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GAO: Plan Fiduciaries Should Give Better Warnings

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Retirement service providers should be more careful to tell plan sponsors and participants when they are and are not acting as fiduciaries, and, when they are acting as fiduciaries, they should avoid highlighting their own products.

Officials at the U.S. Government Accountability Office (GAO) make those recommendations in a report on retirement plan fiduciaries prepared at the request of Rep. George Miller, D-Calif., the highest-ranking Democrat on the House Education and the Workforce Committee.

The GAO officials looked at efforts by the Employee Benefits Security Administration (EBSA), an arm of the Labor Department, to update the definition of “fiduciary” that the department uses when dealing with retirement plan investment providers.

Fiduciaries have a legal obligation to put the interests of the plans and plan participants they serve ahead of their own

Today, to be a fiduciary of a plan governed by the Employee Retirement Income Security Act (ERISA), a person must either have control or discretionary authority over plan investments, or the person must meet a 5-part test described in a 1975 regulation. The person must give advice on a regular basis, have some kind of agreement or arrangement with the plan or a plan fiduciary, and provide individualized advice.

The draft rule released by EBSA rule would expand the definition of plan fiduciary to include any person that provides investment advice to plans for a fee or other compensation.

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The GAO says the Labor Department should change the pending definition update to require that plan service providers give clear, prominent, standardized warnings in situations in which they are not undertaking to provide impartial investment advice.

The department also should change interim disclosure regulations to require that providers disclose compensation and fiduciary status information in a standard format, and it should change investment education guidance to control efforts by providers to highlight their own products in plan education materials, the GAO says.

“Labor could consider a variety of steps to address this potential conflict of interest, such as requiring service providers to disclose that they may have a financial interest in the options highlighted or prohibiting them from using proprietary funds as examples,” Charles Jeszek, a GAO director, writes in a letter summarizing the GAO’s views.

No comprehensive data on the prevalence or impact of service provider conflicts of interest is available, but experts told the GAO that even conscientious plan sponsors may not know whether a service provider is acting in its own interests or in the plan’s interests, or whether the provider’s compensation will depend on the investment options chosen, Jeszek says.

Similarly, providers should tell plan participants when they are acting as ERISA fiduciaries and when they may have financial interests in the outcome of investment purchase transactions, Jeszek says.