A labour of love
This is a busy time for pension fund professionals in the US as they try to figure out the impact of new rules issued by the department of labor (DoL) on fee disclosure and fiduciary responsibility. Changes are likely to occur soon for plan sponsors, providers, investment managers, brokers, and advisers of 401(k)s and other defined contribution plans, which reached a record $4trn (€2.8trn) in total assets and 82m participants at the end of 2010, according to Plan Sponsor.
But there is plenty of uncertainty: the deadline for implementing the new rules has been postponed more than once - now effective at the beginning of 2012 - and the definition of who holds fiduciary responsibility still has not been finalised. Despite this, some players sense an opportunity to enter a market so far dominated by companies such as Fidelity Investments, Vanguard and Aon Hewitt.
Employers are supposed to act as a fiduciary when running a retirement plan: they must put their employees' interests first in designing the plan and ensure that costs are ‘reasonable'. Also, retirement advisers have fiduciary responsibility in that they should put the best interest of a client ahead of all else.
But the DoL says there is much room for improvement. "In recent years, non-fiduciary service providers such as consultants, appraisers and other advisers have abused their relationship with plans by recommending investments in exchange for undisclosed kickbacks from investment providers, engaging in bid-rigging, misleading plan fiduciaries about the nature and risks associated with plans' investments, and by giving biased, incompetent and unreliable valuation opinions," the DoL has written.
Therefore, the DoL has lowered the threshold to define a party - for example a plan provider or broker - as a fiduciary, while asking plan providers to disclose all their fees to plan sponsors, and plan sponsors to disclose all fees to their plan participants. The desired effect is that both sponsors and participants are more aware of the costs of their 401(k)s and, if the costs are not ‘reasonable' or are comparatively expensive, change provider.
According to BrightScope, which tracks retirement plan performance and costs, the average 401(k)'s total costs can range from as little as 20bps of assets for the largest plans to as much as 5% for smaller plans - a key driver of cost is proprietary actively managed funds on the platforms of the big 401(k) providers.
The new rules could make the teaming up of networks of registered investment advisors (RIAs) - who are already fiduciaries - with 401(k) platform providers, such as Lincoln Trust and Aspire Financial Services, a more popular alternative. Charles Schwab, the brokerage and banking company, is thinking of doing this, says a recent Reuters story. Schwab will offer ultra-low cost passive vehicles - index funds and exchange traded funds - with all major asset classes represented, combined with advice by an independent partner. Schwab's 401(k) will start at the beginning of next year and will cost investors no more than 60bps on managed assets all-in, which is significantly lower than average, according to Jim McCool, executive vice-president of institutional services at Schwab.
To be competitive with RIAs, large networks of financial advisers are rethinking their strategies. Under the new DoL rules, any kind of retirement advice - even one-off - implies a fiduciary obligation and cannot be provided by pure brokers. So the Bank of America/Merrill Lynch plans to make some of its brokers assume the role of fiduciaries in order to be able to keep working with corporate retirement plans.
Finally, the new fee disclosure rules put small and mid-size companies that sponsor 401(k) plans under more pressure - if they do not fulfil the fiduciary obligation of determining that costs are ‘reasonable' and make the appropriate changes, including changing providers, they risk being sued by participants.