Biggest Uncertainty for Retirement Advisors: What Will Fiduciary Look Like?

Advisors will be eagerly awaiting the DOL and SEC to issue their definition of fiduciary

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There are some potential developments retirement plan advisors should look out for in 2014, but not all of them are negative, according to Jason Frain, vice president of 401(k) product management and development and retirement solutions for Guardian Life Insurance Co. of America.

The big thing advisors are waiting on, Frain said, is what the definition of fiduciary will look like once the DOL and the SEC are done with it.

“That will have a far-reaching impact on the 401(k) market because the small and micro market, where Guardian does its business is driven by the advisor," he said. "If the advisor’s role changes from a definitional standpoint, there obviously will be changes as to the roles or functions that an advisor can perform.”

Those changes may not be known until summertime, though, according to Frain and other experts.

The worst-case scenario for that definition is if the DOL decides to include advisors who recommend IRAs as fiduciaries. “The ramifications from that are farther reaching than just working with 401(k)s,” Frain cautioned. “It does have an indirect impact on 401(k)s in that a big part of the value that an advisor adds is educating the employees. If an advisor is constrained by what he can or cannot do — potentially talking to those employees and sitting down with them one on one, what recommendations they may or may not make on an investment basis — the more constraints you put on them, the less likely they are to try to provide that value.”

That’s dangerous considering the sorry state of retirement readiness today. “As we look at where employees are overall with their retirement savings, the last thing we need to be doing is to discourage education from advisors. There’s a lot more education that’s needed to 401(k) plan participants to ensure that they’re looking at their financial health and their retirement planning much more frequently and in depth than they’re doing today.”

Another potential business disturber is tax reform; however, Frain said we’re still a long way from knowing how that might affect retirement business. Whenever it happens, Frain stressed that proposals like the cap on tax-deferred status on balances above $3.4 million are misguided.

“We’re a long way from seeing any of those reforms pass — but overall it strikes me as ironic that we believe as a country that there’s an issue for Americans saving for retirement, but we try to limit their ability to save.”

Frain said the biggest losers could end up being the people furthest from retirement. “It’s going to put more of a burden on those individuals that are just starting out,” he said. “It’s more difficult already for a lot of folks starting out, say, in their 20s, coming out of college, they’ve gotten their first job. They’re not really putting anything away toward retirement because they may just be starting to get their feet under them from a financial standpoint, and now you’re going to make it harder for them to catch up as they get into their earning years.”

If reform leads employers to drop their retirement plans, that could be a big hindrance for young workers, too. Frain said employer-sponsored plans are a big benefit for workers because it makes it easy for them to “check a couple of boxes and be involved and enrolled and participate in the plan.” Without that launch pad into planning, many workers would have to take on the responsibility of not just funding their retirement but initiating planning as well.

“They may need to make more conscious decisions and spend more time and energy focuses on an overall retirement savings plan, which is not necessarily a bad thing, but as we’ve seen, that sort of interest and activity with retirement planning isn’t the norm for most individuals.”

Frain suggested a potentially positive change might be on the DOL’s radar. “The DOL is likely to look at the feasibility of open MEPs, multiple employer plans, and whether or not there are changes that could be made to regulations to allow open MEPs,” he said.

In an open MEP, any employer could sign up and adopt a plan that is overseen and functions as one plan across multiple companies, a structure that is hugely beneficial to small and micro plans. “Those types of plans really help a great deal in the micro and small market because they allow a small-business owner who’s busy in his day job running the company to push off a lot of the administrative functions and overseeing of the plan to another entity,” he said.

Frain noted closed MEPs have already been successful among firms that unite around some sort of nexus like a professional employer organization.

One issue that has largely settled down but could come up again in 2014 is fee disclosure regulation. Frain noted that there hasn’t been as much change as anticipated following the rules requiring service providers to make disclosures to plan fiduciaries. There’s been “very little noise” following the rules taking effect last March, he said.

“We saw a slight uptick in activity ourselves in terms of proposals once the 408(b)(2) notices went out, but it was really just a reaction from plan sponsors wanting to go out and either benchmark their current service provider or truly find a new recordkeeping service provider. The reality is that we’ve gotten back to a steady state. It’s just another normal practice now.”

If there are changes made this year, it likely won’t disturb advisors’ businesses too much.

“I think what you’re going to see next year is an update or another proposal on 408(b)(2) that specifies an exact format that has to be followed from a fee disclosure standpoint,” Frain said. “I think that’s going to continue to make it easier for plan sponsors and the advisors that are working with them to do their job as a fiduciary to a plan and to understand the fees and do comparisons across multiple vendors.”

Another change we might see in 2014 is more states considering a state-run retirement plan. “There are a number of states that are looking into sponsoring state-run retirement plans, similar to the way states sponsor 529 plans now,” he said, adding that California and Massachusetts are the only states that have made any motion on that front as of yet.

Where states go on those initiatives will depend on how the industry reacts to efforts to improve the overall state of retirement readiness for Americans, Frain said.

“We’ve seen balances this year that have increased thanks to the market picking up very nicely. I think also the industry is focusing on retirement readiness overall and trying to improve the design of plans that are out there and trying to make auto features much more available, trying to get plan sponsors to adopt auto enrollment, auto-escalation to make sure that roughly 90% of participants are saving.

"Today, participation is much more in the 70%-75% range. Not only that, but to get participants to auto-escalate their contributions to get them up to a more normalized 10% deferral rate, which many financial experts say is the magical number to be on track for a successful retirement and be in that 70%-80% replacement ratio over time.”

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Check out Much of 2013’s Important News Arose From What Didn’t Happen by Bob Clark on ThinkAdvisor.

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