[Editor's note: This is a corrected version of the original story.]

The U.S. Department of Labor’s fiduciary rule doesn’t give Joel Shapiro heartburn.

An attorney who specialized in the Employee Retirement Income Security Act in a previous life, Shapiro is now the senior vice president of ERISA compliance in the retirement division of NFP, the plan advisory arm of insurance and benefits brokerage NFP Corp.

“We’re comfortable taking on the fiduciary role because that has been the core of our business,” Shapiro told BenefitsPro.

That said, complying with the Labor Department rule will require additional work for NFP’s plan advisory team, which includes 100 plan consultants serving about 1,300 plans with assets totaling around $100 billion.

The new rule establishes that anyone providing investment advice, as defined by the regulation, to 401(k) plans with less than $50 million in assets will be acting in a fiduciary capacity, regardless of how advisors are compensated. Advisors will have to comply with the rule’s Best Interest Contract Exemption if they receive “conflicted compensation” in the form of commissions on the investments recommended to plans.

That will impact a small portion of NFP's client base. About 400 plans with $6 billion in assets are served under a commission-based model of compensation. They are typically small plans, said Shapiro. NFP services all plan sizes: Its largest plan has $5 billion in assets, he said.

NFP has been busy adjusting to the rule, even before it was finalized. In early April, the majority stake of NFP Advisor Services, the broker-dealer arm of NFP, was sold to private equity firm Stone Point Capital. That move came after insurance companies MetLife Inc. and American International Group Inc. sold their broker-dealer units.

Since then, NFP Retirement has added to its existing fiduciary capability, which it began building in 2006 with the acquisition of 401(k) Advisors.

In early June, it announced the acquisition of ERISA Fiduciary Advisors Inc., a Florida-based registered investment advisor plan specialist that Shapiro said was co-founded by a former ERISA attorney and has a reputation for a high “ethical” standard.

Away from broker-dealer model

The move to expand its fiduciary footprint with another regional capability is not coincidental to the Labor Department rule. “Clearly, the rule will drive a lot of plan business from the broker-dealer model to the RIA side,” said Shapiro, echoing the sentiments of most defined contribution stakeholders.

In order to comply with the rule, Shapiro did not say NFP was looking to terminate its relationships with smaller sponsors — he, and others, expect some broker-dealers to leave the small plan market.

Rather, NFP is working to determine which plans would be better served via an RIA fee-based model, and which would continue to be better served via a commission model. In an email correcting an earlier version of this story, an NFP representative said the firm has already determined that a handful of its smaller clients will work more seamlessly in the RIA fee-model. That means in those circumstances, the advice NFP gives will not trigger the BIC exemption, because the firm will not be compensated with commissions that the rule classifies as conflicted.

In order to continue advising plans best served under a commission-based model, Shapiro says plan advisors will need some assistance from recordkeepers.

For sponsors of small plans, typically with less than $10 million in assets, the brokerage model can be more efficient and easier to implement, explained Shapiro. That’s because plans that size sometimes don’t have the advantage of so-called ERISA budgets available to larger plans.

ERISA budgets are designed to capture revenue in excess of recordkeeping costs and investment management fees. Plan sponsors can use the excess revenue to pay for other plan costs, like RIA fees, legal fees, and third party administrative fees. An NFP representative clarified that revenue sharing can be used to offset plan costs, including advisory fees, when a plan is designed on a commission-based model of advisory revenue. ERISA budgets effectively offer a different, non-commissioned based form of compensation which plans can use to pay for advisory fees, according to the NFP representative.

NFP is hoping recordkeepers will facilitate the firm's effort to determine which compensation model best serves smaller plans. “If recordkeepers come up with compensation models for smaller plans, the way they have for larger sponsors, that would make that goal easier to achieve, and help assure small sponsors will get fiduciary services with more understandable fee structures," Shapiro said.

The Labor Department’s fiercest critics have said the so-called seller’s carve-out provision of the rule, which requires a fiduciary level of care for plans with less than $50 million in assets, will be expensive to comply with.

In the hands of the recordkeepers

Those costs will ultimately be passed on to sponsors and participants, and will expose plan advisors in the small and mid-size markets to extensive liabilities via potential class-action complaints. The combination of those unintended consequences will discourage advisors from serving smaller plans, and potentially even discourage small sponsors from offering 401(k)s, the critics of the Labor Department rule argue.

Shapiro isn’t quite in that camp. Like many stakeholders, he’s a supporter of the intention behind the rule, but has questions about its functionality.

“It remains to be seen what will happen,” he said. “There is the chance advisors will leave the small plan market, and complying with the rule may very well drive up the cost of delivering service, which will get passed off somewhere. But will we see complete underservice of the $50 million and under market — I do not think that will happen.”

Ultimately, recordkeepers’ ability to design options for small plans as they have for larger plans — with the ability to create clear, compliant and reasonably costing revenue-sharing agreements — will determine how advisors compete for scale among the small plan market.

That should be achievable, and won’t take a “revolution” in thinking on the part of recordkeepers. “I anticipate recordkeepers are aware of this need,” said Shapiro.

“It’s obviously in their best interest to make current arrangements with small plans and advisors that work under the new rule,” he added.

Transamerica, recordkeeper to more than 25,000 defined contribution plans with over $152 billion in assets under administration, has an ERISA budget-type program in place for small plans, noted Shapiro.

It allows smaller plans the flexibility of using revenue-sharing agreements to credit the sponsor, and can apply level recordkeeping fees across the plan to ensure one participant isn’t paying more for plan services than another.

“The fact that one recordkeeper has that type of plan in place proves that the capability exists for other recordkeepers, and that it’s economically feasible to provide,” said Shapiro.

Instant Insights /

Post DOL fiduciary rule, recordkeepers are key to moving small plans to fee-based model

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