How Plan Sponsors Select Advisors to help a company sponsoring their defined contribution (DC) plan like a 401k or 403b may get more complicated after the DOL conflict of interest rule goes into effect April 10 2017 according to an elite plan advisor. While the selection of vendors like advisors is a fiduciary act, there may be more scrutiny on the creation of the RFP questionnaire and its implementation as well as other elements of how plan sponsors select advisors.
Many advisor RFP questionnaires contain mostly subject questions which, while helpful, may not pass muster under the new DOL rule. In particular, the RFP should determine whether the advisor is able to act as a fiduciary and, if so, what type. The DOL rule broadens the definition of a fiduciary to the point that almost all advisors will have to either act in that capacity or work under an Best Interest Contract exemption provided under the new rule.
So three key questions in any advisor RFP should include:
- Will the advisor serve as a fiduciary?
- If so, what type of ERISA fiduciary – 3(21) or 3(38)?
- Does the advisor or an affiliate organization have any conflicts which would violate their fiduciary status?
Disclosure of conflicts will satisfy most conflicts under SEC rules but not so under ERISA and DOL rules. So the fact that the advisor may be an SEC fiduciary will not mean that they can serve as an ERISA fiduciary. One key issue is that ERISA fiduciary may not receive different levels of compensation depending on which investment they recommend.
3(21) fiduciaries make recommendations to plan sponsors who make the final decision while 3(38) fiduciaries make the decisions. While most plan sponsors will follow the recommendations of a 3(21) advisor, they may be willing to pay more for a 3(38) who takes on greater liability. Many advisors and firms are using an outsourced 3(38) services expected to grow as a result of the DOL rule.
Finally, plan sponsors cannot just trust responses to their advisor RFP – they must also verify to ensure that there are no conflicts by the advisor or affiliated organizations putting unprecedented scrutiny on how plan sponsors select advisors.
Just as selection and monitoring of the fees and services provided by record keepers and money managers is a fiduciary act, so is the selection and monitoring of an advisor. And just as the selection and review of providers is often delegated to a third party like an advisor, the use of an outside expert to conduct an advisor RFP is also prudent. There are third party services emerging and many CPAs, attorneys and TPAs can provide help.
