When it comes to standards, I know Kosher is Kosher. However, when it comes to meat, observant Jews now only eat Glatt Kosher meat. It’s a higher standard in the sense that it’s supposed to mean that the there is a lack of blemish or adhesions of the internal organs of the animal. Now, it doesn’t mean that Hebrew National isn’t Kosher, but it means that it’s not Kosher enough for many observant Jews and they’ll only eat it if Glatt Kosher meat isn’t available.
When we talk about President Trump’s delay of the fiduciary rule, I think it’s a bonus for registered investment advisors (RIAs). Why? RIAs have always been a fiduciary under the Plans they work on and in my opinion, the fiduciary rule watered down the fiduciary standard to make brokers fit under the new definition. RIAs don’t sell proprietary product and charge a level fee. Brokers could still sell proprietary products and charge varying fees as long as it’s the best interest of the client. While the best interest contract exemption will protect plan sponsors, litigation will determine what is in the best interest of the clients.
So that means RIAs would have had the Glatt Kosher fiduciary standard while brokers would have only had to meet the Kosher fiduciary standard, or as I called it fiduciary-light. The competitive advantage that RIAs have in marketing would have been lost if everyone had to meet the fiduciary standard, but RIAs still had to answer to a higher standard that most plan sponsors wouldn’t be aware of.
So in my opinion, RIAs still maintain an advantage by being the only advisor being required to serve as a fiduciary. Just my two cents.
Imagine a diet where it doesn’t matter how much weight you lost. Imagine a golf game that wasn’t about your score. Imagine about a job and not how much money you make. Being a plan sponsor isn’t about a specific result, it’s all about a process. So it really isn’t about how much money that your participants make in their plan account balance, it’s all about how fulfilled your end of the process in running a retirement plan.
The process is about fulfilling your role as a plan fiduciary in a prudent manner. That means hiring good plan providers, reviewing their work, and making sure that participants get enough information to make sound investment decisions. It sounds easier than it is, but it’s better to break down what you need to do in a language that you can understand. I don’t need to speak ERISAese to justify my fee, I need you to understand that as a plan sponsor that everything you do is about doing your part f the process as a plan fiduciary in a diligent manner, you’re not aiming to be the best 401(k) plan on the planet. What your plan participants’ rate of return doesn’t really mean anything as long as you did your job as a plan sponsor in a prudent manner. That’s it, that’s all you need to do.
While it sounds easy, the process is like being on a diet, it means being committed to it and taking it day by day. There is no shortcut to being a responsible plan fiduciary. There is no guarantee that you won’t get sued, but it will guarantee the likelihood that the case won’t go very far.
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President Donald Trump delayed the implementation of the Department of Labor fiduciary rule by six months through a directive. While the delay is only for six months, Trump put enough hurdles that implementation of the new rule seems unlikely.
Before brokers rejoice about what seems like the end of the rule, they shouldn’t uncork the champagne bottle. They’ve paid a high price to comply with the rule. That means paying ERISA attorneys a lot of money to comply and they have spent so much money on mailings, developing policies, and procedures. They’ve told a lot of their clients that they would have to stop servicing their accounts to comply. So it’s going to be hard for them to go back to business as if the new rule never existed.
Don’t be surprised to see some sort of backlash. The fiduciary rule has been the talk of the retirement plan industry for the last couple of years and plan sponsors have slowly learned the ramifications of it especially the fact that brokers weren’t serving in a fiduciary capacity. Now that it looks like they’ll be free from it again, there will be some sort of backlash especially now since Trump is pretty unpopular these days. I just don’t think its going to be so easy for broker-dealers to go back in doing what they did before they had to start complying with the new rule.
Just because the new rule is being delayed and/or being killed, doesn’t mean there wont be a fiduciary rule coming down the pike in another 2, 4, or 8 years. I think broker-dealers are going to want this rule implemented rather than a rule in the future that is just going to be more oppressive for brokers to operate in the retirement plan space.
So new fiduciary rule is delayed and the broker-dealers didn’t win anything.
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I worked 9 years working as an ERISA attorney for a couple of third party administrators (TPA) and I always felt like I was a fireman because I put out a lot of compliance fires for our clients and sometimes, it was our administrators that caused these issues. While I always say there is no such thing as a stupid question, sometimes there are truly baffling questions to get from the administrators I had worked with.
5. A 401(k) plan administrator asked why I thought it was inappropriate to reconcile a daily valued 401(k) plan on a quarterly basis.
