Guest blog by Robb Smith | Regional Director, Advisors Access

One of the truly bright spots in the retirement plan industry over the past couple of years has been the emergence of multiple employer plans (MEPs) as a viable retirement plan option for many small and mid-size companies. Where, in the past, MEPs were mainly available to firms affiliated with large associations and professional employer organizations (PEOs), the MEP concept in recent years has been expanded to include unrelated businesses of all types.

As background, most company-sponsored 401(k) plans in the U.S are “single-employer” plans, in which each plan sponsor is responsible for its own plan document, annual plan tax return (Form 5500), plan audits, choosing and monitoring plan investments and hiring plan service providers. All fiduciary responsibility (and, therefore, liability) falls to the plan sponsor and its fiduciaries.

When an employer chooses to join a MEP, they shift a substantial portion of fiduciary responsibility to a qualified, professional third-party. Why? Because no longer is the employer sponsoring its own plan; instead they are joining a plan that is setup and run by an experienced, professional third-party. In essence, the employer is opting to “lease” a plan instead of “owning” their own plan. This allows the adopting employer to release much of the day-to-day plan administration and fiduciary responsibility to competent, third-party plan professionals.

Not surprisingly, there are many detractors of multiple employer plans. One of the many beneficial aspects of a MEP is the potential for economies of scale obtained when hundreds – even thousands – of employers opt to join a MEP instead of managing their own plan. While each single-employer plan requires a separate recordkeeper, administrator and custodian for the plan, there is only one recordkeeper, administrator and custodian for the entire MEP, even though there may be thousands of adopting employers on the plan. This poses a real threat to plan service providers that see the increased popularity of MEPs as problematic to their long-established business models of offering services to individually sponsored single-employer plans.

One issue regarding MEPs that has received considerable attention of late is “commonality”. Opponents argue that the Department of Labor (DOL) may eventually disallow “open” multiple employer plans where the adopting employers have nothing in common. However, there is no indication that the DOL or the Internal Revenue Service have any plans to modify their existing stance on MEPs. In fact, at the Plan Advisor National Conference held earlier this fall, DOL representative Michael Davis stated that the DOL “has no public view” regarding MEPs. This is the only official statement made by the DOL or IRS regarding the commonality issue.

In his recent white paper entitled, “Open Multiple Employer Plans: Tax and ERISA Considerations,” nationally recognized ERISA and benefits attorney Fred Reish wrote: “There is no requirement in the (IRS) Code or any Treasury Regulation that employers participating in a MEP must be members of the same industry or otherwise have any kind of pre-existing relationship (commonality) with one another”.

Another prominent employee benefits lawyer, Robert J. Toth, Jr., wrote in an article entitled, “The Workings of the ‘Open’ Multiple Employer 401(k) Plan,” “The issue of ‘commonality’ regularly arises with regard to the discussion of a MEP. It is often mistakenly used to describe the incorrect notion that employers are required to have a ‘common employment bond’ before participating in an Open MEP.”

Reish concludes in his paper that, “Given the current state of the matter, it does not appear that there is a reason for employers that are considering participation in an open MEP to refrain from doing so...”. Reish also noted that not only are there no current DOL policy or enforcement agenda items targeting open MEPs, but there is also no reason to believe that the DOL will take an active role in restricting open MEPs in the future.

Small- and mid-sized plan sponsors concerned about mitigating their fiduciary and administrative responsibilities while looking to enhance their participants’ retirement income security are well advised to consider the benefits of joining a properly designed and professionally run MEP.

The U.S. Government Accountability Office (GAO) is not exactly the National Enquirer, so you probably won’t see its recent study on 401(k) plans on newsstands. But the report, titled “401(k) Plans: Improved Regulation Could Better Protect Participants from Conflicts of Interest,” does expose some interesting facts about which all fiduciaries need to be aware. While some may find these facts surprising, they are all too familiar to many of us on the front lines of the effort to improve 401(k) disclosure.

