Fiduciary Standards

You no doubt have heard, or will hear, a great deal about the “new fiduciary rules” regarding retirement plans. However, before delving in to that topic a little bit of history would be helpful. In 1896, the Supreme Court decided the case of Plessy v Ferguson. That case gave us the concept that separate but equal was valid in determining education benefits and rights between the races. That remained the law of the land until 1954, when the Supreme Court ruled in Brown v Board of Education, that separate but equal was improper and schools were to desegregate with “all deliberate speed”. While that may sound like a quick edict, the facts are that desegregation of the schools took years. What relevance does that have here you might ask? Here is the connection.

In the late 1960’s and early 70’s, Congress debated the need for significant pension reform. After much debate, Congress passed the Employee Retirement Income Security Act of 1974. This law is commonly referred to as ERISA. Under this law, many new retirement plan rules were created and of those were new fiduciary standards for those that provided “investment advice for a fee”. The importance of that was that if one were a fiduciary to a retirement plan they were obligated by law to make decisions in the best interest of the Plan and its participants before their personal interest. This created quite the conundrum as service providers to retirement plans could wind up with the dilemma of choosing between what was right for the customer versus what would give them a higher profit. Lobbying groups sprang in to action and various exemptions were created so that the insurance and investment community could provide investment products to retirement plans without wearing the fiduciary hat and the responsibility that came with that.

So now here we are in the year 2017, and the fiduciary standards written in to the law in 1974 are now becoming applicable to a wide range of retirement plans and service providers. Two examples of how change on a massive scale can take a long time.

Under regulations issued by the Department of Labor, compensation payable to providers of investment/insurance services to retirement plans and IRA’s must meet “level” compensation standards meaning that the practice of large up front commissions should become a thing of the past as it relates to investment vehicles and compensation earned by providers of financial products must be level in nature. Moreover, this change to level compensation also requires that remuneration to the investment professional must be level across all investments offered so that there is not incentive to offer or push one particular product over another.

In addition, a major change of the new regulations is to expand the list of who is a fiduciary under a retirement plan and to whom this responsibility extends. In short, the role of fiduciary includes the advice that is given to a retiring or terminating plan participant and the new duty on the part of the financial advisor/broker to explain to the participant that it may be in their best interest to leave their account balance in the retirement plan as opposed to transferring to a potentially more expensive IRA.

Finally, much of the discussion around this subject still involves those organizations that seek to do anything they can to NOT become a fiduciary to the retirement plan. Here is where Cashman Consulting differs from many of our peers. We have ALWAYS accepted our Co-Fiduciary status with our Plan Sponsors. This in fact is stated in our Services Agreement. Rather than try and run from this responsibility we have embraced it. Further, our compensation has been and will continue to be (in the large majority of all client relationships) based on a level fee charged against assets under our advisement. No upfront commissions, no greater compensation from one investment over another. On the rare occasion this would happen, we have let our clients know.

We look forward to continuing to service the needs of your retirement plan and its participants.