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.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
Following the first in a series of monthly webinars in October, AXIS Retirement Analytics on Wednesday held a webinar discussing the benefits of benchmarking to fiduciary compliance.
Benchmarking has primarily been used in midsized and large plans, Tom Loch, senior vice president of Castle Rock Innovations, which offers the AXIS platform, said on the webinar. However, Loch, who moderated the webinar, said, with benchmarking, there was “opportunity for smaller plans to present themselves in a new way.”
Benchmarking is not explicitly required in regulations or by the Department of Labor, Edward Lynch, founder and CEO of Fiduciary Plan Governance, said. What is required, he continued, is for plan sponsors to demonstrate appropriate care and due diligence in understanding the fees associated with their plan, what they’re paying for services and whether those services are necessary and the fees reasonable.
“It’s not about the lowest cost,” he said. “It’s about if the cost is reasonable,” adding that independent benchmarking analysis will go a long way in meeting due diligence requirements.
John Blossom, president and CEO of Alliance Benefit Group of Illinois, noted that while plan sponsors aren’t directed to perform a benchmarking analysis specifically, ERISA does in fact “obligate” plan sponsors to “obtain and carefully consider” pertinent information regarding their plans.
Blossom likened benchmarking to the law of the jungle, but instead of “eat or be eaten,” it’s “benchmark or be benchmarked.” He named four things sponsors should consider as part of their benchmarking analysis.
First, he said, is what do they want to benchmark? Sponsors need to decide if they’re going to benchmark their plan features, participant behavior, costs or performance against other plans. If they’re going to benchmark performance, they need to determine by what standard they’re going to measure performance.
Second, sponsors need to consider what they’re comparing their plan to in the benchmark: the size of the database and degree of segmentation.
A third consideration is to compare average fees, but Blossom cautioned against giving an average too much weight. “Benchmarking gives an arithmetic average, but you might have one plan with small contributions and small balances and another with more people and higher balances.” Furthermore, every time someone lowers their fees, the average will fall, Blossom said. “It becomes a race to the bottom.” He suggested using the mean as a more useful measure of a plan.
Finally, sponsors need to think of when they’ll perform their benchmark analysis. Blossom suggested benchmarking at the plan’s inception and conducting a new analysis annually.
Ultimately, benchmarking, fee analysis and compliance are necessary for all plans sold by broker-dealers, not just elite or large plans, Thomas Quercia, senior vice president of business development for Broadridge, said. He noted that independent, bank and insurance broker-dealers were “particularly struggling” with meeting due diligence requirements. “Benchmarking provides an opportunity to differentiate themselves from the competition,” and it aids in doing due diligence, he said.
“There’s a lot of angst around the fiduciary standard,” he said.
Loch asked Blossom to explain the difference between benchmarking and plan design. “It’s difficult to get sponsors to pay attention to basics,” Blossom said. They can use information the collect on retirement readiness as a guideline, but they must still perform due diligence in designing their plans.
Lynch added that plan sponsors have not been heavily focused on benchmarking. The spring and summer was their “crunch time” regarding fee disclosures, but he predicted in 2013, audits would begin to take place, which will bring increased awareness from plan sponsors.
“There’s no question there’s a greater need for education,” Lynch said. “Due diligence doesn’t mean that if you run a benchmarking analysis and your fees are out of line you necessarily have to change anything. Due diligence is demonstrated by a sufficiently robust analysis.”