Among the findings:

1.       Biased Advice - Service providers sometimes guide plan sponsors and participants to investments that are in the service provider’s best interests, not the participants.

2.        Inappropriate “Education” – Under the guise of investor education, service providers often lead participants to investments that benefit the service provider, not the participant. While technically not considered advice, this “education” undoubtedly leads participants to select investments that benefit the provider and not the participant.

3.       Not all “advisors” are fiduciaries – Some service providers talk extensively about fiduciary issues, but structure their contracts to clearly disavow any responsibility to act solely in the best interests of plan participants.

4.       Fees are not transparent – Revenue-sharing arrangements can lead “advisors” to recommend investments or service providers that pay the advisor fees that are hidden from plan sponsors and participants.

5.       Pursuit of rollovers – Some “advisors” abuse their influence by persuading participants to roll assets out of a 401(k) plan into a service provider’s IRA product that ostensibly has higher fees, while the fees are not required to be disclosed to participants.

The report summarizes the impact of these obvious conflicts of interest by saying “If left unchecked, conflicts of interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker’s career.”

To its credit, the GAO was not satisfied with simply pointing out these conflicts of interest, going so far as to actually recommend specific actions by specific governmental agencies that could eliminate the conflicts:

·         Clarify the definition of “fiduciary” – The GAO endorses the efforts of the Department of Labor (DOL) to finalize regulations that would specify who is and who is not a fiduciary for the provision of investment advice. While the Wall Street lobby is aggressively fighting this one, the initiative seems to be moving forward.

·         Remove the “interim final” label from 408(b)2 – While resistance to full fee disclosure resulted in the effective date being pushed from July 16, 2011 to January 1, 2012, it appears that 408(b)2 is indeed poised to shed new light on fees in 2012 and beyond. (But I’ll believe it when I see it!)

·         Revise the definition of “investment education” – The DOL has finally caught on to Wall Street’s practice of “Class, please know that you should be diversified…and by the way, our shiny funds over here will help you do that…”, without any disclosure that those shiny funds just happen to pay the advisor more than other funds. The proposed changes would prohibit advisors from using their proprietary funds as examples when providing “education” and would require those “educators” to disclose their conflicts of interest.

·         Require better disclosure of conflicts of interest – Burying conflicts of interest in the fine print should no longer be acceptable. This proposed requirement would make those conflicts be clearly disclosed when advisors are discussing a participant’s investment options.

·         Stop abusive rollover tactics – While this proposed regulation would not necessarily end the unseemly practice of service providers convincing participants to roll their assets out of a plan and into an outside investment, it would at least require disclosure that the fees for doing so may be higher than those inside the plan.

It is refreshing to see that our Government Accountability Office (GAO) is taking its name seriously. The long-running, abusive practices of many service providers in the retirement plan industry are being exposed and accountability for fixing the problems has clearly been assigned.

For the future of retirement in America’s sake, let’s hope the DOL sticks to its guns and implements these proposed changes and holds retirement professionals to accountability.

The full, 80-page GAO report can be found here.

For years, many service providers to 401(k) plans have benefited from the vagaries of the 401(k) marketplace. Fees have not been required to be clearly disclosed. Plan sponsors were told there was “no cost” to run the plan. Salespeople have been allowed to call themselves “advisors.”

These vagaries have perpetuated because the volunteer committee members who run most corporate retirement plans have not understood them. These committee members are well-intentioned, but they have full-time, demanding (and better paying!) jobs. Therefore, these fiduciaries have relied on their service providers for direction. And since many – even most – of those providers are being compensated from the investments in the plan, the result has been the proverbial fox guarding the henhouse.

Better late than never, the Department of Labor (DOL) is stepping in. My last column focused on the new regulations from the DOL that will mandate transparency in retirement plan fees and expenses. This column addresses the next effort of the DOL, which is to clearly separate the salespeople from the true advisors by clarifying the regulatory definition of who is a fiduciary under ERISA.

