What investments you need to change for the DOL Rule

The answer: NOT A SINGLE ONE

Multiple times today I've heard reports and seen documentation of "advisors" telling their clients that in order to accommodate the DOL's Fiduciary Rule, they need to make substantial changes to their organization's retirement plan's investment menu.

Folks, this is a dirty lie. Here's why.

The real reason these changes are being presented is that their broker-dealer or firm's corporate headquarters is dictating that changes be made to retirement plan clients to reduce their liability and allow the representative to continue to get paid. In short, their business model can't accommodate servicing your plan anymore, so you need to change it, and no attention is being paid to whether or not you're violating ERISA in the process.

Exhibit #1: "You need to change these investments to these over here."

ERISA says you must have a prudent process for selecting and monitoring the investments in the plan. If those investments weren't failing your investment policy statement last quarter, you're quite likely violating your own investment policy by replacing them. Remember Tussey v ABB and the millions of dollars in penalties?  Don't be like them.

The motivation here could be:

  • because selling agreements have changed at the firm level and those aren't permitted (i.e. they won't pay to play or hold the assets at the firm)
  • because the firm has released a list of approved investments and those aren't on it
  • because the firm decided that revenue sharing is too risky to use in retirement plans despite the fact that it can end up reducing overall investment expense at the participant level and felt it was easier to strip it out

Whatever the reason, the DOL Fiduciary Rule says ABSOLUTELY NOTHING about this. It does say that your advisor must act in your best interest. So, is violating your investment process in your best interest?

Exhibit #2: "You now have to hire this outside 3(38) fiduciary to pick the investments."

The motivation here is likely that the advisor is no longer allowed by their firm to choose investments or take on that level of liability for your plan. A popular workaround is to have the plan sponsor hire a third party to have discretion over the investment decisions. Some firms are actually requiring this.

Let me break this down for you: they're suggesting that you hire a firm you've never met and who will never meet your employees, and that it's a good idea to grant them discretion to pick the investments for you primarily so the advisor's liability will be reduced. Likely the advisor has someone in mind, they will provide no due diligence on how this firm was selected, and they will take no liability for you hiring them.

At Retirement Planology, we're fundamentally against this unless there's a cost savings to the plan, and that this advisor/firm has actually met your employees and understands their investment needs and your plan design. You would never treat engineering firm employees the same way you would a marketing firm or factory employees.

Again, the DOL Rule says NOTHING about this. It does say that your advisor must act in your best interest. Does violating ERISA's prudent selection process to hire an outside expert or hiring someone to make decisions in the best interest of your employees when they've never met them sound like it's in your best interest?

Exhibit 3: "It's just terrible that you need to move from A Shares you've had forever to a fee-based setup. This is not in your best interest."

Part of the DOL Fiduciary Rule does cover the need for a broker to not benefit from recommending one investment that pays more in commission to the broker than another in the plan. This falls under DOL trying to dictate conflict-free advice. Let's unpack this one.

A shares can be offered in any plan with any type of compensation model (fee-based or commission-based), and purchased at NAV without the sales loads (so how long you hold the funds is totally irrelevant to the fees). A plan sponsor is not required to change these investments due to the DOL Rule. But, most retirement plan platforms and broker-dealers have quit allowing plans to be under commission-based pay structure under the Rule due to the variation in commission amounts per fund and per family. There's some paperwork at the recordkeeper level that will need to be completed to switch over to level-fee compensation (assuming your representative can even receive fees instead of commissions). This is not a bad thing.

HOWEVER, there could be better share class options available to the plan that would better serve the participants and reduce cost. That absolutely IS in your best interest to revisit, although you might find a change is not required.

Wrapping up

If your broker, advisor, or agent is suggesting that you need to make any of these changes to your investment lineup in your organization's retirement plan to accommodate the DOL's Fiduciary Rule, the only change you need to make is to fire them because they are lying to you. It's also clear they don't understand the DOL's Fiduciary Rule, ERISA and are --maybe unwittingly but nevertheless -- deliberately putting you and your plan at risk. 

We're here and ready to help if it's time to hire a retirement plan specialist dedicated to helping plan sponsors. In fact, we've been set up to accommodate this rule since the day our firm was founded.  Contact us today.