- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firm’s policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
In a workshop at the 2013 NAPA/ASPPA 401(k) Summit, Fred Reish, partner at Drinker Biddle & Reath, and Samuel Brandwein, corporate retirement director at Morgan Stanley, took on advisors’ new responsibilities after fee disclosure.
There are two “disclosure regimes” advisors have to comply with, according to the panelists: 408(b)(2) plan disclosures and 404(a)5 participant disclosures.
Under the 408(b)2 prohibited transaction rules, advisors have to “prudently evaluate compensation for covered service providers,” Reish (right) said. If they fail to do so, they’ve committed a prohibited transaction. Sponsors aren’t off the hook, either, if they fail to collect disclosures.
However, in the preamble to the final regulation, the Department of Labor noted that fiduciaries to a plan should at least be able to compare disclosures to the requirements of the regulation and “form a reasonable belief” that they are adequate. Reish stressed the “reasonable belief” part of the regulation. Advisors can’t just trust that covered service providers have fulfilled their disclosure duties. “Sponsors rely on advisors to keep them out of trouble-with-a-capital-T,” he said.
Reish suggested creating a checklist to “establish reasonable belief” that disclosures have been made correctly. First, advisors should determine if any covered service providers have failed to deliver their required disclosures.
Next, in determining whether the disclosures are adequate, Reish referred to the DOL’s stricture that fiduciaries should be able to compare the disclosure with the required regulations. If hidden compensation isn’t disclosed, it’s not the sponsor’s fault, he said.
If fiduciaries find that there are disclosures missing or incomplete, changes must be requested in writing and the covered service provider must comply within 90 days.
Reish noted that the DOL takes a “tough-love” stance regarding these disclosures. If service providers don’t comply with the written request within 90 days, sponsors must fine them and report them to the DOL. Reish said, though, that in most cases he’s seen, service providers typically respond within 48 hours. “Service providers are very aware of having to respond,” he said.
Among the issues plan fiduciaries have to evaluate as part of the disclosures are: reasonable compensation, reasonable costs, adequate or appropriate services and conflicts of interest that are manageable. Reish said sponsors have a duty to monitor their ongoing obligations every three years.
Reish said that in light of the sometimes extensive disclosures sponsors receive, the DOL was considering requiring that service providers provide a guide similar to a table of contents.
Regarding 404(a)5 requirements, Reish noted that while the legal duty to provide participants’ disclosure is on the sponsor, it’s likely to fall to recordkeepers and advisors who are “just stepping up, even though they’re not legally obligated.”
/* .premium-promo { border: 1px solid #ddd; padding: 10px; margin: 0 10px 10px 0; width: 200px; float: left; } .premium-promo li, .premium-promo ul { list-style-type: none; margin: 0; padding: 0; } .premium-promo li { margin: 0 0 10px; padding: 0 0 10px; border-bottom: 1px dotted #ddd; } .premium-promo h3 { text-transform: uppercase; font-size: 11px; } .premium-promo h4 { font-size: 16px; } .premium-promo a { text-decoration: none !important; } .premium-promo .btn { background: #0069a1; border-radius: 4px; display: inline-block; padding: 5px 10px; clear: both; color: #fff; font-weight: bold; } .premium-promo .btn:hover { background: #034c92; } */ $(function() { $('div.current p').eq(1).attr('class','marked'); // $('H').insertAfter('.marked'); $('div.premium-promo').insertAfter('.marked'); $('.article-content ul').each(function() { $(this).prev('p').attr('style','clear:both'); }); });The regulations state that plan administrators aren’t held liable for the quality of the information in the disclosures if they “reasonably and in good faith” rely on that information provided by service providers. Here, again, Reish suggested advisors create a checklist to help make sure disclosures meet the requirements.
There are some special issues regarding participant disclosures that advisors need to keep in mind, Reish continued. If there are changes to the plan, participants must be notified between 30 and 90 days before the change takes effect. Furthermore, notification must be made to anyone eligible to participate in the plan, not just people who are actively participating. Reish suggested changes be kept to once a year when possible to avoid multiple mailings and the costs associated with them.
Other disclosures that have to be made to everyone, not just participants, include services and fees that must be listed in the enrollment package, Reish said.
Reish warned that one effect of these disclosures may be an increase in litigation. “Losses cause investors to go talk to attorneys who will look for failed disclosures,” he said. He warned that advisors may see more litigation in general. “The focus will shift to service providers,” he said, noting that 401(k)s are essentially run by service providers.
Sam Brandwein of Morgan Stanley spoke about behavioral changes among sponsors and participants following the disclosure regulations. One of the most common phrases he’s heard regarding the new disclosures, he said, is “much ado about nothing.”
He hesitated to say they would have no effect, though, citing behavioral changes following the enactment of seat belt laws in the past as a precedent. Before New York passed its seat belt law in 1984, just 16% of adults used them, he said. Now, that’s up to 91%.
He argued, too, that it wasn’t just the law and drivers’ fear of being ticketed that led to more people using seat belts, but the education and public awareness regarding the benefits that came with the law. In New Hampshire, where there are no seat belt laws for adults, he said, seat belt use was at 16% in 1984. Today, even without regulations for adults, it’s risen to 75%.
Brandwein noted that following fee disclosures, changes in participant “behavior will be slow to evolve because the starting point is so low.” He referred to a 2010 study by AARP that found 71% of people thought they paid no plan-related fees; another 6% said they weren’t sure if they did. “A lot of participants don’t understand how 401(k)s work. Even in the lowest-cost funds, there are still fees.”
One of the difficulties of effective disclosure is that participants are getting this information without context, Brandwein said. “Not every investment can be easily broken down,” he said.
Regardless of their fees, advisors can demonstrate their value with benchmarking. “Make the case for services you provide like training and education,” Brandwein said. He referred to a survey of plan sponsors by OppenheimerFunds in September that found nearly half of sponsors don’t believe providers with the lowest fees always offer the best value. However, just 4% of sponsors said they believed higher fees indicated a higher value.
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