"Legal liability has always been a concern to advisors, and this just adds one more aspect of it," says Libby Dubick, president of Dubick & Associates, a financial services and advisor marketing consulting firm. "If anything, it provides another reason for businesses with retirement savings plans to bring in an outside expert."
Steven Kaye, president of American Economic Planning Group in Watchung, N.J., views the ruling as "a positive development for my business because it makes employers more aware of fiduciary issues and what I bring to the table, and I think it will prompt more plan sponsors to hire 401(k) consultants." Many of the businesses he works with are former clients of brokerage firms who are looking for better processes and safeguards to protect themselves. When meeting with prospects, Kaye explains potential liabilities and how a registered investment advisor can put practices into place, such as having an investment committee and offering appropriate investments addressing fiduciary risk. To protect himself, he carries pension fiduciary errors and omission insurance costing him about $2,000 a year and speaks several times a week with an attorney conversant in ERISA matters.
Experts say other areas advisors working with 401(k) plans might review include:
Service agreements. Attorney Ken Raskin says the ruling should prompt advisors working with 401(k) plans to look into their professional insurance coverages and to review service agreements with clients, particularly with regard to avenues a plan sponsor, or employer, has in recovering losses. "Financial advisors should consider having service agreements in place that limit liability to issues involving fees rather than to investment losses," he advises.
A conflict-of-interest policy that discloses issues such as the fact that an advisor is paid based on asset growth should also be in place, advises Ron Hagan, CEO at Roland Criss, a firm that audits and certifies pension plans. "I've seen plan sponsors repeatedly trapped in lawsuits over this issue." If documents need to be changed to add more protections, he says, "it's better to do it now rather than later. The ruling provides an opening for advisors to meet with 401(k) clients and talk about how to handle governance issues."
Vendor relationships and fees. Kaye views acting as a go-between between his employer clients and their vendors as an important part of his role. "The interests of vendors are often at odds with those of the plan sponsor, or employer," he explains. "The vendor wants to get the most revenue possible and do education maybe once a year, rather than quarterly. The employer wants to get the maximum amount of service for the money." Kaye says he will often challenge vendors about fees, the appropriateness and scope of fund lineups, educational services and other issues.
Documentation. "You can't just suggest a group of lifestyle funds and think your fiduciary obligations are being met," says Stephen Ferszt, an attorney with Wolff & Samson in New York City who works with financial advisors on ERISA-related issues. "To be protected, advisors need to show that participants are receiving the information and education they need to make decisions."
One way fiduciaries can demonstrate that they have carried out their responsibilities is by documenting the processes involved, and experts say a detailed record of participant education and governance procedures can mean the difference between winning and losing a lawsuit. "The fiduciary standard is a process standard, not a performance standard, and the best protection from liability is to have a good investment process in place," says Lynch.
Education and training. A number of guides are available to advisors to better understand and carry out fiduciary obligations and expand 401(k) plan business:
- The Department of Labor Web site includes a sample fee disclosure form at (http://dol.gov/ebsa/pdf/401kfefm.pdf ) and a booklet titled Meeting Your Fiduciary Responsibilities (http://dol.gov/ebsa/publications/fiduciaryresponsibility.html).
- 401kexchange.com has a Provider Ratings & Market Share Report that ranks plan service providers based on nearly 50,000 plan sponsor satisfaction surveys, as well as marketing and prospecting tools.
- The Center for Fiduciary Studies at fi360.com sells Prudent Practices for Investment Advisors and other fiduciary handbooks and has information on its fiduciary training programs.
- Information on obtaining a plan audit and CEFEX certification is available at www.rolandcriss.com.