Three Key Trends Facing ERISA Plan Fiduciaries

Transcription

1 TH XCLLNT FIDUCIARY Three Key Trends Facing RISA Plan Fiduciaries Ronald. Hagan * There are a variety of facts and forecasts floating around in the RISA retirement plan community about the top challenges facing plan fiduciaries in 2016 and beyond. The focus of much of the speculation is centered on the rapidly changing impact of both regulatory and technology innovations on executives that manage their RISA plans and their plans vendors. This article discusses three major trends, substantiated by powerful evidence, that provide guidance on what retirement plan fiduciaries and their advisors can expect in the near future. TCHNOLOGY AND RGULATORY DVLOPMNTS: A DUAL- DGD FORC FOR CHANG The retirement plan executive class is on the precipice of change. Information technology and regulatory developments continue to up the ante for chief financial officers and human resource executives who strive to maintain a compliant, prudent retirement plan management process. While there are multiple methods of managing RISA s complex fiduciary principles, three key trends are shaping how fiduciaries of the future will approach their retirement plan management role: 1. Automation of Fiduciary Practices 2. Commoditization of Investment Advice Services 3. Addition of IRAs to Fiduciary Oversight List As we explore these trends and their implications for fiduciaries and retirement plan service providers, it is important to keep in mind the four fiduciary disciplines that are a mainstay of a compliant retirement plan management process, regardless of the changing regulatory or technological tide. Those four disciplines include: Governance (management structure for the plan) * RONALD. HAGAN is Chairman of the Fiduciary Standards Committee of Roland Criss, the premier fiduciary manager for retirement plan sponsors, foundations, and endowments. Ron has over 26 years of experience in the fiduciary industry, and has pioneered many of the certification, standards practices, and supply chain management strategies that are preferred by fiduciary leaders today. He can be reached at ronhagan@rolandcriss.com. 5

2 Administration (day-today execution of the plan) Investments (investment policy and strategy) Controls (fiduciary standards and vendor monitoring) Although industry change is imminent, the ability to effectively fulfill all four of these fiduciary duties is foundational to the prudent management of any RISA qualified retirement plan today, tomorrow, and well into the future. Trend #1: Automating Fiduciary Controls is a New Business Reality for RISA Plans Recent changes to RISA make compliance with its fiduciary rules more challenging than at any time since its introduction in Recent surveys show that most organizations sponsoring RISA plans today lack the necessary controls to ensure a sound fiduciary process. What s more, most do not have the means to document their compliance as is required under RISA s fiduciary standards of care. Automation of at least some aspects of the fiduciary function is becoming an essential component to maintaining employee confidence and avoiding enforcement penalties. Journal of Compensation and Benefits Automation Addresses More Than Just Documentation Needs Most plan sponsors expect their senior executives to assume accountability for the management of their RISA qualified retirement plans. Yet, they realize that the biggest pain points in the RISA compliance process lie in basic (but critical) areas such as upgraded procedures, practice evaluation, service provider monitoring, and remediation of procedural gaps. stablishing these strong core elements of a retirement plan process also enable the creation of plan features that are attractive to participants. This is where automation becomes a natural fit for plan sponsors, their senior executive delegates, and plan participants. Going forward, most experts predict that automation will be essential to establishing a sustainable RISA compliance framework. Historical processes used by plan sponsors to manage their retirement plans have not been sustainable in the wake of recent fee disclosure and conflicts of interest provisions now central to RISA. For finance managers charged with fiduciary oversight of their company s retirement plan, automating key aspects of the fiduciary process 6 is becoming a more dependable approach than relying on ad hoc processes (such as databases or xcel spreadsheets). Automated systems are not only a more reliable solution for retirement plan management, but they are easing the compliance process for fiduciary managers by 1) executing a repeatable, consistent solution and 2) significantly lowering compliance costs. Automation: From Fable to Foundational Organizations that develop fiduciary compliance systems for 401(k), 403(b), SOPs, and defined benefit plan sponsors understand that the burden of process documentation, testing, and any remediation or enhancement activities resides solely with the responsible plan fiduciary. That RISAmandated point person is most often the plan sponsor s CFO or senior human resources executive. An automated process removes much of the dayto-day burden from this single individual by providing a reliable, efficient solution to the multiple aspects of retirement plan management. An example of a technologybased fiduciary practices compliance system is FiduciaryGRC. FiduciaryGRC automates the steps it takes to satisfy RISA s fidu-

