by Betty Meredith, CFA, CFP®, CRC®
Betty Meredith, CFA, CFP®, CRC®, is InFRE’s director of education and research. Meredith oversees incorporation of research findings and best practices into InFRE’s certification study and professional continuing education programs to help professionals meet the retirement preparedness and income management needs of clients and employees. She has almost 30 years of experience in the financial services industry.
A couple of months ago, I went to the optometrist at the new Costco in Ann Arbor, Michigan, because my eyesight had changed so much I could tell it was time for new lenses. The doctor’s assistant used a diagnostic machine to take several pictures of each eye to form an initial prescription, so the doctor had a baseline scrip to fine-tune during the exam. Because of this, I spent less than 15 minutes with the doctor, and no changes needed to be made to the baseline prescription.
The optometrists at Costco are independent doctors who purchase their own equipment and agree to discount their services in exchange for Costco providing highly visible, endorsed access to customers. Using technology and employing lower-paid staff to provide the doctor with preliminary information, along with a steady stream of patients, keeps the exam fee at a reasonable level. Retirement planners can be doing the same in the employer-sponsored market. (See the December 2010 Journal column “It’s Time for a New Retirement Model for the Middle Market”¹ for more thoughts on how planners and software providers can apply standardized retirement profiles to the middle market.)
When the Department of Labor (DoL) published a final investment advice regulation² effective December 2011, it amended the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code) by exempting investment advisers who provide certain types of advice to participants of ERISA retirement savings plans from being considered as engaging in prohibited transactions. (A prohibited transaction under ERISA and the Code prevents self-dealing by fiduciaries of ERISA plans and conflicts of interest between plans and their fiduciaries.) With this new regulation, planners can now provide investment advice face-to-face to hundreds if not thousands of employees every year—even if the planner is compensated with fund commissions by assuming fiduciary responsibility and using annually certified/audited software that ensures objectivity. The next step needed—providing retirement planning advice in the workplace versus just investment advice—is now a realistic possibility.
History of Investment Advice in the Workplace
From their beginning, participant-directed retirement savings plans did not require plan fiduciaries to offer employees investment advice. Employers, therefore, stayed away from offering any kind of advice. For example, until the mid-1990s, merely labeling a mutual fund in a workshop or in print materials as “growth” or “balanced” was feared as giving advice! This led to a tremendous shortfall in the quality of education and guidance for employees.
Over the years it has been clarified that employers are responsible only for performing prudent due diligence on the selection and monitoring of an advice provider who has accepted fiduciary responsibility. The employer is not responsible for the outcomes of the advice provided.
To demonstrate how the new advice regulation has swung the pendulum to the opposite extreme, here is a timeline of the progression of investing advice for ERISA defined contribution plans. It is important to understand how things evolved as they are implicit in the regulations effective today.
Event: The DoL releases final 404(c)regs3 on investments in participant-directed plans. Plans were permitted to transfer responsibility for selecting among the investment options in a defined contribution plan to participants if:
- Participants actually direct the investment of their accounts
- The plan satisfied the requirements of the 404(c) regulations
Participants could materially affect the potential return on their account and the degree of risk; and
- Participants had the opportunity to invest in at least three options, change investments at least every three months, diversify within and among alternatives, and obtain sufficient information to make informed decisions about their plan options
Event: Many employers were not offering education programs or offered limited programs because of uncertainty regarding the extent to which the provision of investment-related information might have been considered the rendering of “investment advice,” resulting in fiduciary responsibility and potential liability in connection with participant-directed investments. Interpretive Bulletin 96-1 (IB 96-1)4 distinguished between education and advice as it related to plan information, general financial and investment information, asset allocation models, and interactive investment materials.
IB 96-1 made it clear that “designating a person to provide investment advice to participants would not, in and of itself, give rise to liability for losses resulting from the individual participant’s investment decisions,” providing a much needed safe harbor and clarification for plan sponsors. IB 96-1 made it clear, as with any selection of a service provider, that the plan fiduciary is still responsible for the prudent selection and periodic monitoring of the designated adviser. Fiduciaries must consider a service provider’s qualifications, quality of services offered, and reasonableness of fees. This bulletin also allowed the provision of “near advice”—asset allocation advice that was not fund specific.
