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Retirement Planning > Retirement Investing

The Retirement Market’s ‘F’ Word

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In an earlier post for ThinkAdvisor, I highlighted the fact that many Americans in the 76-million-strong baby boom cohort are relying on 401(k) plans to fund their retirements. With more than $4.6 trillion in assets, these plans represent a sizable market that is increasingly moving toward the open-architecture model familiar to many independent advisors.

This move toward open architecture is creating new opportunities for qualified advisors to provide investment services to both plan participants and plan sponsors, but “qualified” has become a more rarified concept. New government regulations, part of the 2012 update of the Employee Retirement Income Security Act of 1974 (ERISA), have strengthened the definition of a “qualified advisor” and focus on the industry’s “F” word: fiduciary. Now understanding your fiduciary responsibility as a retirement advisor is crucial.

Advisors who are new to retirement plan services may never have been subject to rules mandating fiduciary responsibilities, but ignorance is no excuse — you need to learn all about the F-word to thrive in the competitive retirement plan space.


There are two new sections of ERISA that govern the fiduciary relationship between a retirement plan and a service provider: ERISA 408(b)2 and 404(a)5. For both, service providers are required to disclose in writing whether or not they are fiduciaries. ERISA 408(b)2 requires that all service providers — including advisors — fully disclose their fees to plan sponsors. ERISA 404(a)5 requires the same disclosures to plan participants. These rules are designed to ensure that plan sponsors can determine the cost of services, and that plan participants receive all relevant information concerning the plan’s investment menu and related service and administrative fees.

With new fee disclosure and written fiduciary identification mandates, 401(k) plan sponsors now need and desire to work with fiduciary advisors. So, advisors should put into place fiduciary best practices to effectively manage liability for the plan sponsor. These best practices include developing and maintaining an investment policy statement; establishing a documented investment selection process; and evaluating and monitoring, on an ongoing basis, all investment options available to the 401(k) plan.

Advisors also need to be aware of an older, legacy rule, 404(c). This section of the vast ERISA law requires that they provide a diversified and broad range of investment menu choices, with benchmarked performance disclosures.

The fiduciary requirements of ERISA 408 and 404 apply to all 401(k) plan advisors. This creates a problem for registered representatives who want to serve the plan market but are not registered investment advisors. They cannot serve as fiduciaries, which creates compliance exposures for broker-dealer firms. Broker-dealers and their registered reps can comply via outsourcing the fiduciary advice and management components of a 401(k) plan to qualified, competent and well-resourced investment advisors with the requisite level of expertise and resources. In fact, ERISA’s “prudent expert rule” implies that plan owners should outsource to independent experts if they themselves do not have the necessary qualifications.


In outsourcing these responsibilities, different levels of fiduciary protection are available. Outsourced ERISA 3(21) fiduciary advisors assume, in writing, “co-fiduciary” responsibilities with the plan sponsor. These advisors offer objective advice and recommendations to the plan sponsor or its investment committee, who in turn make the actual decisions about selecting, monitoring and replacing plan investments. Outsourced ERISA 3(38) investment managers go a step further – they actually assume the responsibility, discretionary authority and liability for selecting, monitoring and replacing investment options, and implementing diversified asset allocation portfolios.

Outsourcing’s benefits to the advisor are clear. First, the advisor can operate from a position of trust and loyalty that deepens the relationship with the client. Second, the advisor can tap investment and administrative expertise and delegate liability, while remaining the primary service provider and relationship manager for the plan sponsor.

Plan sponsors and participants both can benefit from outside fiduciary guidance and expertise, whichever type of relationship they choose. Outsourcing the advice and management components of a 401(k) plan helps to reduce owner liability and client risks, and tends to increase employees’ chances of successful participation in the plan. Research by behavioral finance experts Shlomo Benartzi and Richard Thaler have documented in their paper “Heuristics and Biases in Retirement Savings Behavior” that employees can be encouraged to save more, take fewer loans and stick with retirement plans when they are well-constructed.

As a result of the landmark changes to ERISA, the standards for advisors to 401(k) plans have been raised from suitability, which governs the broker-dealer industry, to the higher fiduciary standards of loyalty, care, prudence, diligence and skill that are required for investment advisors acting solely in the best interests of their clients. The new ERISA regulations are important and complicated. Advisors need to learn and use fiduciary best practices to fulfill their new obligations and avoid liability — and should be aware that they can turn to outsourcers for help.

Author’s disclaimer: For investment professional use only. Past performance is not indicative of future results. The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. Any mention of a specific security is for illustrative purposes only and is not intended as a recommendation or advice regarding the specific security mentioned. Diversification does not guarantee a profit or guarantee protection against losses.


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