like the warranty card of your DVD player, that’s the end of its impact. Fee disclosure has no effect if a plan sponsor doesn’t take the statement of fees and compares to what is out there in the industry. So fee disclosure is all about regulating and requiring the dispensation of information. Sure it regulates service providers to provider information, but it doesn’t regulate behavior. Service providers can still charge excessive fees, it will only be up to the plan sponsor to discover whether those fees are excessive.

The regulation of target date funds, while nowhere near finalized, is all about regulating how these funds are marketed plan participants. It will allow plan participants to get a little more knowledge as to what each specific target date funds has. The mutual fund companies weren’t bad actors, but were bad marketers. They marketed funds without giving participants any insight to determine which fund if appropriate for them.

That leaves the proposed rule on the changes to the definition of fiduciary. I believe it’s a game changer, because it creates a level playing field for brokers and advisors. It will also put the needs of plan sponsors and participants first and pushing a specific product or platform second.  It will also regulate third party administration (TPA) firms, especially the payroll providers, who have been skirting the rules for years.  The payroll provider TPAs who administer plans with no advisors, yet develop fund lineups and make “suggestions” to plan sponsors on which funds to pick and which plan sponsors can’t rely on, will have to regulate their behavior. The producing TPA who disclaimed any fiduciary role, yet pushed revenue sharing funds to lower their fees and had access to the plan sponsor’s trust account to pay those fees will also have to look at what they do.

For plan providers who didn’t have to put the needs of the plan sponsor first because they didn’t have to be a fiduciary will have that bill come due. For those plan providers who didn’t believe being a fiduciary was part of the bargain can exit stage left and I think a lot of brokers from broker-dealers who don’t feel  the role of fiduciaries fits the role of the broker will make that quick exit.

The new definition of fiduciary will create a level playing field for all advisors who would be required to meet the requirements of being plan fiduciary, so it will regulate the behavior of plan providers more so than the other changes coming down the pike.