Q&A with C. Frederick Reish: Regulations, sponsors favor experts

Compliance considerations with larger plans give experienced 401(k) teams an advantage

Mar 3, 2013 @ 12:01 am

By Darla Mercado

A 40-year veteran of the retirement plan industry and an ERISA attorney, C. Frederick Reish has played a pivotal role in preparing broker-dealers, investment managers and insurers for the latest onslaught of regulations from the Labor Department. He has represented plans and fiduciaries before the Internal Revenue Service and the DOL, and he consults with broker-dealers and registered investment advisers on litigation involving the Employee Retirement Income Security Act of 1974.

At Drinker Biddle & Reath LLP, Mr. Reish is a partner in the firm's employee benefits and executive compensation practice group, and chairman of the firm's financial services ERISA team. Prior to joining the firm, he had his own practice, Reish & Reicher PC, which also specialized in ERISA law and fiduciary litigation.

Mr. Reish, 68, regularly hosts webcasts and speaks at conferences on upcoming DOL regulations and the best way to prepare for compliance. He is also an author of numerous articles and white papers on the matter, including most recently “Providing Guaranteed Lifetime Income Benefits; Managing Fiduciary Responsibility.”

InvestmentNews: What do the business prospects look like for advisers who are hoping to get into the 401(k) business this year, especially considering the Labor Department's fee disclosure rules and upcoming fiduciary re-proposal?

Mr. Reish: I think it will continue to be an opportunity, but it's getting more difficult. A large number of the plans that advisers work on are very small — maybe from a few hundred thousand to $3 million in assets. In that case, they might have an existing relationship in which the adviser is serving as an insurance broker. These plans are mainly for small-business owners who want to rely on someone they know and trust.

But as plans get larger, plan sponsors are looking for more expertise.

I think we'll see more teams and firms that are focused on retirement plans taking a larger percentage of business in 401(k) plans with $10 million in assets and up. The opportunity for advisers wanting to break into that part of the business is to become a junior member of one of those teams or organizations. Plan sponsors are looking for more-focused advisers, and it's difficult in that mid to large market to say you'll advise if you don't have the credentials to show you're an experienced 401(k) adviser.

What's even more complicated is 408(b)(2) compliance — the fee disclosure that service providers must make to plan sponsors. That's not easy if you've never done it before. I also think you have to talk intelligently about participant fee disclosure with plan sponsors. As the whole area becomes more regulated, it's more difficult to enter, and there are greater barriers to entry if you're acting alone. The opportunity to accumulate and live off of your retirement funds is more of a protected right, even though the burden is on the participant to save enough. It's a major social issue.

InvestmentNews: Where are advisers who are new to the business most likely to go wrong, particularly in the area of compliance?

Mr. Reish: Say the adviser doesn't understand the fiduciary rules and the concept of being a functional fiduciary. In other words, if you meet the definition of being a provider of fiduciary advice — even if you don't say you're a fiduciary — if you meet that definition, you're a fiduciary.

Two things happen. One, you have to be a good fiduciary, meaning you have to give prudent retirement advice to the plan. Retirement plans are governed by more balanced investment principles, like modern portfolio theory and not speculation. You have to understand the “prudent man” rule in context of the plan [that a fiduciary must act “with the care, skill, prudence and diligence under the circumstances then prevailing with which a prudent man acting in a like capacity” would act].

The second thing results from fiduciary status: prohibited-transaction rules. Fiduciaries need to have level income, and they can't raise it based on the advice they give. If I'm a fiduciary adviser and I recommend that you invest in a group of expensive mutual funds that pay me a lot of money, then that's a prohibited transaction. But if I say I'll give you advice for $25,000 a year, then my compensation is level, no matter what advice I give. As a new adviser, you may not appreciate the subtleties of level and variable compensation.

In the near future, it may be even more difficult for the new person entering the business because of the possible expansion of the definition of “fiduciary” in the proposed regulation. We expect it from the DOL in July.

InvestmentNews: What regulatory developments should financial advisers watch out for in the upcoming year?

Mr. Reish: Two things will accompany the re-proposed fiduciary regulation. One, there could possibly be a proposed guidance on capturing rollovers, which could be expanded to go beyond just fiduciary advisers. The second is a series of prohibited-transaction exemptions, where the DOL may think that with the protections built into the system, certain kinds of transactions with adequate disclosures can be consummated even if they otherwise would be prohibited transactions.

In an advisory opinion, the DOL said that because the plan fiduciary has so much control over the plan, when they talk to participants about rollovers, they will unduly sway the participants; therefore, any of that guidance is suspect. Fiduciary advisers can't capture rollovers, so that guidance is really threatening. But I think you can design a program that deals with the DOL's concern of undue influence and provide education, but not necessarily give advice.

There is a three-legged stool for capturing rollovers: You explain the program, provide information about the advantages of rolling over into different IRAs or leaving the money in the plan, and you answer basic questions about rollovers in a nonbiased way. If you go to the participants [to solicit rollovers], and you're a fiduciary, then that's dangerous. But if you provide them with information and they acknowledge when they come to you that they weren't swayed by your fiduciary status, and that they wanted to work with you, then I think you can put together a package that works with the concerns the DOL has expressed.

InvestmentNews: What do you think the DOL's enforcement priorities will be this year as they pertain to advisers working with plans?

Mr. Reish: The DOL has been investigating RIAs who provide consulting and advisory services to plans for a number of years. That's expanding. In the past few years, they've begun investigating broker-dealers, and broker-dealers often have RIA programs and nonfiduciary investment consulting services. The investigation itself focuses on nonfiduciary and fiduciary recommendations and services.

Where the DOL is discovering problems is in situations where the adviser is serving as a fiduciary and receiving compensation that is above and beyond the advisory fee. There are all kinds of ways to receive variable compensation, including 12(b)-1 fees, revenue sharing at the broker-dealer level and payments from custodians. Service providers are paying each other, and all that has to be turned off if you want level compensation — or it has to be offset so that even after the payment, the compensation is still level. There are people who don't understand how deeply you need to get this. It's these little add-on payments that the investment community views as minor, but from a fiduciary perspective, they are prohibited.


There will be a heightened focus on fiduciaries: Under ERISA law, the DOL has a little bit of control over service providers via 408(b)(2), but they have enormous jurisdiction over fiduciaries. It's also natural that when viewed that way, the DOL would try to label as many people as possible as fiduciaries. I think the activities of service providers will continue to be more heavily regulated, and their activities in more cases will be considered fiduciary activities, and more service pro-viders will step up and say they're fiduciaries in certain cases.

Some examples of that include seeing more retirement-plan-focused RIAs marketing ERISA 3(38) discretionary-management services, as well as small-plan providers' going to national and regional RIAs, and signing them on. In that case, advisers who can't be a fiduciary will sell the package, and the RIA can be part of it, providing advice and helping the plan sponsor choose investments, while the individual adviser continues to be a quarterback.

We also are seeing third-party administrators that do compliance work and testing for plans sign on as fiduciaries to determine whether participants are qualified for distributions, and whether participant loans and hardship withdrawals should be granted. Third-party administrators are taking some of that day-to-day-operations work and signing on as a fiduciary to the plan.


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