Adding protected lifetime income to an investment portfolio can improve the retirement security of many Americans. Providing fiduciary advisers with holistic tools and products can help them blend annuity- and investment-based income approaches more effectively. In this article, Milliman’s Michelle Richter explores the opportunities and challenges advisers face as the financial services industry moves toward supporting a fiduciary standard of advice in the annuity space.
Recently, a long-term Milliman client sold its family-owned business and sought assistance with purchasing annuities for plan participants in conjunction with the termination of its pension plan. The company was looking for a trusted partner to assist them with the process as well as fiduciary responsibilities. Milliman consultants Mary Leong and Katherine Warren discuss the challenge, solution, and outcome in this case study.
Monitoring the life status of pension plan participants and beneficiaries is an important fiduciary requirement. The inability to locate them can produce an administrative burden for plan sponsors. The latest DB Digest article, “Fiduciary responsibilities: Wanted dead or alive,” by Milliman’s Verna Brenner highlights three auditing strategies plan sponsors should consider to effectively track retirees.
In this case study, Milliman’s Katherine Smith discusses a comprehensive review the firm conducted of one organization’s 401(k) fiduciary processes. As a result, Milliman identified three specific areas where the plan administration and governance could improve: fee schedules, expense allocation, and fiduciary plan governance. The changes that were implemented enhanced the participant and plan sponsor experience and fiduciary best practices.
On June 8, 2016, the U.S. Department of Labor (DOL) final fiduciary rules became effective, but these new rules are not actually applicable until April 10, 2017. The final rules outline what advisers, financial institutions, and employers need to do to adhere to them. Daunting? Yes. Impossible? Maybe, but some believe the fiduciary rules have been a long time coming. The new rules require advisers and financial institutions to comply with and uphold the fiduciary standards surrounding ERISA when advising clients for a fee. This is significant, as it has the potential to impact how some advisers help their clients with retirement planning. Some advisers may decide to stop helping.
As participants become more and more responsible for their own retirement savings, employers are finding they need to turn to their retirement plan experts for help. A plan adviser who gives fiduciary advice receives compensation for the recommendation he or she makes, and usually the recommendation is based on the specific needs of the participant. The advice is given so that an action will be taken. The final rules clearly state this expert is a fiduciary and the recommendation made has to be in the best interest of the participant and not the pocketbook of the employer and or adviser.
Why is this so important? Because millions of participant dollars have been rolled into IRAs that have high fees and expenses associated with them. Participants don’t understand the fees, they don’t understand their investments, and often they lack the proper tools to help them make educated decisions. It bears asking the question, should an adviser make a recommendation to roll or transfer account balances to another plan or IRA, when a participant might be better off staying put? The answer could be yes, and employers may find that terminated employees are staying with them because it is a better financial decision.
How do advisers and employers feel about this? Many advisers are frustrated they will have to comply with the best interest contract exemption. It has several requirements, but it means advisers may need to modify or fine tune their current practices to satisfy the rules. Plan sponsors will have to take another look at their advisers and service providers and understand their fiduciary responsibilities. It’s important they confirm that any rollover assistance is administrative in nature and cannot be perceived as advice from non-fiduciary human resources (HR) staff or service providers. However, plan sponsors can now feel good knowing that the general education they offer to participants about plans and investments is acceptable; it does not mean they are providing investment advice or taking on additional fiduciary responsibility.
With all of this said, could the election results change, delay, or repeal the final fiduciary rules? There is speculation this could happen, which makes the financial services industry happy, but for those pushing for reform, very unhappy.
While the basic duties sound easy enough, a plethora of recent cases demonstrates the prudence of constant review of the retirement plan decision-making process. The recent U.S. Department of Labor (DOL) rule on fiduciary conflicts of interest expands the duty of a fiduciary detailed in ERISA 401(a)(1) to act solely in the interests of participants and beneficiaries. Similarly, rulings on the fiduciary duty of prudence centered on breaches that were due to failure to monitor.
In Tibble v. Edison, the lower courts found that the trustees offered no credible explanation for offering high-price mutual funds. While this was a breach of fiduciary duty, part of the case was dismissed because of a six-year statute of limitations. The Supreme Court found that the fiduciary duty to select a prudent investment does not end once that decision is made: “ERISA’s fiduciary duty is derived from the common law of trusts. As such, a trustee has a continuing duty … to monitor, and remove imprudent, trust investments.” Therefore, the six-year statute was only a starting point for the ongoing duty to monitor any fiduciary decision. This case was remanded back to the lower courts for review.
Enact procedural prudence. In each of the ERISA fiduciary cases, courts focused on “how” a decision was made. Did the fiduciaries document their decision and how they arrived at it? Deciding not to act is a decision. Document both decisions and the progression to an eventual decision. Did the fiduciaries seek expert advice when warranted? The courts are not looking for the right answer using the benefit of hindsight. They are looking for an answer that a prudent person familiar with the situation could have arrived at. When fiduciaries document a prudent decision-making process, unfavorable legal decisions should not become an issue.