Another Reason for a New Fiduciary Standard

A friend of mine who is a retirement plan consultant was advising a $14 million plan on which custodian and third party administration (TPA) firm to use. She picked a local unbundled TPA, using the Schwab platform.

The broker of the record is somehow related to somebody on the plan sponsor’s through marriage. Perhaps there were cousins removed as well, but you get the drift. The broker, affiliated with one of the large broker dealers suggested using a high cost, insurance based platform.

The reasons for using the insurance company based platform were obvious. The broker had little or no knowledge as it pertains to plan cost and it seemed that the only thing he really cared about that he could easily be paid by this insurance platform and Schwab would have been harder to get paid.

Swell. The client and plan participants would have paid more in fees, so the broker can get paid easier. Wonderful. The fact that the broker didn’t bother to find out which other unbundled platforms could have paid him easily as well (Matrix, anyone?) makes this story a little more outrageous.

Requiring brokers to abide by the Department of Labor’s definition of fiduciary is much needed, as seen by this example. So this broker, under the new rules, would be more tied to the client’s needs as a plan sponsor and less to the almighty dollar. Fiduciary standards will require brokers to live up to a higher duty of care, where the client comes first and the 12b1 trails come later. So brokers under the rules if implemented, will either change their habits, get out of the business, or partner up with ERISA fiduciaries. Either way, plan sponsors win out when advice is given with no strings attached and the client’s needs come first.

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3 Responses to Another Reason for a New Fiduciary Standard

  1. You don’t seem to be saying that the plan did not already have fiduciaries–but only that the plan’s fiduciaries did not do their jobs. Expanding the fiduciary definition and responsibilities ever outward has its own sets of problems–as the ESOP appraisers are finding out. At some point, those at the top need to take responsibility for their roles.

    Nick Saakvitne

  2. Destry Witt says:

    It happens all the time – more often than the preferred. Something like only 10% of plan advisors come from RIA shops, so naturally some 90% of the transactions are going to be sold by non-fiduciaries. We just need to get to a place where “if you get paid for it, you’re a fiduciary.

  3. Michael Schmidt says:

    I have a similar situation. A particular indian tribe with a very successful casino has a significant 401(k) and a defined benefit plan, as well. I have proposed programs that would save 91bps on the db and 1.41% on the 401(k) with huge potential savings.

    The administrator (clearly an overworked bureaucrat) keeps telling me that the current (broker) is their “consultant” for each plan, and that I need to get together with him. His non-responses so far would seem to show that he is more afraid of a loss of commission rather than a fiduciary responsibility.

    It would be good to clean these devils out.

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