More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
An uncertain regulatory environment means opportunity for advisors to enter the 401(k) market, especially those looking for new products and a way to diversify their revenue streams, said Brian Graff, CEO of the American Society for Pension Professionals and Actuaries, in an interview with AdvisorOne from the 401(k) Summit on Sunday in Las Vegas. And he sees increasing interest from RIAs in particular.
“Of course, there are a lot of new rules, proposals and studies being discussed, and one of our missions is to provide educational outreach to help interpret these new rules,” said Graff, who is also ASPPA's executive director.
He noted that for advisors not regulated by FINRA or the SEC, the Department of Labor can, and should, step in to fill the void.
“I recently spoke at a DOL hearing in support of an expanded definition of fiduciary as it applies to 401(k)s,” Graff said. “In the 401(k) space, the DOL absolutely has a role to play in regulation. For example, if an advisor of record on a plan says to a client, ‘you should offer these 20 mutual fund options in your plan.’ Does that constitute advice? Common sense says absolutely. But how does that work from a fiduciary standpoint? Disclosure is the key, through some sort of seller’s exemption.”
The so-called seller’s exemption would work in the following way, Graff explained: If the advisor discloses to the client that they aren’t acting in a fiduciary capacity, that they are being compensated by the plan provider and they are transparent about the amount of the fees they are charging—and the client is OK with that—then they have satisfied their disclosure requirements.
“We believe very heavily in transparency, and this is an issue of transparency,” he added.
The seller’s exemption is part of proposed DOL regulations amending the definition of fiduciary under the Employee Retirement Income Security Act (ERISA).As far as a timeline for the new regulations, Graf noted that although the SEC is moving cautiously, the DOL is pushing ahead.
“Phyllis Borzi, assistant secretary for the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA, has said she wants it done before the end of 2011, which I believe is very ambitious,” He said. “But certainly it will be done before the end of 2012 for the simple fact that they’ll want something in place before the next presidential election.”
When asked how the mission and messaging of ASSPA has changed in the wake of the economic crisis, Graf responded that it continues to actively advocate for 401(k)s as the most effective way for Americans to save for retirement.
“For employers that offer plans, nearly 75% of workers participate, on average, in those plans,” he said. “For those that rely on IRAs or do not provide a plan, only about 5% of employees save for retirement. So the key now is to figure out how to expand coverage, especially with tax reform, rather than taking incentives [to offer plans] away.”
As far as target date funds, annuities and other forms of guaranteed income products within the plans, Graf said the organization supports them, but only if there is client demand.
“We don’t want regulators to force them to be included in the plan, especially if participants don’t want them,” he says. “It doesn’t do them any good. However, I do support the distribution of income statements, similar to Social Security benefit statements, that inform people how much income they’ll receive from the plan in retirement or more importantly how much income they would have had if they participated in the plan, which would be eye-opening for them and encourage more plan participation.”