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Regulators Have 401(k) Advisors in Their Sights

By Joan WarnerMiriam Rozen October 17, 2013

It’s been almost 15 months since Department of Labor rules took effect that required financial advisors who work with plans governed by the Employee Retirement Income Security Act, or ERISA, to disclose every penny of the fees they collect. That’s enough time for officials to get a sense of how compliance is going — and they’re far from thrilled. Lawyers and other experts say they expect the department to start cracking down on advisors who provide investment services to 401(k) retirement plans without adhering to the new regulations.

Phyllis Borzi, the DOL’s assistant secretary for the Employee Benefits Security Administration, told a conference of plan sponsors last month that many providers of defined-contribution plan services aren’t observing even the spirit of fee-disclosure regulations, let alone the letter. Some vendors do no more than give plan sponsors “a laundry list of services they may provide” and a range of fees for those services. “This wasn’t what we had in mind,” Borzi said.

What the DOL does have in mind is itemized disclosure that tells plan participants exactly what providers are being paid. The point, of course, is to highlight any possible conflicts of interest. And the rules go beyond disclosure. If advisors do collect fees from, say, mutual funds, they must either credit them to the plans they’re advising or offset them by reducing other charges.

The Labor Department has already shown that it can get tough. Last August, according to its website, it investigated USI Advisors, a firm in Glastonbury, Conn., alleging that the fiduciary had failed “to fully disclose” the 12b-1 fees it received from mutual funds in which it invested on behalf of ERISA plans. The department further alleged that the advisors didn’t “use those fees for the benefit of the plans.” USI Advisors paid $1.3 million to 13 pension plans to resolve the charges.

Financial advisors who provide services to qualified retirement plans or plan participants should review their compensation, their disclosure and the “fair value” of their services, says Fred Reish, a partner in the Los Angeles office of law firm Drinker Biddle & Reath. Reish leads a team of 10 lawyers nationwide who counsel financial advisors, 401(k) plan sponsors and administrators about regulatory issues. He encourages advisors to determine whether they qualify as fiduciaries under DOL regulations — and he acknowledges that that isn’t always easy. “In most cases, if they advise about 401(k)s at all, financial advisors do satisfy the DOL definition [of a] fiduciary,” he says.

Keep it Simple, Keep it Straight

The key to avoiding an investigation, Reish adds, is to make sure your compensation doesn’t change if you recommend one investment over another. The more level your fee structure, the better.

Ryan Glover, a financial advisor at Greensboro, N.C.-based Tarheel Advisors, takes that to heart. His firm, which manages $35 million in assets, 30% of which are in 401(k) plans. Glover’s way of dealing with the new regulations has

Ryan Glover
been to charge a flat 25 basis points to advise plans with no more than 150 participants. “We turn down all the stuff we get offered from wholesalers,” Glover says. He and his partner both worked for Merrill Lynch before launching their firm five years ago, and Glover says Tarheel Advisors’ approach to 401(k) fees is more straightforward than the wirehouse’s.

Financial advisors should keep comprehensive records of all services they provide to 401(k) plan administrators and participants, says Lynne McAuley. She is director of Fiduciary Doctors, a company with offices in Boston, Phoenix and Los Angeles that does regulatory consulting, and a former investigator for the EBSA. “They should track the time they need to take for each [thing] they do for their clients, so they can demonstrate their value when a DOL investigator asks,” McAuley says, adding, “I know this is a pain in the neck.”