3 ciary standards, allowing for the customization of specific features to fit each plan sponsor client. FiduciaryGRC technology contains preventative automated controls that turn on key switches in its cloud-based platform to drive down the number of manual touch points and labor-intensive controls detectors. It tracks and monitors the four fiduciary disciplines of plan Governance, Administration, Investments, and Controls, and it applies RISA regulations to that tracking and monitoring. Its benefits include: reduced costs for the plan s sponsor constantly monitored expenses paid by plan participants, and a risk management system that operates in lockstep with RISA. Technology solutions like FiduciaryGRC address the challenges faced by organizations that sponsor RISA qualified retirement plans and seek to satisfy fiduciary responsibilities as required by the Department of Labor (DOL). Plan sponsors are increasingly turning to technology solutions like this one to simplify the retirement plan management process and gain confidence about the surety of their DOL compliance. Trend #2: Commoditization of Investment Advice Services Over the last five years, information technology and webenabled investment advice services have gained in popularity. This trend is not only reshaping how investment advice is delivered, but it is also transforming the traditional role of the investment advisor. New tools now exist that replace the services once offered exclusively by financial advisors, and at dramatically reduced costs. Traditional investment advisor responsibilities now provided via a technology platform include services such as: The xcellent Fiduciary Constructing retirement plan investment lineups valuating mutual fund managers Replacing funds when appropriate The trend toward greater use of technology by fiduciaries to perform the Investment discipline continues to commoditize many of the primary services that financial advisors historically have provided to RISA qualified plans. 7 Fee compression for investment advice services is stark evidence of the commoditization occurring in this field. Gone are the days of the 1% (i.e., 100 basis points) asset based fee, when robo-advice solutions are now available for 25 basis points or less. In fact, fee compression is happening at such a rapid pace that the industry is having a hard time keeping up: While 25 basis points was the median fee benchmark just months ago, many online vendors have lowered their fees to 15 basis points in that short timeframe. The market for investment advisors is certainly a turbulent one, and demands that those wanting to stay in the game prove their value in tangible ways. One of the ways investment advisors can demonstrate their value is through tools like the Vendor Value Index (VVI), which measures the quality of investment advice services with respect to the fees charged. There are benefits to working with an experienced, trusted advisor, if he can provide the expertise, time, and sound judgment that aligns with RISA standards and provides plan sponsors added assurance. The key is to rely on quantitative data provided through tools such as the VVI, as opposed to relying simply on the longevity of an advisor relationship or the professional brand umbrella under which the advisor operates. The trend toward commoditi-

4 Journal of Compensation and Benefits zation of investment advice, and the wide variation in fees that characterizes the market for investment advice, adds significant vendor management pressure to RISA plan fiduciaries. Plan fiduciaries themselves, however, may also use tools like the VVI in partnership with their current advisors, to determine whether an online alternative may better serve their unique organization and retirement plan needs. Trend #3: Addition of IRAs to Fiduciary Oversight List A revision to the definition of who is a fiduciary has been announced by the DOL. The initial elements of a rule called the Best Interest Contract xemption (BIC) go into effect on April 10, A key provision of BIC affects RISA plan participants assets when they transfer or rollover their defined contribution accounts to Individual Retirement Accounts ( IRA ) upon termination of employment or retirement. Plan sponsors will need to ensure that their plans participants receive IRA advice only from advisors that meet compliance requirements under BIC. BIC requires a service provider that delivers investment advice to acknowledge her fiduciary status and any associated representatives that provide such advice. Under BIC, the provider and her advisor representatives must offer advice that: 1. Is prudent, meaning serving the client s best interest, 2. Is devoid of misleading statements, and 3. Carries a reasonable fee. In addition, BIC requires that investment advice vendors: 1. Adopt procedures that reduce possible negative effects of their conflicts of interest, 2. Fully disclose information about their conflicts of interest, and 3. Provide transparent information about the cost of their advice. Plan fiduciaries will likely find it challenging to vet advisors under this new rule, as they are not accustomed to testing the regulatory compliance status of their vendors. A critical place for plan sponsors to start will be documentation both of vendors contracts, and of the plan sponsor decisionmaking process. While the U.S. Department of Labor imputed fiduciary status for IRAs and retirement plans, the Internal Revenue Service retains exclusive enforcement of IRAs. In order to satisfy strict IRS standards, fiduciary oversight must include an enhanced management process that is validated by adequate documentation of compliance. Under BIC, plan sponsors will need to document how they evaluate and make decisions on each of their retirement plan vendors in order to attest to their compliance with the new BIC rule. The pace at which the three trends are emerging vary, as illustrated in the below chart. 8

5 The xcellent Fiduciary CONCLUSION As plan sponsors continue to balance a plethora of executive responsibilities with the management of their retirement plans and as an everevolving slew of regulations threatens to overwhelm plan sponsors seeking to excel in their fiduciary duties automation will become a more prevalent solution for savvy leaders and their fiduciary peers. Wherever plan sponsors fall on the spectrum of technological acumen, there are firms and advisors who can help customize a technology solution that adopts part or all of the fiduciary function. With the emergence of new and better technology interventions each day, plan sponsors will be able to look forward to a broader spectrum of options in their pursuit of the ideal retirement plan management approach. For information about automation of the fiduciary role, contact Roland Criss at or admin@rolandcriss.com. FiduciaryGRC, Vendor Value Index, and VVI are trademarks of Roland Criss Fiduciary Services. 9