Large record keepers Fidelity, John Hancock and others expanding fiduciary duties

Some are willing to take on more responsibilities in areas such as investment product selection, IRA rollovers and even financial wellness

Jan 9, 2017 @ 3:52 pm

By Robert Steyer

Several large record keepers are expanding their fiduciary duties by providing more advice to defined contribution clients in response to the Department of Labor's conflict-of-interest rule that is slated to take effect in April.

They are willing to take on more responsibilities in areas such as investment product selection, IRA rollovers and even financial wellness. In many instances, what was considered education before the regulation will be considered advice and a fiduciary event by the Labor Department.

“We took a long hard look at this,” said Margaret McKenna, executive vice president of relationship management for Fidelity Investments, Boston. “Guidance is now advice. It's a big, bold change for our industry.”

(More: DOL fiduciary rule will trim 401(k) advisers' stable of record keepers, asset managers: study )

Record keepers have walked a tightrope between offering advice and providing education to sponsors and participants. The conflict-of-interest rule is designed to identify what the DOL views as distinctions between the two.

Company executives acknowledge that additional fiduciary responsibilities will carry additional risk, and they said they are prepared.

“The rule provides good guidance on how to comply,” said Patrick Murphy, the Boston-based president of John Hancock Retirement Plan Services. “If you comply, you can stay out of hot water.”

Empower Retirement is “accounting for the additional risk that fiduciary responsibilities bring,” said Edmund F. Murphy III, president of the Greenwood, Colo., company. “We will manage that risk through the implementation of prudent processes and careful management controls.”

Record keepers are adjusting practices to follow the new requirements, and executives interviewed said assuming fiduciary responsibilities based on the new rule won't add extra costs for clients.

Empower says that recommending advisers to plans or participants, rolling a participant's retirement assets in or out of a DC plan and discussing investment selections with participants will qualify as advice rather than education.

“Routine transactions will remain non-fiduciary,” said Mr. Murphy of Empower, citing examples such as participants contacting a call center to check loan balances or to request loans. Empower representatives who provide investment recommendations, including rollover recommendations, will be considered fiduciaries.

Mr. Murphy and other record-keeping executives were interviewed before Rep. Joe Wilson, R-S.C., introduced a bill Jan. 6 seeking to delay implementation of the fiduciary rule by two years.

Empower started contacting consultants, advisers and sponsors in the third quarter. It wrote to 35,000 sponsors describing differences between fiduciary advice and non-fiduciary education and offering a timetable for webinars and other information until the fiduciary rule takes effect.

“Some of our current activities will be viewed as advisory in nature,” said Empower's document, a copy of which was obtained independently by Pensions & Investments. Several subjects identified as advice — savings rates and financial wellness — are “subject to change, pending further DOL clarification,” the document noted.

(More: Fiduciary concern clients' No. 1 reason for hiring 401(k) advisers: study)

Fidelity has sent to 22,000 corporate DC plan clients a detailed document describing the choice between an advice/education service and an education-only service.

For the former, “all existing licensed (representative) interactions can continue” and “licensed reps can provide explicit recommendations,” said the document, also obtained independently by Pensions & Investments . For the latter, “licensed reps are not available,” while “unlicensed reps can provide fact-based descriptions.”

The Fidelity document also shows how the advice vs. education approaches differ for important issues affecting participants — enrollment, savings, market volatility, job change and pre-retirement planning.

To illustrate the nuances of the fiduciary rule, Ms. McKenna cited Fidelity's call-center activity after United Kingdom residents voted June 23 for the country to leave the European Union. The day after Brexit was one of the busiest days ever. “We said your 401(k) is a long-term investment,” she explained. “Stay the course. Don't panic.”

At the time, these call-center representatives' comments qualified as education. If the Brexit vote would have taken place after the fiduciary rule takes effect, “that becomes advice,” Ms. McKenna said.

Mr. Murphy of Empower said new clients must sign an agreement and existing clients will receive an updated agreement acknowledging Empower's fiduciary services.

Ms. McKenna said sponsors must sign a “short” contract amendment to select which Fidelity service they want.

However, John Hancock's Mr. Murphy said contract amendments aren't necessary. “We will continue providing the full range of services we have offered in the past and will not seek a contract change to confirm our role as fiduciaries,” he said.

“Asking sponsors to decide a la carte whether to continue providing fiduciary services as part of our overall offering would be a step backward,” he said. ”We think this is in the best interests of sponsors and participants, and also helps all parties comply with the fiduciary rule.”

Wells Fargo's record-keeping unit is taking on fiduciary responsibilities beyond providing investment advice, said Joe Ready, the Charlotte, N.C.-based executive vice president and director of Institutional Retirement and Trust. “If the sponsor hires us, we own it,” Mr. Ready said.

Wells Fargo will assume a fiduciary role in discussing with DC plan participants the role of Social Security and what age to take it; how much to defer annually in their accounts; how to hedge longevity risk; and how to determine the desired monthly income in retirement.

“Our expansion (of responsibilities) is a reflection of our mission,” Mr. Ready said. “The goal is better outcomes.”

While some major players are increasing their fiduciary roles, others are making few — if any — changes.

“We are not providing fiduciary advice for our record-keeping services, such as plan enrollment, investment selection or other in-plan activities,” Charles Nelson, CEO for retirement at Voya Financial Inc., Windsor, Conn., said in a prepared statement.


“Our existing model also does not change when providing in-plan advice through third parties,” Mr. Nelson added. “For those services, we will continue to act as a limited-purpose fiduciary according to the legal framework that existed prior to the new rule.”

One exception is an IRA rollover. “When handling such a request, our phone-based representatives will, in certain situations, act as a fiduciary,” Mr. Nelson added. “They will use the best-interest contract exemption with respect to IRA investment selections, evaluating product options and costs, and making prudent recommendations in the best interest of participants.”

Aon Hewitt, Lincolnshire, Ill., doesn't expect any fiduciary-rule impact. “We're not changing anything,” said Alison Borland, senior vice president and head of defined contribution. “Either you are providing education or you are providing advice.”

Ms. Borland's company provides advice through a separate service, Aon Hewitt Financial Advisors, a registered investment adviser subadvised by Financial Engines. The service is available for an additional cost.

Aon Hewitt avoids the issues affecting many record keepers that are reviewing their policies because it doesn't sell investment products and doesn't have an IRA rollover business. “We're not conflicted,” Ms. Borland said.

Schwab Retirement Plan Services doesn't expect much change in its record-keeping business, Mike Peterson, a spokesman, wrote in an e-mail. It continues to offer independent 401(k) advice through Morningstar and GuidedChoice, both of which are fiduciaries for the advice.

Participants can access the advice online or through a Schwab call-center representative, “who helps them complete the third-party advice process,” Mr. Peterson added. Schwab “does not act as a fiduciary in the delivery of the advice.”

Schwab also offers investment education services. “We are reviewing materials provided with those services to make sure they are consistent with the new rule's education exclusion,” Mr. Peterson said.

The fiduciary rule won't cause many changes in services to sponsor or participants, wrote Stephanie Napier, senior counsel, ERISA and fiduciary services, for Vanguard Group Inc., Malvern, Pa. “For participants, we will continue to make fiduciary investment advice available to those who want investment help from a fiduciary,” Ms. Napier said. “We will also continue to educate participants who contact our call centers.”

Robert Steyer is a reporter for InvestmentNews' sister publication Pensions&Investments.

This article has been updated to correct Schwab spokesman Mike Peterson's name.


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