Do Fiduciaries Produce Better Returns

The legislative and regulatory activity since 2008 has been focused on increasing the fiduciary level of care to the investment market, motivated by the belief that investors are being injured - in spite of the protections that have been in place for decades. The superficial assumption is that investors will benefit from a fiduciary level of care.

An Executive Summary of ERISA Fiduciary Risk

The Employee Retirement Security Act of 1974 (“ERISA”) governs the overwhelming
majority of retirement plans and indirectly all Individual Retirement Accounts. This broad
reach means that ERISA and the regulations derived from it dictates the actions of a large
portion of the investment industry. Unfortunately, ERISA is not synchronized with securities
laws, creating inconsistencies in the overall regulatory framework. In addition to the
inconsistencies in regulations themselves there is added complexity because ERISA is
administered by different federal agencies (Department of Labor and IRS) from that which
administers securities laws (SEC).~end~

These inconsistencies and complexities have given rise to widespread misunderstanding and
fear of ERISA. The confusion is compounded by the use of similar sounding language that
has different meanings in ERISA and securities laws. In fact, specialists in securities laws are
often unaware of the details of ERISA and specialists in ERISA are not experts in securities
laws. These separate silos of expertise often produce contradictory conclusions, the most
frequent of which is whether an individual is a fiduciary.

ERISA 404(a)(5) A Game Changer?

On October 14, 2010 the US Department of Labor released final regulations concerning the disclosures that must be made to every plan participant in participant-directed individual account retirement plans such as 401(k).~end~

The regulation requires plan fiduciaries to give workers:
  • Quarterly statements of plan fees and expenses deducted from accounts.
  • Cost and other information about investments available under their plan.
  • Access to supplemental investment information.

Disclosures must use uniform methods to calculate expense and return information and present it in a format that makes it easier for workers to comparison shop.
This report discusses the implications of these regulations.

Fiduciary Adviser Audit Requirements

Reprinted from The ASPPA Journal

As it stands today, the Department of Labor (DOL) estimates that 3 million participants and 13 million IRA investors need advice and are left to fend for themselves or to use intimidating computer systems to make their investment decisions. The social objective of broad availability of quality investment advice runs counter to the goals of the advisers who seek to serve the less than one million top of the pyramid clients. Recognizing this disparity in goals, Congress included fiduciary relief as an incentive to professionals to serve clients with smaller balances.~end~

The Law & Regulations

Congress’ goal of making quality, cost effective and unbiased investment advice is addressed by the addition of Section 408(g) to ERISA. On February 26, 2010 the DOL proposed regulations in specific areas of 408(g) to expand this goal to include providers with a conflict of interest and those serving IRA accounts. This article reflects the newly proposed regulations planned to take effect later in 2010.

Impact Analysis: 2010 Advice Regulation Proposal

The Vice President, Joe Biden announced new Department of Labor regulations that will govern investment advice to IRA and 401(k) participants. These regulations seek to neutralize the conflicts of interest that exist when advisers or their affiliated firms receive compensation from the sponsors of investments they recommend.

These new regulations follow the cancellation of similar regulations developed under the Bush administration that were three years in developing, following the Pension Protection Act of 2006.~end~


The long history of these regulations raises the question of whether the 2010 proposals will in fact be finalized and enacted. The likelihood that they will actually materialize is somewhat higher than in the past, when the financial services industry’s credibility was greater and the administration was more open to input.

Vulnerability at Retirement

Much has been written and discussed about reducing the vulnerability of retirees during retirement but very little about reducing the vulnerability of investment firms when plan participants reach retirement. The history in this area has been to treat this inflection point as a new opportunity for competitors to gather rollover assets from the plan.

This discussion examines the alternative of creating a seamless transition into retirement and eliminating the inflection point for the majority of participants in defined contribution plans.~end~

The seamless transition permits providers to retain participants and assets that are already on the books, without having to compete for them in the form of rollovers. Such an approach reduces the vulnerability at retirement for providers of retirement plan products and services.

The key to this seamless transition is acceptance by plan sponsors. Acceptance is achieved by the protection of the Qualified Default Investment Alternative (QDIA). This powerful safe harbor provides fiduciary relief to plan sponsors who default any non-electing employees into a qualified investment.