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.
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.
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
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