Employers (and their retirement committees) have spent countless dollars and hours providing information to retirement plan participants about their investment choices and distribution options.
Some of this effort has been driven by regulatory mandates (such as fee disclosure under ERISA Section 408 and information on investment options under ERISA Section 404(c)). Other communication initiatives are based on employers’ genuine desire to help employees achieve financial security in retirement (such as more general investment and financial education).
Despite these well-intentioned (and costly) initiatives, there is a significant gap in efforts to protect employee savings. This gap results in employees being most vulnerable at a critical point in time: when they meet a distributable event (e.g., retirement or other termination of employment) from their retirement plan. After all, the distributable event is when financial advisors and brokers see the opportunity to transfer tens – or hundreds – of thousands of dollars into fee or commission generating products.
The casual observer might be forgiven for thinking that the new Department of Labor rules expanding the definition of “fiduciary” will close this gap. Indeed, the new DOL rules are intended to address practices that targeted participants taking plan distributions. After all, the new DOL rules specifically seek to impose some form of fiduciary responsibility on financial professionals who are advising participants on whether to take plan distributions and how to invest such distributions.
However, there are limits to what will be accomplished by the new DOL rules. At this point it is not clear when – or if – the new DOL rules will be fully implemented. Opponents of these new rules continue efforts to delay and modify the new rules in ways that weaken the protections provided to participants.
Indeed, the new DOL rules already contain a variety of concessions to financial advisors that serve to undermine the protections that could be provided to plan participants. Many of the concessions that effectively undermine participant protections are contained in the “Best Interest Contract Exemption” (“BICE”) created by the DOL.
• The BICE exemption permits the ongoing use of commission-based compensation; these commissions ensure that there is a significant risk that the advisor’s financial interests will impact the advice given to participants. No additional disclosure or contractual provisions (as required by the BICE exemption) can eliminate this inherent conflict.
• This same BICE allows advisors to limit their recommendations to proprietary products offered by their employers – and still be treated as acting in participants’ “best interests.”
In effect, advisors can recommend that participants take a plan distribution, limit their investment recommendations to their firms’ proprietary offerings, collect commission on such sales – and still be deemed to act in participants’ “best interests.”
For these (and other) reasons, employers must expect that participants with distributable events will continue to be subject to aggressive (if not downright predatory) sales practices. With this expectation, employers must grapple with whether and how they will act to protect participants. These are not challenges to be taken lightly.