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.
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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.
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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.
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