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Now that the Election is Over: What’s Next for Retirement Plans?

November 11, 2012

By Joseph Potosky

Now that the election is over, most professionals are figuring out what the impact will be on their respective industries.  In the employee benefit world it is clear that Health Care Reform will move forward.  While there is much that needs to be done before full implementation in 2014, all of the political/judicial impediments that looked so daunting at the beginning of the year have been removed.

What has gone largely unnoticed is the significant impact the election will have on the way retirement plans are sold and serviced.

During the past couple of years, the Department of Labor announced three distinct pieces of regulations designed to further consumer rights and define retirement plan responsibilities; the 408(b)(2) disclosure regulations to plan sponsors by the vendors who service their plans, the 404(a)(5) disclosures to plan participants and the fiduciary advisor regulations.  While the first two rule processes were fully implemented last year, the fiduciary advisor regulations were pulled as a result of bipartisan resistance over the broad nature of the regulations.

There is no doubt that in early 2013 the Department of Labor will re-propose their “fiduciary advisor” rules.   With the Obama reelection and the champion of Consumer Financial Protection, Elizabeth Warren, in the Senate, there is no doubt that this regulatory change will happen.  The bigger question is what it will mean to financial professionals and the retirement plan distribution system.

Under the current rules in order to be a retirement plan fiduciary a service provider must provide advice on a regular basis which will serve as a primary basis for investment decisions.  The proposed regulation dropped the regular basis requirement and set the rule that any advice which may be considered in making an investment decision would make an advisor a fiduciary.  The net result of this language is clear…any person who is paid a fee by a retirement plan and at any point in time makes an investment recommendation of any kind to either the plan or a participant and in any manner automatically would become a plan fiduciary.

A large majority of retirement plans are serviced by registered representatives of broker dealers who are not fiduciaries. These representatives, such as insurance agents or stock brokers, can still provide service to retirement plans and not be a fiduciary by hiring private investment fiduciaries to select plan investments and by following investment education procedures outlined in interpretive bulletin 29 CFR 2509.96-1.    However, the oversight of this arrangement will necessarily be a nightmare for most Broker Dealers.  With multiple retirement plan platforms requiring investment selection support and employees needing investment education, the ability for a Broker Dealer to ensure that their registered representatives are not providing any advice which may be part of any investment decision will be almost impossible.

As a result, this regulation strikes directly at the heart of the business model run by most Broker Dealers.  Retirement plans require a large amount of work to support and do not provide a huge amount of revenue to the servicing agents or brokers.  The huge benefit and payout on a retirement plan is the opportunity it provides for rollovers and cross-selling of other financial products; however, these additional sales opportunities introduce the possibility of an implied fiduciary relationship.  Take away these cross-selling opportunities and the regulatory oversight nightmare of a 401k make them a very bad option for most broker dealers.

This changing landscape will require a major change in philosophy and approach in the financial services industry.  Either Broker/Dealers will have to accept some fiduciary responsibility for their representative’s activities or their advisors will have to adjust their business model and relationships to accommodate these rules.  A broker/dealer change, outsourcing fiduciary responsibilities, a joint venturing with plan fiduciary providers are a few of the options a plan advisor may consider when addressing this changing environment.

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