So You Want To Be A 401(k) Financial Advisor?

Whether you are financial advisor who is not in the 401(k) business and wants to be in it or you're the financial advisor who wants to dramatically increase their small book of business, this is the perfect time. With dramatic changes in the industry because of fee disclosure regulations, financial advisors who are serious in doing a top-notch job as a 401(k) advisor will find plenty of opportunity to develop and increase their book of business. As I always say, if you don't do it right, don't do it at all. A 401(k) advisor who will do it right by doing their job and making sure their clients do their job will find the 401(k) plan business very rewarding. So this article is for financial advisors who want to start or improve their lot as a 401(k) financial advisor.

A Yale Professor scares 6,000 plan sponsors and everyone misses the point.

Blaming a Yale law professor is off point because the information is already available to the public.

When I was in law school and the Executive Editor of the student magazine there, I uncovered a scandal where the bulk of editors and staff members of a student run law journal did not fill out and verify they completed the hours of work necessary to receive academic credit for that work.  There was never explanation of why that was so, just attacks on my credibility. Rather than admitting their mistakes, the law journal's editors tried to change the subject, but the scandal was still there. Substantive change was implemented by the law schoolafter the scandal to alleviate the concerns I raised.

A Yale law professor by the name of Ian Ayres sent out 6,000 letters to plan sponsors around the country that he targeted as having high fees.

The tone of the letter wasn't particularly nice, but I haven't met many professors (especially law professors) who know how to write anything other than a law article very well.  The letter stated "Using data from the form 5500 your company filed with the Dept. of Labor in 2009 and BrightScope Inc. I have identified your plan as a potential high cost plan. We recommend that you improve your plan menu offerings, including adding lower fee options, both at the plan and fund level, and consider eliminating high-fee funds that do not meaningfully contribute to investor diversification." Ayres then claimed he would name these expensive plans on Twitter in 2014.

Of course, advisors, ERISA attorneys, and plan sponsors are in an outrage, but everyone is missing the point.

I'm sure Professor Ayres is doing some type of research regarding plan expenses and his manner in writing to plan sponsors could be a lot nicer and he could be a lot more current than Brightscope's 2009 ratings.

The point is that information regarding plans and expenses are public information. Anyone wishing to target expensive plans can do so, whatever service they want to use including the Department of Labor's efast Website. So plan sponsors need to take into consideration that if their plan pays too much in fees, someone out there in the public can easily access that information.

In addition, only a poorly written letter threatening to shame plan sponsors got their attention. I have met so many plan providers who tell me that they have reviewed the expenses of a plan sponsor and get blown off by that sponsor when the fee discussion comes up. Plan sponsors don't have to be shamed into doing their job in making sure that plan expenses are reasonable for the services provided.

Instead of crying about the effects of a poorly written letter, a recipient of this letter should take this letter from Ayres as a call to action to improve their plans. If Ayres sees it based on old data, plan sponsors should see the same problems using current data. The Ayres letter is no a scarlet letter, it can be removed by a little action by the plan sponsor.

Everyone in the industry shouldn't just attack the messenger, but check the message.

A DOL Advisory Opinion on revenue sharing that didn't set the world on fire.

But it does give provider pause to make sure they aren't doing it wrong.

Principal Life Insurance Company wanted an advisory opinion regarding revenue sharing, probably because of concerns with how these payments are used to offset plan expenses as well as changes dealing with plan expenses and Form 5500.

In Advisory Opinion 2013-03A, the Department of Labor stated that revenue sharing and similar amounts carried on the books of a retirement plan service provider as a credit due the plan, if properly structured, are not ERISA "plan assets" prior to receipt by the plan.

So that in English, means that as long as a plan provider is careful with how they credit revenue sharing payments, especially by not giving them to the plan outright, or by contract, giving the plan an ownership position in these revenue sharing payments, they are not going to be ERISA plan assets.

Principal didn't have any issues that made revenue sharing payments ERISA plan assets because they maintained a bookkeeping account tracking the credit; these credits were general assets of the service provided; and there was no agreements that provided that revenue sharing payments were held for the benefit of the plan.

The Advisory Opinion reiterated the obligation of the responsible plan fiduciary under ERISA �404, to make sure that the compensation paid to and among all service providers is reasonable and to monitor any revenue sharing arrangements between these providers.

Did this Advisory Opinion change the world? Not particularly for plan sponsor because they always had that duty to review plan expenses. For plan providers, it is some comfort that if they act appropriately in the bookkeeping of revenue sharing, that they won't be using plan assets, which would bring a host of other problems. However, I'm sure that there are recordkeepers that are not bookkeeping revenue sharing payments correctly and I think this Advisory Opinion is a good wake up call for all providers to make sure that they are handling revenue sharing payments correctly.

New proposed DOL regulations: more fee disclosure guidance?

Plan providers may have to develop a guide.

The Office and Management Budget received a proposed regulation from the Department of Labor (DOL) , that will be released in 3 months. The assumption is that this regulation will be further clarification under Section 408(b)(2) fee disclosure regulations. This will add further work and headaches to plan providers.

Rome wasn't built in a day, and the process and impact of fee disclosures was going to take time. Everything in the retirement plan business of often trial and error and the DOL has had a year to reflect on fee disclosures.

It should be no surprise that absent a model form of plan provider fee disclosures in a language that plan sponsors would understand, that plan fiduciaries would find the disclosure to be confusing.

That is why the proposed regulation may have to do with creating a guide to fee disclosure that could further explain the fees. As I call it: a guide to the guide of plan expenses.

If you are a plan provider, consider reviewing your disclosures to make sure they are easier to understand and easy to adapt to a summary or guide for plan sponsors to easily decipher. As always, I know a good, inexpensive ERISA attorney (cheap plug here).