4. Another 401(k) plan administrator asked me about the non-resident alien exclusion, where you can exclude non-resident aliens who receive no U.S. source income from the retirement plan without an effect on the Section 410(b) coverage test. The administrator then asked if that exclusion included Puerto Rico (of course Puerto Rico is a U.S. commonwealth). When I told about Puerto Rico’s status and that they use dollars, he asked me if they use Puerto Rican dollars.
3. A client relationship manager (who visited the client and reviewed funds) asked me what’s the difference between an age 60 in-service distributions and an age 59 ½ in service-distributions. Of course, the answer I gave was six months.
2. That same client relationship manager was at a meeting with a potential client and their lobbyist. She said she was from Yonkers. The lobbyist said Yonkers was the second largest city in New York State. She asked what was the largest city in New York State?
1. A salesman asked me whether with a new client that sponsored 401(k) plan with a large illegal alien employee base, whether it was appropriate for illegal aliens to defer in the 401(k) plan with fake social security numbers. Yes, you read that right. Of course I told him that even if it wasn’t illegal, it was still unlikely illegal aliens would defer money into a 401(k) plan based on their income and legal status.
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Charles Schwab Corporation is the latest plan provider whose 401(k) is the subject of a class action Employee Retirement Income Security Act (ERISA) lawsuit. It’s starting to feel like a game show.
The lawsuit claims that plan fiduciaries engaged breached their fiduciary duty over the plan by including Schwab’s proprietary investment products as investment options within the plan and sale of their own services to the plan.
The compliant states that there was a 3 to 5 basis point difference in fees between the Schwab S&P 500 Index Fund and the other S&P 500 Index funds. While that’s small, for a plan of that size, the complaint alleges that Schwab reaped hundreds of thousands of dollars in extra fees because of that 3 to 5 basis point difference.
The lawsuit also says that Schwab included seven other Schwab mutual funds, ten Schwab target-date funds, a Schwab stable value fund, a Schwab money market fund, and a Schwab savings account as investment options. In 2015, more than $500 million in plan assets were invested in Schwab proprietary funds.
What do I think? This is as easy as picking ripe fruit off the vine. As long as plan providers use their own proprietary funds in their 401(k) plan, these class action lawsuits will still pop up. Mind you, you know why Schwab had Schwab products in their own 401(k) plan? It’s not to make money off their participants; it’s about keeping up appearances because how would it look if the Schwab 401(k) plan for its employees only had Vanguard funds? It wouldn’t look good, I’ll tell you that.
In British-style parliamentary systems, a backbencher is a member of parliament who doesn’t hold government office and isn’t a spokesperson of the opposition. They’re essentially a rank and file member. However, the backbencher is usually the future of the party. For example, British Prime Minister Theresa May had to start somewhere and its not in the front bench as an opposition member when she joined parliament in 1997.
As a retirement plan provider, your backbench of employees is usually the future of your organization and it’s best to take care of them and nurture them. I’ve been involved with one too many organizations where the backbench is ignore or treated so poorly that they decide to leave. Best example is that semi-prestigious law firm I belonged to which was loaded with some of the best associate attorneys I’ve ever know. Every one that I know were rising legal stars and for one reason or another went to greener pastures where their talents could be appreciated.
As a plan provider, you spend so much time in training your employees that you can’t afford to have a revolving door of employees, especially talented employees. I’ve seen too many plan providers lose talented employees who actually join the competition or become a competitor. I can recall a certain third party administrator where their backbench was stacked with such seasoned plan professionals that it’s an all-star list of professionals that many in the business would know.
The backbench is your future, nurture it or it goes away.
One of the wrinkles of the new fiduciary rule is the requirement of a financial advisor who wants to solicit former plan participants for a rollover to review the costs involved with the plan to determine whether moving the money to a rollover IRA is in the potential client’s best interest.
While I’m a fan of fee transparency and this is going to be a plus for consumers, I think there is one big problem with this rollover wrinkle.
Mots money these days in qualified plans is in participant directed 401(k) plans. Despite what the media thinks, the fees aren’t as bad as they were 10 years ago. They are low when compared to the asset-based fee that advisors have for IRA clients where they have discretionary control. They may charge 100 to 125 basis points for advice and that looks rather high than the 25-50 basis points that advisors collect on 401(k) plans. Of course, there is a difference when participants direct their own investment and bear the risk. The work by a financial advisor who makes the investment decisions in a fiduciary capacity deserves more than the 25-50 points they charge when they don’t have discretionary control and they select the investment lineup.
I think advisors should certainly charge more for the work they do especially when they’re the ones in control of making the decisions. The problem is whether the Department of Labor and litigators understand the notion that people who do more, should get paid more.