|
Tags: fiduciaries | regulation | retirement plans | sec AdvisorOne earlier this week reported on how section 408(g) of the Employee Retirement Income Security Act (ERISA) Pension Protection Act (PPA), a recent addition to ERISA, might exonerate broker-dealer reps who advise on IRA accounts of all fiduciary liability by employing a computer model to help plan participants make investments. This Website Is For Financial Professionals Only
With the potential to stir up the fiduciary world, I spent some time researching the new rule. Turns out, a third party must certify the computer model. Still, adopting a certified computer model would swing the doors wide open to the lucrative retirement plan market while limiting liability risk.
ERISA 408(g) raises many questions. For instance, since when do you have to be a fiduciary to advise on IRAs? Is this just a marketing ploy to enable broker/dealers to sell third-party services? And, if a computer model can provide fiduciary advice to plan participants, what value does advice offered by humans have?
The DOL website says the agency found that investors with self-directed retirement plans needed additional advice. So based on Section 3(21)(A)(ii) of ERISA and Section 4975(e)(3)(B) in the IRS code, it proposed to extend the fiduciary standard to plan sponsors, fiduciaries, “participants and beneficiaries of participant-directed individual account plans, as well as providers of investment and investment advice related services to such plans.”
The advice had to be dispensed within what is called an eligible investment advice arrangement that is:
- Authorized by a plan fiduciary
- Subject to annual audits by an independent third party
- Disclosed by advisors to plan participants and beneficiaries according to a model Fiduciary Advisor Disclosure
The extension of fiduciary responsibility to advising on IRAs is part of the joint effort by the DOL and the SEC to redefine the term "fiduciary." A letter written by Kent Mason of Davis & Harman LLP in April of 2011 claims that 40% of IRA owners had less than $10,000 in their accounts and that 98% of IRAs with less than $25,000 were held at brokerage firms. It claimed that 408(g) would increase costs to a point where these IRA holders could not afford advice.
As a result of industry comments explified by this letter, the
DOL withdrew its proposal with the caveat that it would not let go of its intention to extend fiduciary standards to those advising IRAs.
Then, on October 25, 2011, the DOL issued final regulations which went into effect on December 27, 2001, including the 408(g) computer model exemption. But the definition of a fiduciary—which includes the DOL’s intended application to advisors on IRAs—is still in limbo, as we all know.
So what really is the case?
Blaine Aikin, CEO of Fi360, creator of the AIF and AIFA designations, says that technically, an IRA is not an ERISA account. But there are proposed transaction rules in the IRS code that would apply to IRAs. The IRS has delegated responsibility to the DOL for oversight of those prohibited transaction events. The computer model would be one way to step in the middle of the fiduciary but that, currently, the regulations do not extend to IRAs.
IRA participants must do some due diligence when selecting an advisor. Advisors utilizing the computer model must take care not to give advice in addition to the computer model’s or they would step back into the fiduciary role.
Lou Harvey of Dalbar, the creator of the Registered Fidiciary® designation and provider of third-party certification for the computer model, who was quoted in the recent article, told me in an interview that advisors on IRAs have been considered fiduciaries ever since the Tax Reform Act of 1986. The IRS was charged with enforcement but has done nothing about it until now. The PPA gave the DOL the authority to write the rules to be enforced by the IRS.
So there are now two options: the level-fee arrangement and the computer model. The computer model splits the role, saying the actual advice comes from the computer model and the rep gathers the data and implements the advice.
Harvey also said this frees the broker-dealer rep to pursue other fee-generating business associated with the IRA such as 401(k) rollovers without once again subjecting the rep to the fiduciary role.
The computer model benefits broker-dealer reps more than RIAs because RIAs are already fiduciaries.
If Harvey is right, the value of being a fiduciary gets supplanted by a computer model and reps are free to charge a fee for any other activity associated with the IRA as long as the computer model is the only ‘person’ dispensing the advice.
The new regulations may make it easier for the SEC to impose a standard definition covering reps and RIAs. But the role of a fiduciary, in my view, involves much more than a computer spitting out an investment plan.
Read more...
|
