When does a person providing investment advice become a fiduciary under the Employee Retirement Income Security Act (Erisa)? The jury is still out, but it may not be for much longer.

Some industry trackers speculate the U.S. Department of Labor will issue its long-delayed rule on the definition of “fiduciary” in early 2015. Securities and Exchange Commission chair Mary Jo White has said she wants her agency to decide by the end of this year whether to proceed with a rule to establish a uniform fiduciary standard for broker-dealers and registered investment advisors.

The exact timing of tougher fiduciary standards is, however, of little concern to wealth managers focused on building out their 401(k) business.

Among them is St. Louis-based Acropolis Investment Management LLC, a fee-only firm that entered the 401(k) business several months after passage of the Pension Protection Act of 2006. Its total assets under management exceed $1 billion, including approximately $175 million in the 26 401(k) plans it manages.

Mike Lissner, a partner who oversees Acropolis’s retirement plan business, says he wouldn’t hold his breath waiting for the DOL rule in early 2015. Still, he is pleased with the fiduciary-related changes the department has been trying to push. “I’ve been frustrated with the pace,” he says, “but I think the direction is absolutely right.”

As he sees it, most plan trustees don’t have a good grasp of what to do and usually defer to their investment managers without passing responsibility to them. “They’re on the hook for us,” he says, but “my feet should be held to the fire.”

Acropolis serves as an Erisa Section 3(21) fiduciary on most of its 401(k) plans, which gives it shared responsibilities with plan trustees. It’s moving more toward being a Section 3(38) fiduciary—assuming sole responsibility for plans, including control and discretion over plan assets.

If more advisors adopted Section 3(38) relationships, he thinks it would help reduce 401(k) fees considerably. “A brokerage company probably doesn’t want to be put on the stand and defend that they selected a fund because it paid them more,” he says.

He notes there have been more than a dozen high-profile court cases pertaining to 401(k) plans, many of them focused on fees.
Recently, there has been much industry debate over revenue sharing—using a portion of the investment fees paid by participants for the plan’s administrative expenses. Acropolis, which primarily uses index funds, has never had revenue sharing and if it were to use a fund that had it, shared fees would return to the plan, he says.

To help address participant deficiencies in retirement readiness, a widespread industry problem, Acropolis has developed a program in-house that plan sponsors can offer employees. The firm writes educational materials and holds participant sessions two to four times annually. Acropolis reviews record-keeper data on its plans’ participation rates, contribution rates and asset allocation to help develop content and measure training outcomes.

With asset allocation, “My theory—not that I’m draconian in any particular sense—is that 98% of participants should be using a target-date plan,” says Lissner. He reasons that individuals’ investment decisions are often influenced by where the market is, not by their circumstances.

Like retirement giant CalPERS, which recently dumped its hedge-fund holdings, Lissner is leery of including alternative investments in 401(k) plan lineups. “I’m not against alternative investments, but I’m against alternatives for the masses,” he says. “I’m most scared of participants hurting themselves.”

He thinks uninformed investors may be tempted to select investments based on past years’ performance without comprehending expense ratios and risks. “The key with 401(k) plans is broad diversification in low-cost funds,” he says. “Alternatives are neither.” When a trustee for a plan Acropolis serves as a 3(21) fiduciary made the ultimate decision to include a hedge fund in the plan lineup, Acropolis wrote why it was a bad idea, he says.

The Department of Labor is taking comments through November 19 about the ways 401(k) plans use brokerage windows, also known as self-directed brokerage accounts. “My bias is, if the trustees of a plan or senior executives want them, that’s fine,” says Lissner, noting that 10% to 15% of Acropolis’s plans offer these accounts. But the firm’s default offering has no brokerage window—which must be a plan-wide feature available to all participants. It must be requested by a plan sponsor.

Staying Focused
HSW Advisors, a New York-based independent private wealth management boutique with more than $1.3 billion in total assets under management, has also been stepping up its pursuit of the retirement plan business. The firm operates within HighTower, a national advisor-owned financial services company serving high-net-worth individuals and institutional clients.

HSW Advisors currently manages a half-dozen retirement plans with about $100 million in combined assets. Ken Hoffman, a managing director with HSW Advisors who is leading its charge into the retirement plan market, says he would like to bring in another $100 million to $200 million in retirement plan assets next year.

