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Documentary Rekindles Fiduciary Standards Argument

A PBS documentary on the effectiveness of retirement plan advice rekindled a discussion on the application of fiduciary standards for financial advisors.

The question before financial advisors is this: Which threshold will the government require them to meet when it comes to advising retirement plan participants?

Will the U.S. Department of Labor and the Securities and Exchange Commission (SEC) require financial advisors to meet a fiduciary threshold in which clients’ needs – without exception – are placed before the needs of the advisor or the broker-dealer the advisor represents?

Or will the government remain satisfied with financial advisors meeting the lower “suitability” threshold, now in effect?

Discussion around the application of fiduciary standards for financial advisors was rekindled last month in the wake of the PBS “Frontline” documentary titled the “The Retirement Gamble.”

The documentary questioned the effectiveness of 401(k) plans and the retirement advice given by investment advisors who have a vested interest in steering plan participants to funds that commission-based advisors represent.

In the “Frontline” broadcast, producer Martin Smith, who also narrated the program, took issue with the fees charged by mutual funds for managing corporate 401(k) programs. He found that fees and explanations of expense ratios often were buried in the fine print of turgid, opaque language.

In one segment, a teacher is quoted as saying she eventually passed on moving her retirement assets out of an annuity because of the penalty.

The program also contended that retirement plans offer too few low-cost options, and that actively managed funds offered by many plans were over the long term far more expensive than index funds. Other experts interviewed also said the industry made no effort to go beyond the “suitability” threshold of responsibility to investors, compared with meeting a higher “fiduciary” threshold.

“I would argue you should almost always be with somebody who has fiduciary duties,” said Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, who was interviewed on “Frontline.” “The only time you might not is if you wanted to buy bonds or individual stocks. It is going to be quite hard to find somebody, as of right now, working to the fiduciary standard.”

She said that 401(k)s have failed retirees, in part because those who sell and advise plan participants are required only to meet a “suitability” standard, which doesn’t guarantee that the interests of participants are put first, the documentary noted.

Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research, told “Frontline” that the type of financial advisor usually encountered by plan participants at a mutual fund call center or in a local bank exhibit two standards of loyalty: one to their profession and another to their company.

This is in contrast to an advisor in a traditional retirement plan governed by the fiduciary standard of loyalty to a client.

“A professional standard that your guy is guided by is a much lower standard than a duty of loyalty or fiduciary standard,” Ghilarducci said. “Basically, your guy is out for himself to maximize his sales, and the way he does it is to be loyal to the mutual fund. They try to sell you the most profitable products.”

Not so, or at least it’s not that cut and dried, according to the National Association of Insurance and Financial Advisors (NAIFA). Imposing a stricter fiduciary-duty standard would limit plan participants’ access to products, services and advice – particularly participants in small plans, NAIFA said.

“If advisors are precluded from offering commission-based products, consumer choices will be limited, and many may not be able to afford advisor fees,” NAIFA said in a posting on its blog. “Additionally, if advisors’ liability and costs increase, advisors may not be able to afford to work with small accounts or Individual Retirement Account (IRA) holders.”

The U.S. Department of Labor is seeking to update the definition of fiduciary advice, which dates back to 1975 under the Employee Retirement Income Security Act (ERISA), when 401(k)s and IRAs had not yet developed into mainstream retirement vehicles.

The Labor Department is expected to release new rules governing advisors and their fees and commission structure in July and, for months, all manner of financial industry lobbyists have been pushing hard to sway government regulators to their view.

Employee Benefits Security Administration (EBSA) Assistant Secretary Phyllis C. Borzi said the department would insist on nothing less than the “strongest possible protections to business owners and retirement savings in plans and IRAs.”

“Investment advisors shouldn’t be able to steer retirees, workers, small businesses and others into investments that benefit the advisors at the expense of their clients,” said Borzi. “The consumer’s retirement security must come first.”

Last year, Morgan Keegan and Co. agreed to pay more than $633,000 to 10 pension plans covered by ERISA following the Labor Department’s EBSA investigation that found the full-service brokerage company steered employee benefit plan clients to hedge funds between 2001 and 2008.

Under the settlement terms, Morgan Keegan will disclose to ERISA clients whether it is acting as a fiduciary to those plans and, if so, reveal its compensation arrangements.

Meanwhile, two industry groups representing life insurers and corporate retirement plan sponsors also have hit back against “Frontline.”

“It is not news that fees matter or that a successful retirement requires disciplined saving over a working career,” said the Plan Sponsor Council of America (PSCA), in a statement posted on its website after the program aired. “The truth is, employees who work for large companies are overwhelmingly likely to pay 401(k) fees that are a small fraction of retail mutual fund rates.” The Plan Sponsor Council represents corporate-sponsored retirement plans.

The American Council of Life Insurers (ACLI), in a news release, said that “Fees can vary depending on the services provided…. It is important to look holistically at the plan and the services provided to determine whether fees are reasonable.”

“Employers serve as plan fiduciaries, choosing investment options for the plan, ensuring service provider fees are reasonable,” ACLI said.

PSCA went further and said in its statement that “it appears Mr. Smith is not aware of his responsibilities,” as a small-company plan sponsor himself. Smith owns a production company, which produces documentaries for PBS. 

“In the show, Mr. Smith stated that he was too busy to look at investment alternatives. He wondered, ‘How did this get in here?’ The answer, of course, can be found by looking in a mirror. We hope that Mr. Smith understands his responsibilities as a plan sponsor and a fiduciary.”

As a goodwill gesture, PSCA offered Smith a free one-year membership in its organization. “PSCA members look forward to sharing their experiences and expertise with Mr. Smith,” the PSCA statement said.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].

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