American Benefits Council Opinion on 401(k) Participant Advice : Just Keep it Free of Conflicts

After reading the ABC’s opinion on participant advice, which is being openly scrutinized by various organizations trying to protect the 401(k) participant, I feel it was the most clear and concise of the responses I have read thus far. The following is our interpretation of its points:

Don’t Eliminate Advice and Account Management – “Over-swinging the pendulum” to get rid of account management and advice via the ’01 SunAmerica Opinion does not make sense. It was conflict free in the first place. No need to throw the baby out with the bathwater.

PPA Didn’t Work – Trying to “manage” conflicts rather than eliminate them just doesn’t work. And, in my opinion, PPA was doomed to fail. It was designed to create the opportunity for more employees to receive advice by managing the potential conflicts of interest as they exist among the wirehouse/broker dealer world of varying forms of compensation on a fund-by-fund basis, which could translate into conflicted advice. The wirehouse/broker dealer would have had to take a 180 degree turn on how they received revenue in order for this to happen for the opportunity to advice Joe Participant on his $30,000 nest egg. Not a likely scenario.

PPA’s Intention Was Positive, But Misunderstood – We always took the PPA’s Fiduciary Adviser provision as a means of paving the way for companies to offer advice to their employees by establishing a clearly defined fiduciary safe harbor. For select companies already operating in a conflict-free manner (fee-for-service without a broker dealer affiliation), I believe this to be a huge benefit and success. However, the market is now trying to figure out how to lower the fiduciary standard in order to make more money at the expense of the participant. Again, not likely to happen. Safe harbors for plan sponsors to help their participants? Good. Attempting to lower the standard of care from being a true fiduciary? Not so much.

Sticking Point is Conflict-Free Advice, or Fiduciary Standard of Care – Understandably, organizations that are not positioned to sell products are advocating for a fiduciary standard of care. Various product-oriented organizations are attempting to redefine this. Fiduciary360 recently conducted an excellent webinar on the topic. The point is, employees assume and expect advice to be free of conflicts. We have learned this firsthand after conducting over 1,000 1-on-1 401(k) consultations over a 90 day period beginning in February of this year. The plan has 4,500 participants and ~$600M in assets. If there is a “catch” with the advice that is being delivered, the influential members of the organization are going to balk at the validity and/or lack of potential bias in the advice. This is especially true if an adviser must explain that his/her compensation is level but his firm’s is not, even though that is likely the resource from which they are receiving their recommendations. These “stink tests” conducted by educated, experienced people that have been “sold” things before will then advise their friends/colleagues, whom respect their opinion, to stay away. This not only affects the “fiduciary adviser’s” utilization of the service, but also the company’s credibility that was supposed to conduct the due diligence on the advice provider. Conflict-free, process driven advice (fiduciary standard, specifically outlined by CEFEX and fi360) can be trusted if delivered on a purely fee-for-service basis.

In our opinion, only conflict free advice can be trusted, and anything short of it would not only impact the participants, but also their trust in the due diligence efforts of the plan fiduciaries, plan advisor/consultant, and provider. When it is conflict free, participants clamor for the help they need, especially in light of the recent volatility in the markets.