A few years after ERISA was enacted, the U.S. Supreme Court ruled in a case called Manhart that it was unlawful for pension plans to pay lower monthly benefits to women than to similarly-situated men simply because women on average lived longer. No one thinks that paying men and women with the same compensation and service and who are the same age, the same monthly benefit is an issue today. In fact, people would be shocked if you said that those men and women shouldn’t receive equal pension checks. However, back in the 1970’s, many benefits professionals said that such compliance would be the end of pension plans.
I think of this dispute every time I read arguments citing a report commissioned by financial services organizations finding that holding brokers to a fiduciary standard under new Department of Labor (DOL) regulations will make 30% of surveyed plan sponsors “at least somewhat likely” to just stop offering plans, and almost 50% of those without a plan less likely to adopt new plans. We are also hearing that brokers will become unwilling to provide advice to smaller accounts if a fiduciary standard is adopted.
President Obama has taken up the battle for greater broker accountability, and we may actually be seeing a re-proposal of 40 year old DOL regulations later this year. These regulations are currently being reviewed for release by the U.S. Office of Management and Budget (OMB.)
However, the opponents of a fiduciary standard are marshalling their support in Congress and criticizing the DOL’s re-proposal before actually knowing what is in it. Even if the DOL issues new regulations, it is possible that Congress will override them or force the DOL to wait until the Securities Exchange Commission (SEC) (which is also considering whether to increase broker responsibilities) acts. SEC Chair Mary Jo White has just announced her support for a uniform standard for brokers and advisors that puts the customer first, stating that the SEC will act on its own, but again, we don’t have any timetable or any assurance Congress won’t step in.
In short, we can’t count on any regulatory changes actually coming into effect any time soon. What does this mean for plan fiduciaries? If they are following best practices, new rules will probably be a non-event because they will already be getting their investment advice from ERISA fiduciaries. Here’s why:
- If company fiduciaries aren’t competent to make investment decisions without outside advice (and many will admit that they aren’t), shouldn’t they be getting advice from those who stand behind it and are required to put the plan’s interest first? Under the current DOL regulations, a broker can make general recommendations without becoming a fiduciary, and may put its own profit first, but is that the kind of advice responsible fiduciaries should seek?
- Nowadays, there are many advisers who will agree to be ERISA fiduciaries and who will assist plan committees in understanding and fulfilling their responsibilities, for example, by helping to develop investment policy statements and assisting in investment review. Plan committees don’t need action by a government authority in order to hire these professional fiduciaries and protect themselves. If they all did so, this debate would be moot for 401(k) plans (IRAs may be a different story) because non-fiduciaries wouldn’t be consulted.
- The industry has been referring to the commissioned survey finding that 30% of surveyed plan sponsors may drop their plans if the fiduciary standard goes into effect. But what question are these plan sponsors responding to? Did it ask them if they wanted additional protections, even if it cost a little more? Or, are they just being asked whether they want to pay more for the same advice? I note that AARP has released results of its own survey indicating that 89% of 401(k) sponsors favor imposing fiduciary duties on advisers, so obviously how you phrase your survey question matters. Do plan sponsors really want to have no recourse under ERISA if they receive bad or inappropriate advice? (For a truly cautionary tale about lack of broker accountability, see my post on “The Teflon Fiduciary”.)
Having said all of that, we might have new rules one day, and it will be hard for the investment advisory industry to change its business practices overnight. Any new rules should not be overbroad or unreasonable and perhaps they should have a delayed effective date. But are current providers really going to stop providing services to smaller plans? Looking back to Manhart and the case of womens’ pension checks, I am sure that if the industry has to adjust to new rules, it can and will do so, and plan sponsors will continue to maintain their plans, despite the alarmist talk that we are hearing now. I predict that there will be a lot of new fiduciary advisory services sprouting up.