Many defined contribution plan advisers join the advisory boards of record keepers and asset-manager providers they use. But do these board memberships create perceived conflicts in the eyes of the Department of Labor and 401(k) or 403(b) plan sponsors?
That's the situation one elite plan adviser I know found himself in during a DOL audit of a plan-sponsor client. The DOL examiner asked why the adviser, a retirement plan specialist, had not switched out funds provided by the Pacific Investment Management Co. after fund manager and co-founder Bill Gross departed and the firm's Total Return fund experienced massive redemptions. The examiner questioned whether it was a potential conflict of interest because the adviser was on the PIMCO advisory board.
The adviser claimed that participating on the PIMCO board, for which he was not paid, was a benefit to clients, as he had more access to the money manager. In fact, immediately following Bill Gross' departure, the adviser spent days on site at PIMCO's headquarters conducting due diligence and determined it was not in his client's best interest to exit the PIMCO fund. Hindsight proved him right but, regardless, he followed a prudent process.
Still, in the new fiduciary era where the Department of Labor and plan sponsors are looking at all actions of advisers to determine if there is a conflict of interest, participating on a provider's advisory board could be viewed as a conflict, whether real or not. Even if the position is unpaid, these meetings are often held at desirable locations where hotels, travel (sometimes first class), food and events are covered by the provider.
Would you blame DOL examiners and plan sponsors for questioning potential conflicts if an adviser is wined-and-dined at a five-star resort during an all-expense-paid trip at a desirable location that may also include a spouse?
Does that mean advisers should resign and not participate on provider advisory boards? I don't believe so. These meetings give providers insights into how to improve service and develop relevant new products. Advisers would also lose the ability to conduct due diligence and gain insights into what providers are doing, as well as develop relationships with home-office personnel they might not be able to meet otherwise.
Perhaps advisory board meetings should be conducted exclusively at a provider's home office and advisers, concerned about conflicts, might pay their own travel expenses. Or maybe they should disclose to clients the advisory boards on which they participate, as well as the arrangement and the benefits to clients. If the clients are uncomfortable, it might be prudent not to use those providers for those clients.
It seems that, given the limited potential of harm of belonging to an advisory board, disclosure should suffice.
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.