Updated January 2020
Retirement plan sponsors face a challenging legal and economic landscape in 2020. Regulation and litigation has increased dramatically over the past decade. While the Department of Labor’s fiduciary rule is now defunct, the SEC has adopted a best interest standard effective in 2020. While all qualified plan sponsors are fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA), legislative changes have made it confusing to determine which parties should share in that responsibility.
Since the vast majority of plan sponsors need to involve external plan managers in some capacity, it’s important to understand how financial professionals of different classes differ in what they bring to the table. Two major categories of professional assistants are available to sponsors. Broadly speaking, they can be grouped as investment brokers and retirement plan consultants.
Investment Brokers
Investment brokers, who collectively still advise many plan sponsors nationwide, play a relatively narrow role in managing retirement plans. Their focus, essentially, is limited to selecting the investments that optimize returns given the details of the plan itself. Under the best interest rule recently adopted by the SEC, any financial professional advising retirement plans and their retail investors would have to act in the best interest of the plan’s participants, at a level above that of the historical suitability standard, but would still not rise to the level of a fiduciary. This means that brokers who manage plan participants’ retirement accounts do not assume co-fiduciary responsibility with plan sponsors.
Fees
Another crucial feature of the broker-sponsor relationship is the fee structure. Fee-based (versus fee-only) compensation for retirement plan advisors is typically unique to brokers. Under this model, the trading of securities can be a source of income. In other words, a portion of the compensation is commission-based and variable based on the performance of the plan itself. This is potentially problematic in that investment brokers, who are exempt from fiduciary status , but now are legally obligated to look out for participants’ interests ahead of their own, may have greater potential for conflicts of interest. While this conflict of interest may or may not impact participants, a fee-based model leaves the possibility open. At a minimum, the conflict needs to be disclosed using specified language.
Retirement Plan Consultants
The scope of involvement with plan administration is much broader for retirement plan consultants. These financial professionals are considerably more specialized than investment brokers. In addition to sharing the same fund selection responsibilities taken on by brokers, consultants can also advise plan sponsors on how to maintain regulatory compliance, increase plan participation and minimize risk for participants. Consultants are co-fiduciaries by their legal status. They bear the same legal (and ethical) burden as plan sponsors to make sure that the best interests of participants are being served.
Fees
The compensation model used by retirement plan consultants is fee-only (rather than fee-based). This means that consultants are paid only for the services that they provide, not on commission from the sale of financial products. This structure helps ensure that there’s not a situation in which a consultant stands to benefit from anything contrary to the plan and the participant’s best interests.
Selecting a Retirement Plan Consultant
It can be difficult for a plan sponsor to stay on top of the various tasks of ERISA compliance, such as regular benchmarking and open communication with participants, that are required for a plan to legally achieve its goals. Instead of acting as a tool to improve the prospects of participants and make a company a better place to work, 401(k) and 403(b) offerings can become a liability in this environment.
Enlisting the help of a qualified retirement plan consultant, acting as a fiduciary and without conflict, can ensure that sponsors stay on the right side of the law and look more attractive to employees. PlanPILOT has been serving sponsors in this role since long before recent regulation and litigation made having a consultant essential. If you have concerns about how these changes might affect your business, you can contact us here.
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When “Conflict-Free” Isn’t Free From Conflicts Learn the potential conflicts of interest faced by retirement plan consulting firms, and the pitfalls associated with each conflict. |
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A consultant is very helpful person for any broker or dealer. and you shared very useful information with us about consulting. thanks a lot!
You made a valid point when you said that it’s a good idea to hire a retirement planning consultant in order to keep sponsors on the right side of the law. Retiring can be a complicated process, so it’s a good idea to work with a financial planning company that cares about your wellbeing. My uncle is getting ready to retire, so I’ll suggest that he find a retirement planning company that can give him the professional advice he needs.