What ERISA Attorney Fred Reish Says Advisors Need To Know About 408(b)(2), Fiduciary Investment Advice, And Retirement Income Projections Hot

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“The 408(b)(2) regulation requires most service providers to retirement plans, including pension, profit sharing, 401(k) and 403(b) plans subject to ERISA, to make written disclosure of their services, fiduciary and/or RIA status, and total compensation,” according to Fred Reish, an ERISA attorney with Drinker Biddle & Reath LLP.

On the surface, it might sound simple enough. But the devil – as is the case with all things ERISA-related – is in the details.

In an interview with A4A, Reish explained what advisors need to know about 408(b)(2) and 404a-5 as well as other recent Labor Department edicts.


“After 408(b)(2) goes into effect, and over the next six months, advisors need to help their plan sponsors review and evaluate all of the 408(b)(2) disclosures,” Reish said. “That's the immediate thing.”

Reish predicts that some RIAs, will begin using the 408(b)(2) disclosure rules as a competitive tool. He says RIAs searching for new plan sponsors as clients will begin asking prospects if their  current advisor has helped them evaluate their required disclosures and examined the associated fiduciary risk.

In fact, Reish says benchmarking and the evaluation of all of these disclosures is going to become an important service for RIAs to plan sponsors.


Fiduciary Investment Advice
Reish predicts that the U.S. Department of Labor will in late 2012 or early 2013 re-propose fiduciary investment advice regulation, and that is likely to increase the number of those classified as advisors. “It will both expand the definition of fiduciary and focus people’s attention on fiduciary services,” Reish says. “So plan sponsors will become more aware of the concept of a fiduciary and of what it means.” 

The DOL expanding the definition of a fiduciary will change the marketplace, says Reish. The biggest change: a transition to level fees.

Reish expects that broker/dealers and other advisors will change from receiving variable (and potentially conflicted) compensation to a model where the compensation to the adviser is level, regardless of the investments recommended, he wrote in a recent LinkedIn post. 

Specifically, Reish sees more broker/dealers, and specifically top retirement plan advisors, becoming IARs (Investment Advisor Representatives) and fiduciaries. “There will be more advisors who will sign on as co-fiduciaries for retirement plans,” he says.

Initially, Reish says the broker/dealers that have  RIA programs for their top retirement plan advisors will limit the offering to non-discretionary investment advice. “In response to more non-discretionary investment advisors in the marketplace, some RIAs will either add or expand their discretionary investment management programs for retirement plans,” Reish says. In other words, more RIAs that are focused on retirement plans will add or expand their 3(38) investment management services. “So I can see an expansion there, partially because the broker/dealers, at least initially, won’t be offering those services and you know how the competitive markets work. Everybody wants to distinguish themselves from the competition.”

Reish recommends that advisors who want a leg up on the competition should consider offering 3(38) investment management services now. “It’s a great way for them to distinguish themselves,” Reish says. “But it’s just one of the things they should look at offering.”

Reish also says those dominos have already started to fall, and once that fiduciary investment advice regulation comes out there will be a chain reaction.

“A lot of this is pent up,” Reish says. “We’re just waiting for the next step, and the next step is the proposed regulation or maybe even the final of the proposed regulation. But somewhere in there, somewhere between the re-proposal of the fiduciary advice regulation and it becoming a final regulation, I believe that significant changes will be occurring; the number of advisors who are serving as fiduciaries and the perhaps in the number of services they are providing.”

As for benchmarking, Reish says there are three items worth noting.

Advisors need to talk more about their services, Reish says. It’s not just that they provide recommendations about mutual funds, or that they help plan committee with risk management. “Everybody will be doing that,” Reish says. “So how does an advisor distinguish themselves in that environment?"

"And the reason that’s connected at the hip to benchmarking is that part of the explanation of your fee in the benchmarking process is to say, ‘These are the services we provide, we provide discretionary fiduciary services, non-discretionary fiduciary services, no fiduciary services, plan-level services, participant-level services,’ says Reish. "It’s an issue of quantity initially--just how many of those services do you provide to a plan?”

In addition, RIAs need to discuss the quality of those services. “The RIA will need to explain how their services produce results,” Reish says. How do participation rates compare to other plans? How do contribution rates compare to other plans? And how are the plan participants investing as compared to other plans.

Moreover, in the future, advisors in small- and mid-market plans will be asked to help plan participants determine how much they need to save for retirement. One of example of that would be a “gap analysis,” Reish says. That’s an analysis of how much a participant has saved as compared to how much they need for retirement, and if there’s a shortfall, providing a plan for making up the difference.

“A really well-run plan -- when you have the employer plus the recordkeeper or the provider and the advisor together -- should score really well on participation, participant investing, and deferral rates,” Reish says. “That assumes that an advisor will be more than just an investment person, that the advisor will be a consultant on the success of the plan.”

According to Reish, more plan sponsors are looking for their advisors to do that. “They are hiring advisors who just don’t know investments, but advisors who know retirement plans,” he says. “And that’s particularly true in the 401(k) world.”

Retirement Income On The Horizon
Reish notes in a recent post that the DOL is working on proposed regulation that would equire or facilitate the projection of retirement income on participants’ statements.

He predics the DOL will adopt an approach of projecting the account balance to a lump sum at either age 65 or 67; discount that amount for inflation, so that it is expressed in terms of today’s dollars; and then convert it to a lifetime income amount, either expressed as a monthly or annual dollar amount. The regulation will be a proposal, and there will be an opportunity for private sector comments. Reish expects the proposal to be issued this summer.

“The decision about deferral is about retirement readiness," says Reish. “Once you are in retirement it’s really all about monthly income. Advisors will need to have an approach where they can help people in retirement invest properly and then withdraw their money for at least 30 years.”

Reish says RIAs will need to become more familiar with different types of insurance products to help their clients meet their retirement income needs. That’s because creating a retirement income may require investments and insurance. “The answer may very lie partially in investments and partially in insurance,” he says. “I’m not saying that insurance is appropriate for every retiree, but clearly it’s appropriate for some. And so RIAs may have to think beyond investments, and begin to study and use more insurance products. And that is a bit of a culturally change.”

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