His sweet spot, he says, is plans with $10 million to $80 million in assets and few employees. Plans with fewer participants can be simpler and more streamlined, offer better service and be less expensive for the record-keepers his firm partners with, he says. Plans of this size are also less likely to already be well advised, he says.

Among the industry’s plans with assets between $250,000 and $100 million, 18% don’t have an advisor and 62% work with “blind squirrels”—advisors who work with few plans and lack formal training in plan management. He attributes this data to the Retirement Advisor University (TRAU).

Hoffman, who received training and certification from TRAU, says it’s important for advisors to keep up with pricing, trends, reporting and the demands of Erisa reporting. “If you’re not focused on it, you’re going to lead people awry,” he says.

“I don’t see anything on the horizon that’s a major industry changer,” he adds. “What I do see is people catching up to current legislation.” This involves determining the reasonableness of fees, providing transparency and establishing and documenting processes, he says.

He recently spoke with a prospective client, a financial services business whose 401(k) plan has about $20 million in assets and no advisor. Its record-keeper, one of the U.S.’s largest asset management companies, manages 29 of the 31 funds in the plan’s lineup, he says. According to Hoffman, many of these funds are not well ranked in their peer group or they sport too high a fee.

“We showed them that we could be inserted as the advisor, do a lot of the work, take it off their plate and actually lower their fee—and significantly improve the objectivity of the plan and improve the investment menu,” he says. The key suggestion, he says, was using less-expensive share classes for the plan’s funds.

Plan sponsors don’t need to write a check when revenue sharing pays for record-keeping, but they should think about what the plan is costing participants, he says. “Our perspective is, don’t hide anything,” he says, noting that his firm uses retirement class R6 shares and institutional shares and builds up fees from there.

He also expects to be able to chop out at least a third of the fees and make other improvements on a $15 million plan if the plan changes record-keepers. Record-keeping is a low-margin business, so unless a record-keeper is consistently investing in its infrastructure it can’t compete, he says.

HSW Advisors seeks out prospective clients by scouring Form 5500 filings. “There are services that slice and dice them and make them very easy to sift through and understand what’s being done properly about a plan and what’s not,” he says.

Hoffman is also enthusiastic about combination plans, which put a defined benefit plan atop a defined contribution plan. Including these two layers is starting to become more popular with plan sponsors. “That doesn’t mean everyone wants to do it,” he says, “but not everyone is aware of it.”

Helping Hand
For advisors who want to continue to assist business-owner clients with their 401(k) plans but lack the time or expertise, options abound.

One company focused on keeping advisors in the game is Security Benefit Corp., a Topeka, Kan.-based retirement plan provider that manages approximately 800 401(k) plans and $4.2 billion in defined contribution assets. It works with 15,000 advisors (registered reps and investment advisor representatives) who are affiliated with 200 independent broker-dealer firms.

Security Benefit provides record-keeping and investment products and partners with companies specializing in other services. Its plan sponsor clients can select Chicago-based Mesirow Financial to serve as their fiduciary.

Mesirow selects and monitors mutual funds from Security Benefit’s platform, writes investment policy statements, manages plan lineups, sends quarterly report cards to plan sponsors and advisors, and removes and replaces investments as needed, says Kevin Watt, vice president of defined contribution at Security Benefit.

Security Benefit teamed up last year with Atlanta-area-based Financial Soundings LLC to send plan participants annual report cards and recommendations about retirement goals.

In July, the U.S. Treasury Department and the Internal Revenue Service issued final rules on longevity annuities, which make them accessible to 401(k) plans and IRAs. Watt isn’t aware of demand for them yet, but he has seen interest in guaranteed retirement income products. Plan sponsors seeking to offer such products should ensure there is portability at the plan and participant levels, he says. Security Benefit offers a fixed account managed by Guggenheim Investments, which he says is a combination of a stable value fund and an insurance-guaranteed account.

In sum, Watt says advisors must decide whether they want to play a fiduciary or 401(k) servicing role. “We are constantly on a campaign that says you can stay in this business,” he says, and, with help, “You can continue to do what you do best.”