New regs leave 401(k) biz 'wide open' for advisers

Heightened scrutiny seen as a foot in the door; some drawbacks, too

By Darla Mercado

Jan 28, 2013 @ 3:11 pm (Updated 3:26 pm) EST

401(k), adviser, registered rep

When it comes to retirement plans, more-stringent regulations could turn out to be a blessing in disguise for financial advisers.

The Labor Department released tougher rules for fee disclosure last summer and is expected to release a re-proposed broader definition of “fiduciary” in the spring. While those two actions have plan sponsors asking advisers some tough questions — typically, about costs and standards of care — the new regs also present advisers a chance to win business, according to a recent white paper from Broadridge Financial Solutions Inc.

“The main point is that opportunity to the advisers is wide open,” said Cynthia B. Dash, chief operating officer at Matrix Financial Solutions Inc., a subsidiary of Broadridge. Matrix provides custody and trading services to banks, record keepers and registered investment advisers.

Indeed, increased focus from the Labor Department on fee disclosure and fiduciary duty has left plan sponsors searching for specialist advisers who can help them comprehend the rules and meet their obligations. More of those small-business owners are demanding that advisers act as fiduciaries, according to the report.

The Employee Retirement Income Security Act of 1974 outlines three different types of fiduciary: a 3(16) plan administrator who handles the day-to-day business of the plan, a 3(21) adviser who shares fiduciary duties with the plan sponsor, and a 3(38) investment manager who has the responsibility of selecting and monitoring the plan's investment options.

“From our standpoint, there is always an opportunity to come in, meet with the client and bring in the value-add of a conflict-free lineup and advice,” Ms. Dash said.

Such opportunities come with plenty of risks, however.

Taking on an additional fiduciary entails extra work, requiring an adviser to act in a participant's best interests, follow the plan document's terms, diversify investments and ensure that costs are reasonable, according to Broadridge's report.

The fiduciary tag also brings liabilities. A breach of those duties could require advisers to restore plan losses, return any ill-gotten gains and pay the costs related to fixing errors. Advisers seeking to be 401(k) fiduciaries also need to be bonded and should have sufficient insurance — via a rider on their errors-and-omissions policy — to cover the risk of a suit stemming from a fiduciary breach.

Further, an adviser can inadvertently assume fiduciary status due to certain actions, such as providing advice on which investments to add to a plan.

An adviser wading into 401(k) plans as a fiduciary likely will need to rethink their compensation. Fiduciaries can charge a fee for their service. As far as providing advice to participants, advisers also can receive level compensation, regardless of which investments workers choose, or they can use a computer model that's been vetted under Labor Department standards, according to the paper.

Still, there is room in the retirement space for insurance agents or registered reps who are otherwise not permitted to act as fiduciaries. Rather than provide fiduciary services — including financial advice or authority over the assets — they can work on educating plan participants about their investments and offer tools that can model investment scenarios based on employees' risk tolerance, according to the paper.

These reps can also help boost participant enrollment and aid with searches for new vendors.

Ms. Dash noted that even in that scenario, agents and brokers need to make fee transparency the prime feature of what they offer.

“If they focus on transparency and the lineup by offering educational services, then that will lead to greater retirement savings,” she said. “They'll be in the same wheelhouse as the financial adviser and not at a disadvantage.”