More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
“No matter how much they may want to, they can never completely offload their liability as it applies to their fiduciary responsibilities,” says Richard Friedman, managing director of corporate retirement services for asset management firm IRON Financial. “For the investments made within the plan, 3(38) is the only mitigation of liability that plan sponsors and brokers can rely on.”
Friedman is referring to section 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA), which provides that a plan sponsor can delegate the responsibility and liability of the selection, monitoring and replacing investment options and functions to an ERISA described investment manager who then takes on the fiduciary responsibilities—and therefore liabilities.
Friedman, in an interview with AdvisorOne at the ASPPA 401(k) Summit on Monday in Las Vegas, says there is a “jumble” of information about what constitutes a fiduciary. Many firms might call themselves experts in section 3(38) of the ERISA, but not all of them are, and it becomes a case of figuring out who really has that liability expertise.
“If you engage with a poor liability mitigation firm in this area, you actually could do more damage and expose yourself to more liability than if you had never engaged one at all,” Friedman warns. “We’ve taken what works for our clients in-house, and offered it as an outside service for other firms. We do educational seminars on the fiduciary topic that helps answer the following: What is a fiduciary; who is a fiduciary; and, what does being a fiduciary really mean?”
He notes it is extremely difficult for advisors and plan sponsors to know in this regulatory environment if they are one. They are either a fiduciary by title or by function, he says. They might say they are not a fiduciary, but if they walk like a fiduciary and talk like a fiduciary, then they are a fiduciary.
“What we do is add a game plan and a roadmap to what the plan is doing, and that begins by including 3(38) in the investment policy statement,” he explains. “The IPS has to address 3(38)—period. So we provide them with that IPS as well as a quarterly report with what they need to ensure 3(38) compliance.”
If a 3(38) firm does it right, then the selection, monitoring and replacement of the investment options will lead to a successful retirement on behalf of participants, he says.
“All of this is really first and foremost about the plan participants,” Friedman adds. “People think that what the SEC, FINRA and the DOL is doing is onerous, but it is well-intentioned and with participants in mind. Of course, it’s the unintended consequences we have to worry about, which is really what our government seems to be all about.”
As for the other major plan provider issue, fee disclosure, Friedman thinks 408(b)2 is good for the industry, and would actually like to take it one step further.
“Rather than simply disclosing fees to the plan sponsor, I think making them public and having them appear on a Form 5500 would be great, as well,” he says. “It would provide a level of transparency and competition not previously seen, which would ultimately benefit the plan participant. If fee amounts showed up on 5500s, everyone would be combing through it and asking questions, and that’s ultimately good for consumers and our industry.”