For DC plans, the fiduciary role is an evolving one

For advisors of employer-sponsored retirement plans, staying on top of changing fiduciary regulations presents a constant challenge. The tug-of-war over the 2016 fiduciary rule issued by the Department of Labor (DOL) is case in point. Years in the making, the rule sought to remove all conflicts of interest by extending fiduciary status to virtually any professional involved with retirement assets, starting in April 2017. But amid much debate and confusion, it was pulled back for further review, and currently is not scheduled to be fully implemented until July 2019. Final details are still forthcoming, keeping advisors and their plan sponsor clients guessing.

Even as advisors endeavor to stay on top of their fiduciary responsibilities, they have the opportunity to play a critical role in helping defined contribution (DC) plan sponsors meet their own. In fact, many plan sponsors simply don’t understand the extent of their fiduciary role, and that has led to high-profile and costly litigation. In recent years, large companies such as Lockheed Martin Corp. and Ameriprise Financial have been hit with multimillion dollar settlements1 for breaches of fiduciary duties. Workers have gone after some smaller employers as well, including cases that may bring up issues such as excessive fees, imprudent investment selection, or ineffective plan oversight.

Building a historical foundation for understanding

Providing plan sponsors with some historical context can help them better understand the rationale for their current fiduciary responsibilities and what they need to do to meet them.

Since the 1970s, nearly all fiduciary regulations affecting long-term savings can be traced back to the rapid shift from traditional pension plans to DC plans, such as 401(k) plans, as the primary workplace retirement plan for many individuals.

The passage of the Employee Retirement Income Security Act of 1974 (ERISA) led to a changeover to almost exclusive reliance on participant-directed plans, and subsequently to some unintended consequences. As the first DC-dependent workers began reaching retirement age with inadequate savings, pressure mounted to make the system work harder for people with no specialized financial knowledge. Best practices for plan fiduciaries would have to be redefined to clear the way for more effective plan design. With clouds gathering over the Social Security system — as sufficient future funding of this system has become questionable2 — the urgency to act only intensified. To encourage higher savings rates and more appropriate asset allocations, Congress passed the Pension Protection Act of 2006.

It provided safe harbor protection to plan sponsors who automatically enroll employees into approved qualified default investment alternatives (QDIAs), such as custom and proprietary target-date funds. These diversified investments quickly replaced stable value accounts as default investments in many plans. At the same time, increasing numbers of plan sponsors have adopted automatic enrollment.

More recently, regulators have focused on potential excessive fees that can erode participants’ savings over time. To educate participants — and encourage plan sponsors to contain costs — the DOL issued fee disclosure guidelines in 2010. But that was only a first step.

To uncover all the sources of fees, the DOL has taken a magnifying glass to every link in the retirement-saving chain, from the selection and monitoring of a plan’s investments to advisory fees associated with rollovers and general financial planning services. That led to the massive fiduciary rule, issued in 2016, with additional guidance to come.

Meanwhile, DC plans are continuing to evolve. Potential changes that have been discussed include mandating some or all of workers’ savings into after-tax Roth 401(k) plan accounts. (For more on Roth 401(k) plans, see To Roth or not to Roth in a DC plan). Such a measure could reasonably lead to additional guidance on plan design and participant education.

The shifting fiduciary landscape

The shifting fiduciary landscape
1974 Employee Retirement Income Security Act of 1974 (ERISA) is signed into law. Lays a foundation for plan sponsors’ fiduciary obligations to their plan participants. Protects plan sponsors from liability when participants make their own investment selections.
1975 Department of Labor (DOL) releases fiduciary standard test. Provides guidance on identifying plan fiduciaries among administrators and advisors.
2006 Pension Protection Act of 2006 is enacted. Provides safe harbor status to plan sponsors who automatically enroll and escalate participants. Identifies target-date, target-risk, and managed accounts as acceptable Qualified Default Investment Alternatives (QDIAs), leading plan sponsors to end the practice of using stable value accounts for this purpose.
2010 DOL issues fee disclosure rules. Establishes standards for communicating plan costs to participants.
2016 DOL issues “final” fiduciary rule.* Extends fiduciary status to virtually any professional who manages or administers retirement plan assets, or who provides retirement planning services.

