Plan fiduciaries have a duty to prudently select and monitor their plan advisor just as with their record keeper, TPA and investments. With the new DOL conflict of interest rule set to become effective April 10, 2017 which will change the relationship between the plan and advisor, it can provide a good opportunity to re-evaluate the relationship. On the other hand, ignoring the issue may give rise to heightened legal exposure courtesy of the new rule.
The DOL rule is intended to ensure that advisors act in the best interest of their client by avoiding conflicts of interest. While many 401k and 403b plan advisors already sign on as co-fiduciaries, the new rule with a much broader definition of fiduciary will practically require all advisors to either become co-fiduciaries, have clients sign an exemption (Best Interest Contract Exemption or BICE), or partner with a 3rd party fiduciary.
So though more advisors are going to have to sign on as a fiduciary, which used to be a good way for plan sponsors to distinguish them, there’s a simple way to further distinguish advisors under the new DOL rule. Just ask if their compensation is level meaning no matter which investments they recommend, their compensation is the same. Advisors working under a BICE or using 3rd parties may not have to levelize their fees meaning they may have an incentive to recommend investments that generate higher commissions that may not be in the best interest of their client.
Brad Campbell an ERISA attorney with Drinker Biddle and a former DOL official who used to be in charge of enforcement of ERISA plans cautions that the new rule is ambiguous and that, “…it’s going to be a field day for the plaintiffs’ bar to bring lawsuits against financial institutions—and potentially against plans, with plaintiffs asserting that a plan sponsor played a role in enabling the financial institution to do the things they say were wrong.”
The best protection is to have a documented prudent process to select a plan advisor and an ongoing process to monitor them even if they are the CEO’s son-in-law or college roommate. Because if you are a plan fiduciary, you will be held accountable with personal assets at risk. Need help? Go to 401kTV’s Electronic Plan Advisor Due Diligence Service or ePADD.
