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Industry Spotlight > RIAs

Navigating the minefield of fiduciary liability

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The plaintiffs in fiduciary liability cases can end up with big settlements, so it’s no wonder a growing number of retirement plan advisors are taking steps to safeguard themselves. 

Their first line of defense? Clearer service agreements that leave little doubt about exactly what services they provide and which are subject to the fiduciary standard of care as defined by the Employee Retirement Income Security Act. Practically as important nowadays: agreements in which services not covered by the fiduciary rules also are spelled out. 

“ERISA is clear to sponsors: you are under a duty to know the relevant investing information … and if you don’t have that skill, you are required to hire it out,” said Jason Roberts, who, as CEO of the Pension Resource Institute, has drafted a couple thousand service agreements defining registered investment advisors’ fiduciary obligations to sponsors. 

Also read: Putting customers’ interests first

Roberts said that as awareness of that point has grown among sponsors, the demands and expectations on advisors have increased. And that, in turn, has “absolutely” led to heightened attention to the service agreements RIAs place in front of prospects and clients. 

Regulators have also been paying attention. In 2013, 44 percent of regulatory exams uncovered deficiencies in advisory agreements, according to the North American Security Administrators Association. 

In some cases, regulators called out “hedge clauses” that attempted to limit advisors’ roles and their fiduciary responsibilities. 

RIAs that specialize in 401(k) plans, Roberts says, shouldn’t even bother trying to add such clauses to their contracts. “You can’t contract around your fiduciary duties,” said Roberts. 

Instead of hedge clauses, he says his practice designs “quarantined” service agreements that lay out directly what services the RIA is providing, and of those, which are owed the fiduciary standard of care — and which aren’t. 

That means RIAs must carve out the types of services they simply cannot deliver, and perhaps more controversially, leave out some investment options that sponsors may want but that are too opaque for many RIAs to properly scrutinize. 

“Advisors’ agreements need to stick to their core skill set,” Roberts said. 

Also read: 6 best practices for plan committees

These days, Roberts says, it’s common for advisor agreements to specifically exclude stable value funds and guaranteed investment contracts — investment vehicles that Roberts says many RIAs are well advised to stay away from, even if they are sound investments. 

“The question RIAs have to ask themselves is, ‘Do I, and can I really go and look under the hood of all these contracts and find out what the potential problems are?” 

He also said that when it comes to sponsors offering company stock — a time-honored retirement savings vehicle — there simply is too much liability lurking around the option these days; 90 percent of advisor agreements he helps write end up carving out the option. 

Also read: Fiduciary rule’s on horizon

Brokerage window accounts also create an area of uncertainty for RIAs. Roberts points to a lack of control RIAs have over how a sponsor, and their participants, use the windows. 

That creates a tension between sponsors’ growing need for help on all areas of plan design and RIAs need to stay within their area of expertise, a sometimes bitter reality for RIAs to manage. 

“The fact is RIAs can lose business with a ‘skinnier’ service agreement. We see it all the time,” Roberts said. 

Christopher Winn, managing principal at Advisor Assist, a Massachusetts-based compliance consultancy for RIAs, sees that tension regularly. 

“There’s a push-pull relationship at play,” said Winn. “Advisors are trying to win business as a fiduciary, and then trying to limit their liability as they do.” 

So, what about those non-fiduciary items that sponsors need help with?

A common sticking point with sponsors can come with participant enrollment issues. “(But) if a plan doesn’t have a default enrollment option, can an RIA really be responsible for a lack of engagement?” Winn asked.

The answer, clearly, is no.

The same is true with education as a non-fiduciary service, explained Winn. “More sponsors want help in this area of plan implementation, and more RIAs are claiming the ability to give it. That’s a non-fiduciary service for an RIA. They can’t make participants show up for meetings. Sponsors need to understand that RIAs are not liable for that.” 

Again, advisors need to be clear in what they can and can’t deliver. “It’s often the sponsor’s assumption that RIAs can and will do everything involved with the plan,” he said. 

Jim Sampson, managing principal at Rhode Island-based Cornerstone Retirement Advisors, said his firm’s agreements break services down to the “granular” level. 

“They spell out our fiduciary role in very specific terms,” said Sampson. 

Pure fiduciary issues, like the investment policy statement, selection of qualified default investments, portfolio modeling and recommendations on other service providers are all defined in the agreements. 

“We don’t see service agreements as a compliance nuisance. … The key is being able follow through with the services you say are going to provide.” 

“Service agreements are a differentiator with us, so long as we’re providing what we promise and backing the agreements up with service,” he said. 


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