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Regulation and Compliance > Federal Regulation > DOL

DOL Requires More Due Diligence for 401(k) Advisors

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A bulletin issued in early February by the Department of Labor (DOL), which calls upon advisors to plan sponsors to go through an increased due diligence process in line with specifications detailed in the 2006 Pension Protection Act (PPA), is set to bring about change in the advisor community–not least, experts say, because only a mere handful of practicing advisors are actually even aware of the document’s issuance.

According to the DOL, any advisor to a 401(k) plan is a “fiduciary advisor,” meaning that he has fiduciary responsibility toward the plan that must be acknowledged in writing and approved via an annual audit by the DOL. Many advisors are totally ignorant of this provision, says Lou Harvey, president of DALBAR, a Boston-based financial services research firm, but the law is here to stay and the audits are likely to begin soon. Advisors and brokerage firms whose reps (although many might deny this) act as fiduciaries need to step up to the plate, Harvey says, and decide whether they want to remain in the 401(k) business, and therefore comply with legal requirements, or step out of it, since failure to adhere to the law could result in many advisors being put out of business.

Of course, the law is still very new and it is not about to cause any major upheaval in the near term. Some observers believe that the DOL, although it has been mandated to enforce the law, does not have the resources to do so in a big way at present. Yet firms such as DALBAR–which among its other areas of business, conducts due diligence of brokerage firms and financial advisors–are expecting to encounter greater demand for their services from the advisor community going forward, as knowledge of the new law becomes more widespread.

“The key is for advisors to go through an objective, due diligence process by a third party, and for there to be documentation of that,” Harvey says. “We have an objective process that as been reviewed by the regulators, and we issue documentation that would give plan sponsors the assurance that they are working with an advisor who is in compliance with the law.”

Many advisors would be quick to defend their objectivity even in absence of the law, but the PPA’s goal is to protect the interests of people invested in a 401(k) or other type of retirement plan and the plan sponsors, by drawing a clear line between advising people on where to invest and selling investment products. Now that the line has been officially drawn, advisors have no choice but to familiarize themselves with the law as soon as possible in order to comply with its specifications, says Glenn Kautt, AIFA and president of The Monitor Group, a fee-only financial planning firm in Mclean, Virginia. This issue is still very new, but advisors that want a head start would be well served by filling out the the self-assessment document available on the Web site of the Foundation for Fiduciary Studies (, Kautt says, which is an excellent way to see how they stack up against the requirements of the PPA.

However, this is not to say that it will be easy for both advisors and companies to meet the new rules, Kautt says. While larger corporations will have little issue in complying with the regulation and are likely to have in place programs to take care of the requisite annual audit for fiduciary advisors, for instance, smaller companies with smaller retirement plans that don’t have the financial wherewithal could find themselves with crippling new costs, Kautt says.

“Under the PPA, a plan sponsor has to prudently select an advisor, acknowledge his fiduciary status, and the advisor has to be audited every year,” Kautt says. “This is an overwhelming burden, and I therefore feel that most small companies that have 401(k) plans won’t be able to take it on.”

Firms like DALBAR, though, can help, Harvey says. DALBAR offers the option of providing a single audit, which an advisor can distribute to all her clients. The company is currently in discussion with a range of advisory firms across the country, most of which are trying to decide whether or not they want to still continue in the 401(k) space at all. Most probably will, though, Harvey says, since this is an extremely lucrative business, and the importance of the 401(k) plan is only going to rise in the years to come.

“Those firms that have a strong presence in the 401(k) business will no doubt continue on and there are rumblings that other firms will be coming to us as well,” Harvey says. “We have had a few advisors go through the PPA process already with us, but since the regulation is so new, many firms are still in discussion about what to do. However, we do expect to see a pick-up in our business going forward.”


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