Small-plan sponsors hesitate on fee disclosure rule

Some financial advisers have begun to worry about their fiduciary liability as smaller plans decline to adjust for lower fees

Feb 10, 2013 @ 12:01 am

By Darla Mercado

A Labor Department regulation requiring plan service providers to unveil their costs and services to employers has presented larger- plan sponsors, or those with more than 1,000 workers, with the chance to make changes.

An estimated 80% of the plans reviewed by Towers Watson for benchmarking have had opportunities for improvement in the way of fee renegotiation for record keeping, investment changes or enhanced record-keeping services, according to Robyn Credico, defined-contribution practice leader at Towers Watson.

But for smaller employers, retirement plan advisers are realizing the mandated fee disclosure isn't leading to the bonanza of changes for which they had hoped. The hesitation by small-plan sponsors to take recommendations and make adjustments to their arrangements has led some financial advisers to worry about their fiduciary liability.

“For the most part, the record keepers [at large-plan sponsors] have been willing to change the investments offered,” Ms. Credico said.

She noted that those changes included seeking cheaper share classes.

“Employers are paying attention to the fees and negotiating if necessary,” Ms. Credico said.

But larger employers have the benefit of their sheer size. Service providers don't want to lose their business, and large-plan sponsors have resources that their smaller counterparts lack.

“For smaller companies, if you have an administrative assistant running the retirement plan, then I could see the reluctance [to change],” Ms. Credico said.


Indeed, on the small-plan front, advisers are seeing reluctance among plan sponsors who are in a position to reduce expenses by changing their plan design. Those employers cite the perceived administrative difficulty of changing service providers and share classes.

Others who are in bundled arrangements — in which one provider handles their investments, record keeping and plan administration — fear that if they opt for different providers, they will lose the convenience of having one company handle the plan's affairs.

“The two biggest objections are, "If the participants are paying for everything, then what's the harm of keeping things the way they are?' and, "We use that provider for payroll, so it's just easier,'” said Paula Friedman, vice president for qualified plans at Encore401(k), a division of McLean Asset Management Co.

Switching providers altogether, especially if it provided bundled services, can take six to eight weeks, she said.

Aside from the paperwork, employers need to be able to explain the changes to workers, and sometimes they need to update their plan design to improve matches and employee contributions, Ms. Friedman said.

Employers' reluctance to go to a cheaper structure has been enough to strain some relationships.

Peter Weitz, senior vice president for investments at Fusion Analytics Securities LLC, is rethinking his relationship with a plan sponsor who refuses to switch to institutional share classes, from retail, for a savings of 50 basis points.

“My argument to them is that they run a risk knowing that there is a cheaper alternative and they don't offer it,” Mr. Weitz said. “If they can't give me a compelling reason why they want to pay more for the same thing, I'm going to have a tough time being their adviser.”

On advisers' minds, particularly if they share fiduciary liability with plan sponsors under Section 3(21) of the Employee Retirement Income Security Act of 1974, is the fear that they will be held responsible for employers' contrary decisions.

A judgment call on plan investments isn't necessarily problematic, said attorney Bradford P. Campbell of Drinker Biddle & Reath LLP.

“If you recommend the ABC fund and the plan sponsor wants the DEF fund, then the adviser isn't liable for it, assuming the DEF fund is in the realm of prudence,” he said.

Cost is just one factor in deciding to change a plan's arrangements.

However, in cases where the employer goes against the adviser's counsel, advisers can protect themselves from liability by documenting the guidance they gave, Mr. Campbell said.

The situation is different if there is a clear fiduciary breach.

“If you knew the plan was committing a pure fiduciary breach, then you have the co-fiduciary liability to fix it,” Mr. Campbell said. “If you know the plan is committing prohibited transactions, then you need to report them to the authorities if you can't get them to change their ways.” Twitter: @darla_mercado


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