The definition ERISA uses for fiduciary status is functional, which means that even if brokers or registered representatives do not acknowledge that they are acting as fiduciaries, if they perform fiduciary tasks, they are ERISA fiduciaries in the performance of those tasks. Those who do not comply with ERISA’s limitations could become personally liable for causing a fiduciary breach. The recent wave of lawsuits against some of the nation’s largest employers and their services providers–all of which contain claims for breaches of fiduciary duties under ERISA–further underscores the magnitude of this fiduciary risk.
The Department of Labor (DOL) recently announced that its top agenda item is the implementation and execution of a “strong, vigorous, comprehensive enforcement policy.” The DOL is also sharing information and actively cooperating with the SEC in detecting and preventing conflicts of interest among service providers, including brokers and investment advisors.
Heightened regulatory scrutiny and increased access to the courts means that previously undetected violations may now subject brokers and their broker/dealers to liability and significant penalties. Mounting regulatory pressure is beginning to force broker/dealers to clearly distinguish their representatives’ actions from any that might be construed as fiduciary. In making these distinctions, these brokers will have to change the way they do business if they’re to retain 401(k) client relationships.
Routine practices such as providing participant advice and pursuing 401(k) account rollovers can quickly become prohibited transactions. The DOL has taken the position that if the broker is already a fiduciary to the plan, then making a recommendation to take a distribution, advising on how to invest the funds in the IRA or even answering questions about these matters would be subject to ERISA’s rules. The DOL points out that “if, for example, a fiduciary exercises control over plan assets to cause a participant or beneficiary to take a distribution and then to invest the proceeds in an IRA account managed by the fiduciary, the fiduciary may be using plan assets in his or her own interest, in violation of ERISA section 406(b)(1).”
It is likely that the increasing regulatory pressure will have the effect of requiring that retirement plans and their participants use separate advisors who are separate fiduciaries, devoid of the potential for conflicts. The conflict-free posture of fiduciaries is inherent in their duty of care as set down in the Investment Advisers’ Act of 1940. This duty means that, as fiduciaries, advisors must act in the utmost good faith, never taking advantage of the high level of trust clients have in them precisely because of their fiduciary status.
Some broker/dealers will choose to assure the provision of RIA services from existing divisions of their firms. Other financial professionals who act as brokers to 401(k) sponsors will choose not to become RIAs. Instead, to protect themselves from the risk of crossing the fiduciary line, they will need the services of a “remote RIA,” an outside RIA firm that takes on the fiduciary duties and provides plan sponsors or participants with regular investment recommendations.
In addition to protecting themselves from liability by using a remote RIA, brokers serving 401(k) plans can concentrate on non-fiduciary services including employee enrollment, employee education, plan design, and, of course, sales. By making sure their clients get high-quality fiduciary services, brokers can position themselves to retain existing business and develop prospects.
Brokers’ relationships with 401(k) clients hang in the balance, for those who don’t assure the provision of RIA services run the risk of losing clients to those who do.
Founder and CEO, Smart401(k)
Overland Park, Kansas