We’re settling in now. We’re living in a new Fiduciary Era now. We have been for a number of years.
Some have been quicker to realize it than others. Of course, the uncertain standing of the DOL’s now-vacated fiduciary rule led to much of the tentativeness we’ve seen.
As with all transitions, this one was subtle. It has been building for a number of years. Ten years ago, when I first started writing on this topic, it was an underappreciated subject.
This could be easily understood when many plan sponsors were more concerned with maintaining the viability of their core business, not in the arcane esoterica of their retirement plan.
Gradually, though, in thanks in large measure to Phyllis Borzi’s tenacity and John Oliver’s Nielson ratings, the sense of “fiduciary” evolved from a dreary wonkish subject to a term more broadly understood.
Still, for all the growing awareness, it had been hamstrung by uncertainty. Would the DOL ever finalize a rule? Would that rule survive? What would happen once the rule became vacated?
We’re all past that now. And, as I’ve said, things have settled down. We know where we stand, who’s on what side, and where the marketplace sees the issue. Welcome to the new Fiduciary Era.
As with all new eras, this one, too, has its imperatives. I call it the New Fiduciary Imperative.
It’s a relatively simple set of straight-forward guidelines that all 401(k) plan sponsors must commit to if they want to better control their fiduciary liability (see “A Fiduciary Focus: 5 Steps 401k Plan Sponsors Should Resolve to Take in 2019,” FiduciaryNews.com, January 2, 2019).
While the concept of a new Fiduciary Imperative may be relatively novel, the underlying tasks associated with it aren’t necessarily new.
The good news is leading-edge plan sponsors have been experimented them – honing them, if you will – for some time now. Many of these “steps” have been embraced by service providers, who now include them in their quiver of offerings.
It remains up to the 401(k) plan sponsor to recognize the need to move on from the old fiduciary paradigm to the new Fiduciary Era. If we ever get to a true universal 401(k) MEP, we’ll see this movement accelerate, as it will necessarily include broader outsourcing measures.
Why the 401(k) MEP and not the growing number of state-sponsored private company retirement plans?
For one thing, the 401(k) MEP is a long-established vehicle. Most of its kinks have been ironed out and those that aren’t are very clear. The state-sponsored initiatives lack the operational and compliance track record that would make them a viable outsourcing alternative. Perhaps in a few decades, but not today.
This outsourcing will place more responsibility in the hands of retirement industry professionals. We will continue to see the importance of the retirement benefit housed in the employer, but it will increasingly be limited to the matching contribution, not the particulars of the plan itself.
There’s little upside in a plan sponsor managing the particulars of the plan (which is why a universal 401(k) MEP is important), but the offer of the size, frequency, and availability of a company match will always exist as a unique differentiator from one company to another.
What else does this new Fiduciary Era entail? For one thing, and this shouldn’t surprise anyone, conflict-of-interest fees will be eliminated.
Actually, let me rephrase that. Current conflict-of-interest fee structures (i.e., 12b-1 fees, revenue sharing, and commissions) will diminish to the point where they will no longer exist.
But the financial industry isn’t dumb. They will create new fee structures that, while at first won’t appear to be conflict-of-interest fee structures, will nonetheless retain that same reality.
It’ll take us some time to discover what they really are, so don’t be afraid if you’re fooled at first. We will all be fooled at first.
So, say hello to the new Fiduciary Era. Get used to it. It will be with us for a while.