More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Phyllis Borzi, Assistant Secretary of Labor at the Employee Benefits Security Administration (EBSA), laid out on Monday EBSA’s regulatory agenda for the rest of the year and clarified one area that’s caused a “backlash” from retirement planning officials—the department’s position on the use of brokerage windows under fee disclosure rule 408(b)2.
While stating that she couldn’t predict the timing of EBSA’s release of its reproposed rule to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA), Borzi restated comments she made to AdvisorOne in a recent interview that Labor will not be releasing a fiduciary rule that mirrors the one being crafted by the Securities and Exchange Commission (SEC). “I will not promise anybody there will be a single fiduciary standard,” Borzi told attendees at the Society of Professional Asset-Managers and Record Keepers (SPARK) Institute’s annual conference in Washington.
However, she added that compliance with EBSA’s fiduciary standard “won’t put you out of compliance with another [fiduciary] standard” such as the SEC’s.
Borzi also said the reproposed fiduciary rule will “make clear what types of investment counseling constitutes advice versus education,” and include a more “robust” economic analysis.
‘Backlash’ on Brokerage Windows
Borzi also noted the “backlash” that EBSA has received from the industry regarding its guidance on use of brokerage windows as part of EBSA’s fee disclosure rules 408(b)2 and 404a-5. The industry has complained that the department has ushered in a new requirement involving brokerage windows. But Borzi said during her comments that’s just not true.
The department, she said, has noticed an accelerating trend that has occurred due to rule 408(b)2: “There appears to be a notion that the best advice to give employers is if they want to avoid fiduciary duty they should provide an unlimited choice of investment options,” Borzi said. “People are advising [their plan sponsor] clients that the way to get around the 404c [participant] disclosure [rule] is to move to a brokerage window” that offers unlimited investment options.
In its recent Field Assistance Bulletin providing guidance to help plan administrators and service providers comply with the requirements of new rules, Borzi said the department was “trying to reiterate that a brokerage account or window is not a designated investment alternative (DIA); that’s not groundbreaking.” What the department is concerned about, she said, is disclosure.
She said the guidance reiterated another point, “again not new … that a plan fiduciary needs to prudently select and monitor service providers. So once you choose a service provider you can’t just walk away.”
Added Borzi: “You need to look at what people are actually selecting because you have to tell them what the fees are associated with that. It is entirely possible that many in the industry haven’t captured that information. But if you’re going to give people these kinds of choices and fulfill your fiduciary duty, you can’t just set it and forget it.”
Coming Out Soon: Lifetime Income Illustration, Target Date Fund Guidance
As part of its joint effort with the Treasury Department on how to best integrate lifetime income products into 401(k) and other types of employer sponsored retirement plans, Borzi said DOL is “optimistic” that it will soon seek comment on a “lifetime income illustration.”
The lifetime income illustration would be contained in the pension benefit statements and could show participants the amount of money they would receive per month—as an annuity defined-benefit like payment, not lump-sum cash-out—at retirement. EBSA is currently considering whether it should show an estimate of the monthly allotment based upon one’s current savings balance, or on a projected account total at retirement.
In collaboration with the SEC, Borzi said DOL also hopes to release soon a “simple guide” for fiduciaries on what to look for in a target date fund. “Ordinary people, which includes plan sponsors, don’t understand jargon,” she said. “We’ve spent hours trying to get this guidance into a form that people can understand.”