It would be perfectly logical to assume the advisor who helps you with your 403(b) plan’s investments would be acting in your employees’ best interest. And while your advisor may very well be putting your 403(b) plan first, not everything is logical when it comes to advisor relationships. In fact, not everything is logical when it comes to the term “advisor.”
For example, investment advisors who are registered with the SEC or a state securities regulator are fiduciaries. As such they are required to act in the best interest of their clients. When it comes to 403(b) plans, that means these typically fee-based advisors are charged with putting your plan’s investment results ahead of their own personal gain.
On the other hand, stockbrokers, broker-dealer representatives and insurance agents answer to self-regulatory bodies or state insurance regulators. These advisors adhere to a “suitability” standard. So while their recommendations may be suitable for your 403(b) plan, they may not be in its best interest. Often, the dividing line between suitability and best interest comes down to one thing: fees. A broker operating under a suitability standard may design a fund line-up that generates more personal compensation than a line-up that would actually be in the plan’s best interest.
It is not always easy to determine if your advisor is acting as a broker or a fiduciary. Large insurance firms and brand name investment houses market heavily to 401(k) and 403(b) plans, often holding themselves out as advisors. And they typically offer an extensive universe of funds that could be included in your plan’s line-up. These may include their own in-house funds as well as those managed by third parties.
But will the funds that wind up in your 403(b) plan be low-cost investments that are in the best interest of your employees? Or will these investments be merely suitable for the plan, but great for the advisor?
The idea that an advisor would not be acting in your plan’s best interest can be hard to understand. But behind the broker’s attractive brochures is the reality that their business model is the distribution of products.
Won’t the new DOL fiduciary rule force all advisors to put your 403(b) first?
That’s not clear yet. Yes, the rule, which became partially effective June 9th, did require advisors, brokers, and insurance agents to act in the best interest of their 403(b) clients. That meant they had to act as fiduciaries. This rule was meant to limit the conflict of interest described above when it came to fund selection. But the DOL indicated that it wouldn’t apply any penalties for non-compliance until everything was finalized. And while financial professionals were limited to charging “reasonable compensation,” the definition of what was reasonable remained vague. Finally, advisors could continue to work on commission if they provided the proper disclosures on compensation and conflicts. To complicate matters further, in early March, a U.S. Federal court struck down the Fiduciary Rule. It is now unclear if the DOL will appeal this decision.
Bottom line: while the original intent of the DOL rules was to raise the level of care provided to retirement accounts, it’s not clear whether or not the rule will be reinstated and can accomplish this objective.
While the DOL regulations are being sorted out, how can non-profit employers determine if their advisor is acting as a 403(b) fiduciary?
- Check to see if your 403(b) advisor is a registered investment advisor (RIA). An RIA’s fee-only business model is designed to put clients first. These fee only advisors are already fiduciaries. That is, their approach already matches the DOL’s desired approach. Compare this to a broker or insurance firm that is contorting its commission-based business model to meet the DOL’s desired requirements. Be wary of the term “fee based” as that differs from “fee only” as a fee based business may include commissions or revenue sharing.
- Learn how your 403(b) advisor is licensed. If your advisor holds a Series 65 License that is a good sign you are working with a fiduciary. The license allows its holder to act as an investment advisor representative. That means the advisor is held to a fiduciary duty, a higher standard of care than “suitability.” If your advisor holds a Series 7 License, the advisor may well be a broker – not a 403(b) fiduciary. This is a securities license for trading securities and receiving fees for such transactions.
- Did your advisor ask you to sign a Best Interest Contract Exemption (or were you asked to review other disclosures regarding compensation.) While the DOL rules are far from sorted out, before the March ruling, it appeared that brokers might retain the ability to earn commissions as long as the payments were fully disclosed. The DOL called this disclosure the Best Interest Contract Exemption. This could allow large brokerage and insurance firms to continue business as usual. Advisors providing conflict-free advice had no need to disclose exceptions to their fee-only business model.
- **Determine if your advisor is a 403(b) fiduciary. **The DOL rule required advisors to play a fiduciary role. Some brokers or insurance companies may outsource this role, but it’s still important to know what type of fiduciary is providing your plan services. If your advisor is a 3(21) fiduciary, the provider is charged with making investing recommendations, but you retain responsibility for the plan’s investments. If you are working with a 3(38) fiduciary, however, the provider is taking on fiduciary responsibility for the 403(b) plan’s investments.
If you are confused about your investment advisor’s fiduciary status and responsibilities, or if you are spending too many hours examining the evolving DOL rules to run your non-profit, schedule time to chat with one of our retirement plan consultants. At ForUsAll, retirement plan consultants are Series 65 licensed and investment advisor representatives. ForUsAll offers 3(38) services and is a registered investment advisor with the SEC.