Event: The Pension Welfare Benefit Administration issued Advisory Opinion 2001-09A5 in response to SunAmerica’s application for exemption to use an independent advice firm (Standard & Poor’s) to provide asset allocation advice using model portfolios. The advisory opinion stated that no exemption was necessary because it is not a prohibited transaction—an independent expert (not SunAmerica) was providing specific advice, and SunAmerica had no control over recommendations or communication to participants. SunAmerica, however, would retain the duty to prudently select and monitor the investment advice provider. It’s important to note here that advisory opinions do not have the force of law of an exemption; an exemption would end the issue of potential legal exposure once and for all.
Event: The Pension Protection Act (PPA) amended ERISA and the Code to add the statutory exemption needed to provide plan sponsors the protective clarity needed to allow “conflicted advice.”6 The DoL was tasked with writing the regulations that establish the prohibited transaction exemption. The PPA confirmed plan fiduciaries have a duty to prudently select and monitor an advisory program, but have no duty to monitor the specific advice provided or its results. The PPA also provided two new prohibited transaction exemptions allowing fund providers to charge for investment advice on their own funds.
Event: Final advice regulations7 are issued that state that all prior DoL advice interpretations, exemptions, regulations, or other guidance are still in effect. For a plan to qualify for the advice exemption, advice can be provided in two ways:
The adviser is paid on a “level fee” basis (compensation to the adviser does not vary depending on investment selected).
A computer model/software certified as unbiased by an independent expert is used.
The arrangement must also qualify as an “eligible investment advice arrangement,” which requires a fiduciary adviser to provide written notification of all fees or other compensation relating to advice. The requirements to meet the prohibited transaction exemption are detailed and extensive.
How Does This Facilitate Retirement Planning Advice in the Workplace?
“Enough about the assets,” says Michael Falk, CFA, CRC®, founder of MSF Asset Consulting and partner with Focus Consulting Group in Chicago. Falk was perhaps the pioneer in the 401(k) managed accounts arena when he published an article promoting the concept in the December 1998 issue of Employee Benefits Journal. “We need to go beyond the uncertainty of solely investment advice in the workplace and include things people have more control over, such as pre-retirement debt reduction, shrinking other fixed expenses, and working longer. Furthermore, today’s advice is too often limited to only providing counsel on the defined contribution assets pre-retirees have accumulated. For most pre-retirees—rightly or wrongly—their primary financial asset is Social Security; next is often their home equity. The choice to work longer—extending their human capital—is likely their most valuable option when it comes to improving their shot at retirement preparedness.”
At a recent conference on women and retirement, I asked DoL Assistant Secretary Phyllis Borzi if retirement planning advice in the workplace was on her radar, as the existing groundwork for using investment advice software easily can be applied to retirement planning software that helps people make informed decisions about when to stop working and when to take Social Security. She thoughtfully admitted it hadn’t occurred to her.
Retirement planning advice in the workplace is only a short jump from where we are now. Maybe FPA members who are interested in serving this market can join forces and work with FPA to lobby on behalf of qualified professionals who are willing to assume this important fiduciary responsibility. It’s time to provide retirement planning advice through software that objectively allocates product types for desired outcomes (annuities, long-term care, longevity insurance, and investments) versus just systematic withdrawals. The mid-market desperately needs advice to help make informed decisions about all the resources they have available for retirement.
- Seibert, Kevin S., and Betty Meredith. 2010. “It’s Time for a New Retirement Model for the Middle Market.” Journal of Financial Planning (December).
- U.S. Department of Labor. 2011. Fact Sheet: Final Rule to Increase Workers’ Access to High Quality Investment Advice. (October) www.dol.gov/ebsa/newsroom/factsheet/fsinvestmentadvicefinal.html#.UHIf0k1i7a8.
- U.S. Department of Labor. 1992. Final Regulation Regarding Participant Directed Individual Account Plans (ERISA Section 404(c) Plans) (October 13) [as posted on the Reish & Reicher law firm website, reish.com]. http://reish.com/pa/benefits/404cpream.cfm.
- U.S. Department of Labor. 1996. Interpretive Bulletin 96-1; Participant Investment Education; Final Rule. (June 11) www.dol.gov/ebsa/regs/fedreg/final/96_14093.htm.
- U.S. Department of Labor. 2001. Advisory Opinion 2001-09A. (December 14) www.dol.gov/ebsa/programs/ori/advisory2001/2001-09A.htm.
- Finalized in 2009.
- U.S Department of Labor. 2011. Fact Sheet: Final Rule to Increase Workers’ Access to High Quality Investment Advice. (October) www.dol.gov/ebsa/newsroom/factsheet/fsinvestmentadvicefinal.html#.UHIf0i7a8.