To be considered a fiduciary under the current regulations, an advisor must meet five criteria:
1. The advisor must provide advice or recommendations
2. The advice must be given on a regular basis
3. The advisor is engaged pursuant to a mutual agreement or understanding
4. The advice serves as the primary basis for investment decisions for the plan
5. The advice is individualized to the needs of the plan

Obviously, that’s a very specific, limiting definition. This affords sales reps a great deal of wiggle room, allowing them to recommend investments to the plan which will compensate them (a clear conflict of interest) and still call themselves an “advisor” without being bound by the fiduciary standard of putting the interests of plan participants above their own self-interests. Unfortunately, that is far too often the case.

The proposed DOL regulation would throw out the five-part test and would hold anyone providing advice or recommendations to a fiduciary standard. The new regulation would also disqualify the following from claiming fiduciary status:

1. Any person who provides advice or recommendations in their capacity as a purchaser or seller of securities (i.e., a broker). In this case, the broker must notify the plan sponsor that the advice they are providing is not impartial and may actually be adverse to the best interests of participants.
2. Any provider that offers only investment education.
3. Any platform that is purely a menu from which the plan sponsor may choose.

The result of this regulation is that anyone who claims to offer objective advice to a retirement plan will have to accept their status as a plan fiduciary in writing. Not surprisingly, the 800-pound gorillas of the 401(k) marketplace are fighting this new regulation. They claim that the burden of having to disclose heretofore hidden compensation is burden enough and the requirement to act as a fiduciary and actually put the interests of plan participants ahead of their own interests is beyond their capability.

Some providers have gone so far as to say that they may have to exit the retirement plan business altogether. They argue that participants would then be harmed by a lack of advice.

But perhaps no advice is better than bad advice. As Assistant Labor Secretary Phyllis Borzi said of the proposed requirement: “If it gets rid of schlocky advice, that’s okay with me.”

Amen. 

Much has been written in the press lately about a seemingly novel idea:

The notion that 401(k) plan sponsors and participants should actually know how much they are paying!

After years of wrangling, and against staunch opposition from Wall Street, the Department of Labor (DOL) has finally issued the third and final step in a series of regulations aimed at ending the long-running ruse of hidden fees in 401(k) plans.

These regulations have taken the form of a three-step process:

Step One: The enhanced 5500 reporting for 2009 requires service providers to disclose to the IRS, and ostensibly to plan sponsors, the compensation received from retirement plans after the fact.

Step Two: Regulation 408(b)2, which will lose its current “final interim” label when it goes into effect July 16, 2011. This regulation will require service provider compensation to be disclosed to plan sponsors ahead of time.

Step Three: Last but not least, the just-issued “Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans” rule will require that those same fees and expenses be clearly disclosed to 401(k) participants. This regulation goes into effect for plans with year-ends after November 1, 2011.

All of this regulation is designed to mandate something that seems to be so integral to virtually every other business transaction:

Transparency.

When you buy a gallon of milk, you know that in return for your $3.89 you will receive 16 cups of milk. Even with the fairly convoluted process of buying a car, you ultimately know your “drive-it-off-the-lot” price. But for years, the vast majority of plan sponsors and participants have had no idea how much their 401(k) plans cost.

Now that fee transparency will be mandated, the great unknown is how plan sponsors and participants will respond to this newfound knowledge. Will plan sponsors and participants be appalled with the previously hidden fees and expenses once revealed in the clear light of day? Will they be motivated to make changes to reduce costs? Or, will they simply allow the ever-present inertia that plagues most plans to rule the day? Only time will tell.

But one thing is for sure. Independent, fee-only advisors will no longer have to compete on an uneven playing field. Going forward, plan sponsors will be able to compare service providers on a true apples-to-apples basis. And the ultimate beneficiary will be the 401(k) participants who depend on fiduciaries to truly act in participants’ best interests.