Retirement plan sponsors and participants can look forward to a new relationship with their service providers if legislation now being considered by the House of Representatives is signed into law later this year.
“It’s highly likely this legislation will pass the House sometime in June and go to the Senate, and there is significant support in the Senate,” says Matthew Hutcheson, an independent fiduciary and a congressional expert who has testified on Capitol Hill many times.
If this occurs, three changes will take place in the relationship between plan sponsors and service providers, according to Hutcheson.
One, service providers to any type of retirement plan will be obligated to disclose all fees and costs. At present, the plan sponsor is responsible for gathering this information.
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Two, there will be a significant tightening of the conflict-of-interest rule. Hutcheson says that in the past, conflicts of interest were essentially prohibited, with a lot of exceptions. Now prohibited transactions are going to be less favorably looked upon, and far fewer exemptions will be allowed. “And if a conflict of interest exists, the new rules will explicitly state that before a service provider can provide services, they must disclose the nature of the conflict with an explanation of what it means to the plan sponsor.” He says this will allow the plan sponsor to ask intelligent questions in deciding whether to proceed with the firm in question.
Three, all advice givers to retirement plans, whether explicit or incidental, will be deemed fiduciaries. Whereas a Registered Investment Advisor is a fiduciary by statute, a loophole in the code allows someone like a broker to give advice technically but not be considered a fiduciary, according to Hutcheson. Under the new rules, a fiduciary relationship will be deemed to exist “if someone comes to you and starts talking about investments and you feel vulnerable because you lack knowledge; and in that conversation, the broker may say he’s not technically giving advice, but if you start to rely on that information; and after you make a decision, if you expect favorable outcomes.”