*Originally planned to be phased in, starting in April 2017, this rule is not scheduled to be fully implemented until July 2019, and further clarification is still pending.

Best practices for reducing fiduciary risk

To help your clients potentially mitigate their risks of litigation and fines, you can work with them to establish guidelines, processes, and practices that support their fiduciary responsibilities. Here are some important steps you can take:

  1. Forge a fiduciary partnership. Both the plan sponsor and advisor are fiduciaries to plan participants, so a partnership can be important for developing a system to help satisfy critical requirements. For example, advisors may want to help plan sponsors set up stringent procedures, identify safe harbor requirements, and monitor the plan lineup on a regular basis. Benchmarking their plans against those of similar organizations is another way to gauge if they are competitive and fees are in line with norms. While an advisor serving in an ERISA 3(21) investment fiduciary3 capacity can help the plan sponsor in selecting and monitoring their plan investments, this fiduciary role generally doesn’t let sponsors off the hook. However, it can make it easier for them to meet their obligations.
  2. Help create investment policy statements. Although not required by law, a formal investment policy statement helps guide decision-making around plan investments and provides a tangible demonstration of a plan sponsor’s understanding of their fiduciary obligations under ERISA section 404(c). (This section permits employees to direct their own investments in DC plans such as 401(k)s. Generally, if a plan satisfies ERISA 404(c) requirements, then the plan fiduciaries would not be held liable for any breach related to the specific participant’s choice of investments. Nonetheless, plan fiduciaries are still liable for the selection and monitoring of all investment options made available in the plan.)

    An investment policy statement should outline a plan sponsor’s investment philosophy. That may include viewpoints on passive or active investments, the types of investments allowed (or not allowed), whether a brokerage window is offered, and if applicable, the role company stock will play. It details the criteria for selecting investments — including a QDIA if there is one — and the processes for monitoring them. It also indicates how they will determine when investments would go on a “watch list” and what processes they follow if they decide to remove, add, or replace an investment.

    Providing plan sponsors with a template investment policy as a starting point, then work with them to customize it. Once the policies are complete, offer to help your clients keep them up to date. And above all, encourage them to adhere to their own guidelines. The only thing worse than not having an investment policy is not following the one they have.

  3. Provide fiduciary training. Whether or not a plan sponsor’s benefit office staff are considered plan fiduciaries, offer to provide fiduciary training to help them steer clear of pitfalls.

    Plan sponsors may not have a good understanding of who is a fiduciary. Provide clarity by helping them document the roles and responsibilities of everyone involved in managing and delivering their plans. Plan fiduciaries may include administrators, trustees, investment managers, investment committee, custodian, advisors, and recordkeepers. Make sure this information is added to their investment policy statements.

Litigation can be a real risk for DC plan sponsors. Engaging in a fiduciary partnership with plan sponsors, however, can help them stay on top of evolving regulations and meet their fiduciary obligations with confidence.

1 “Settlements reached in two major retirement plan cases,” BenefitsPRO, July 23, 2015.

2 Social Security Bulletin, Vol. 70, No. 3, 2010. The Social Security Board of Trustees has estimated that the system would remain fully funded until 2035, after which taxes are expected to pay 75% of benefits.

3 “3(21) versus 3(28) ERISA Investment Fiduciaries — Decoding the Numbers,” National Institute of Pension Administrators, Sept. 3, 2013. A 3(21) investment fiduciary under ERISA provides professional investment recommendations to a plan sponsor or trustee, but the sponsor retains ultimate decision-making authority. Both share fiduciary responsibility.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and summary prospectuses, which may be obtained by visiting or calling 877 693-3546. Investors should read the prospectus and the summary prospectus carefully before investing.


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