Biden 401(k) Rule Triggers New Look at Employer Provider Risks

Newly proposed rules widening the US Labor Department’s umbrella of strict fiduciary investment advice standards are pressuring employer plan sponsors to reevaluate the kinds of businesses they hire on behalf of workers.

Plan sponsors that are usually the target of stricter fiduciary regulations are this time poised to be on the receiving end of new protections under the department’s Retirement Security rules package (88 Fed. Reg. 75890–76045) issued Nov. 3. Yet, benefits plan advisers are ringing alarm bells over the trickle-down effects the proposals could have on other fiduciaries to workplace 401(k)s.

Employers already have a fiduciary duty to diligently monitor the third-party service providers to their retirement plans, which have historically evaded fiduciary status but could be swept into the fray under the DOL’s proposed regime. It’s a scenario that’s calling into question the kinds of account rollover and financial education services many employers have flocked to in recent years as a means of beefing up their retirement plans and incentivizing new employee participation.

“If I’m a plan sponsor, I have an obligation to know all my service providers, whether they’re fiduciaries or not, their services, and their fees,” said Bonnie Treichel, founder and chief solutions officer at Endeavor Retirement, a plan sponsor consultancy. “When you comprehensively look at your adviser, your recordkeeper, your third-party administrator together, it’s critical that you know if there’s a change in anyone’s fiduciary status.”

Big banks and insurers on Wall Street have a lot to lose under the proposals. Fiduciary status threatens commissions broker-dealers and insurance agents make on their sales, risking harm to a rollover market of older Americans transferring assets out of workplace 401(k)s into IRAs and annuities.

The proposed rules would discard much of the original 1975 legal test used to determine investment adviser fiduciary status, instead relying on an analysis of advisers’ business model and a “reasonable understanding” about the nature of their client relationships. The proposal largely rejects legal disclaimers companies use to skirt fiduciary liabilities, focusing on the kinds of advice an investor or a plan believes they are getting.

“It’s a key point,” said Matthew Eickman, national retirement practice leader for Qualified Plan Advisors, which specializes in plan-level fiduciary consulting, fee benchmarking, and investment advice. “Many plans are shocked to learn that advisers aren’t already fiduciaries.”

Unclear Consequences

Retirement plans themselves are almost certain to be impacted by the proposed fiduciary rules, but advisers disagree on exactly what that fallout will look like.

Employers tap recordkeepers to track assets in a plan but often give them first dibs on one-time rollover advice when it comes time for distributions, a transaction that puts the third parties directly in the new DOL rule’s crosshairs.

Companies sponsoring plans use insurance products like annuities to offer workers lifetime income options and employ financial coaches to encourage smart money management.

A Bank of America study last year found that 84% of US employers believe financial wellness benefits improve worker retention. And nearly seven in 10 participants in an Allianz Life Insurance Company survey reported interest in developing worker annuity options.

All of those worker-service provider interactions have the potential to become fiduciary investment advice under the DOL’s proposal.

“The proposed rule focuses on what the expectations of a retirement investor are and how the individual investor is reading a scenario,” said Katherine Kohn, a partner at Thompson Hine LLP. “Plan sponsors are going to feel like they need to limit those communications or monitor them to avoid potential liability.”

Banks and insurers may take on fiduciary status already in some cases, but financial wellness firms almost never do. When experts sit down with workers to go over the benefits of their workplace 401(k)s, there can exist a gray area between education and advice, said Treichel.

The DOL’s Employee Benefits Security Administration operates under a 1996 model (Interpretive Bull. 96-1) for determining what qualifies as investment education that identifies four generally permissible topics: plan information, general financial and investment information, asset allocation models, and interactive investment materials. But the bulletin doesn’t go as far as earlier vacated iterations of the rule to clarify whether asset growth models would trigger fiduciary status.

The DOL specifically asks for stakeholders to comment on what role investor education should play in the final fiduciary rule. In the meantime, plan sponsors are left wondering what their liability for providing it to their workers may be.

The agency didn’t immediately respond to a request for comment Wednesday.

Regulators make clear in the proposal that their focus is on investment sales, not education, according to Eickman. By applying fiduciary status to a wider set of companies, the department is taking pressure off the traditional fiduciaries to workplace retirement plans.

“When some sort of service provider who a plan sponsors has implicitly or explicitly endorsed for education crosses the line between investment advice and education, that advice would be fiduciary and the service provider would be responsible, not the plan sponsor,” Eickman said.