Bernadette Starzee, The Daily Record Newswire
The U.S. Department of Labor is cracking down on retirement plans that don't comply with fee restrictions and certain disclosure requirements.
In response to excessive fees charged by some vendors, the DOL in 2012 passed regulations that hold plan fiduciaries responsible for the cost and quality of retirement and profit-sharing plans. The DOL is now targeting plans that don't comply if fees associated with a company's 401(k) plan are deemed unreasonable or not properly disclosed, for instance and many plan administrators are unaware of their exposure.
"Unfortunately, most people who work on the plan don't realize they are fiduciaries and could be considered liable if the plan is sued or if the DOL fines the plan," said Evan Branfman, a financial adviser at Kuttin-Metis Wealth Management, an office of Ameriprise Financial.
A fiduciary exercises authority or discretionary control over management of the plan or disposition of its assets. Basically, anyone in the employer organization who touches the plan from those making the plan selection to those submitting the contributions could be on the hook, according to Branfman.
In Branfman's perfect plan, an employer would work with four service providers: the plan provider, a third-party administrator, a so-called 3(38) investment manager and a financial adviser such as himself.
"The role of the 3(38) investment manager is to take all the liability off the company to make the plan decisions, such as which provider and funds to work with," he said. "For all those people who have their hands in the plan the 3(38) will take it off their plate."
Many registered investment advisers and insurance agents can function as a 3(38) fiduciary. However, financial companies that sell proprietary funds cannot, as this would represent a conflict of interest.
By hiring a 3(38) investment manager, however, the employer wouldn't escape liability completely.
"There are two things you cannot be alleviated of: that you did due diligence in picking the right 3(38) and that the money gets [from employees' paychecks to the investments] in a timely fashion," said Charles Massimo, CEO of CJM Wealth Management.
However, some protection is better than none, and Massimo said employers are better off having a 3(38) fiduciary in their corner.
"In my opinion, in this day and age, with how hard the DOL is going after fiduciaries that breach their responsibility, it's a good idea for plan sponsors to have that protection in place," he said.
However, hiring a 3(38) investment manager adds cost, which is more of an issue for smaller plans, said Ronald Stair, president of Creative Plan Designs, a third-party administrator. If, for instance, an employer pays $20,000 for the services of a 3(38) provider, this fee will be absorbed better by a $100 million plan than a $1 million plan, he said.
In light of the added costs and limitations, Stair questions whether going with a 3(38) investment manager makes sense for many companies.
"The whole purpose of the 3(38) is, people think they're getting rid of their fiduciary liability, but you still have liability for your choice of 3(38)," he said. "Lawyers tend to go where the money is; if the 3(38) gets sued by 10 clients and its malpractice insurance doesn't cover it all, the lawyer may turn around and sue the plan sponsor."
When employers hand over liability to the 3(38) investment manager, they also cede control over investment decisions the "equivalent to saying 'do it for me,'" Massimo noted.
This lack of control may not sit well with employers that have the knowledge and manpower to take a more active role in the selection process. The alternative is a 3(21) investment manager, which gives advice but leaves the final decisions to the employer. Even in the case of 3(38) managers, however, employers do maintain some control in that they can fire the provider.
A financial adviser can work with employers to vet 3(38) providers, checking their track records and reputations, finding out how many plans they have worked on and who their clients are, and getting references, Branfman said.
A reasonableness assessment, or benchmark, should be performed on the employer's plan, to compare fees and fund selection to other local plan providers, he added. In these assessments, "we find most plans are 30 percent more expensive than they should be," Branfman said.
The plan should then be benchmarked on a regular basis going forward, and the financial adviser should work with the 3(38) investment manager to consistently renegotiate plan fees, he noted.
"If you have a good 3(38) provider, these plan fees can be renegotiated on regular basis, so the service doesn't have to cost you any more," Branfman said.
Published: Fri, Sep 12, 2014
