Advisors to defined contribution plans are carrying more liability than brokers and advisors in the retail space during the transition period for the Labor Department’s fiduciary rule, according to analysts at Broadridge Financial Solutions, which provides communication services for 21 of the 25 largest plan record-keepers.
“The reality is as a (plan) advisor, if you have a conflict related to either proprietary product, forms of compensation, or limitations of access to products that you offer your clients, you need to be affirmatively disclosing those conflicts to your client now,” said Andrew Besheer, a project leader for Broadridge’s DOL Fiduciary Rule Solutions program, during a webinar hosted by the firm.
The rule’s Best Interest Contract Exemption, and other prohibited transaction exemptions, are scheduled to go into effect on January 1, 2018, meaning brokers and advisors in the retail market can receive commission-based compensation until then without incurring liability.
But the rule’s impartial conduct standards, which have been applicable since June 9, require that all investment advice on qualified retirement accounts must be in the best interest of investors.
Besheer says that means plan advisors should take every precaution necessary to protect themselves when handling plan assets, particularly if they are advising on rollovers.
“You need to be able to document that (the conflicts) going forward and to show you are making the effort to comply with the rule,” Besheer said, noting that the Labor Department has said it won’t enforce in a “punitive sense” the rule for advisors that are making the effort to comply. “You want to show you are making that effort,” said Besheer.
While the Labor Department may not be focused on enforcement action in the near term, “there is nothing they can do to prevent the plaintiffs bar from taking their own enforcement action,” said Besheer.
“Plan advisors are the ones who are most exposed to that in the period between now and January 1,” he added.
He says plan advisors need to document the changes they have made to non-compliant plans since June 9.
Plan specialists being inundated
Existing fiduciary plan specialists are already being inundated with new business as a result of the rule, an outcome many industry experts foresaw when the rule was finalized in 2016.
Jared Faltys, a partner in Nebraska-based Retirement Plan Consultants, which advises on $2 billion of small plan assets, said his business has grown 20 percent since the beginning of this year.
According to Faltys, demand for plan benchmarking services has increased under the rule, even among micro plans with as little as $1 million in assets.
Because of the spike in demand for plan specialists, questions are emerging as to whether or not they will have the capacity to take on new business under the rule, said Sarah Simoneaux, a partner with Simoneaux and Stroud Consulting Services, which advises financial services firms.
“If you are working with a (plan) specialist, watch out for capacity,” she said. According to Simoneaux, broker-dealers have been effective at creating new models that assure affiliated brokers advising on plans are in compliance.
Broker-dealers are taking different approaches. Some are limiting the number of record-keepers that affiliated brokers can work with, “as a way of controlling the flow of information,” said Simoneaux. Others are requiring plan specialist fiduciary designations in order to work with plans.
Simoneaux underscored the increased need for sponsors to issue request for proposals under the rule. “RFPs have become a best practice, even though not required under ERISA.”
She recommends that plan advisor specialists suggest to existing clients that they put out a new RFP every three to five years. “If you are already providing value you will come out on top.” Along with benchmarking plan fees, recommending RFPs will help inoculate advisors from potential litigation, she said.
Broadridge’s Besheer underscored the need for advisors to focus on process and documentation. “Creating a repeatable process, documenting it, following it, and documenting you followed it on a client-by-client basis” will be necessary to stay compliant under the rule, he said.
While many in industry are expecting changes to the exemptions that become applicable the first of next year, the advisable course of action is to begin preparing for full compliance with the rule now, said Corey Fiedler, vice president of product management at Broadridge.
“You need to engage now for January 1 in order to integrate new processes into workflows,” said Fiedler. Broadridge’s clients are looking to launch new practices in October, in order to train brokers and advisors in time for the January 1 deadline, she said.