Day of Reckoning with the DOL

By Aaron Schumm, Vestwell’s CEO and Founder

It.  Is.  Here.  Department of Labor Secretary Alexander Acosta has made a wave in the political landscape by not further delaying the applicability date of the DOL Fiduciary Rule.  Many suspected the can would be kicked down the road, with another delay.  Without taking a political stance, this is a prime example of a highly publicized regulation not being “pared back” by the new administration by way of an executive order.

Forward-thinking shops have already moved to spiritually fulfil their fiduciary obligations – (Link).  But, as we all know, there are procrastinators.  The “wait & see” camp have been left scrambling for solutions.  The anecdote by John Castelly of Personal Capital perfectly captured the state of procrastinators, “This turnaround with a June 9 deadline is just like when we were back in school, thinking we would have a substitute teacher, so we didn’t do our homework, but the real teacher showed up instead and we are now not prepared.”

So, what does it mean for you?  Still, there remains a void that will be filled by the fiduciary rule becoming regulation on June 9.  In the simplest terms, the rule is about transparency of fees, suitability of financial products, and alignment of interests between advisor and consumer.  As it pertains to the 401(k) industry, there are a few key areas we will highlight.

Fee transparency. There can be no “hidden” fees, such as 12b-1’s, sub-transfer agent fees, etc.  Of interest to you, whether a company or an employee, might be the 408(b)2 and 404(a)5 fee schedules to understand who is being paid and how much.

Reasonable Fees. Expanding on point 1, the advisor and plan sponsor’s fiduciary responsibilities now include selecting providers and investments with a reasonable fee.  What’s a reasonable fee?  While that is debatable depending upon a number of factors, a strong argument can be made that with advent of low-cost investment products like index ETF’s and efficient technology platforms to help operationally scale, the total fees (including advisory, admin and investments)  can be totaled at well below 2%, and may be closer to 1% in practice (depending on the investments and service).

Fiduciary roles – There are 4 main areas in defined contribution plans:

    1. Named Fiduciary – This is typically borne by the plan sponsor but can also be aided by the platform provider.
    2. Named Investment Manager – If you’re picking the fund lineup for the employees, you’re picking up that responsibility.  But, investment managers, MF/ETF strategists, DCIO’s, financial advisors, and platform providers can step in to take on this role for you.  This is usually done under the SEC 3(38) and/or 3(21) construct.
    3. Named Administrator – This role is responsible for the final administrator processes on behalf of the company & employees.  Typically, the plan administrator named in the agreement is the plan sponsor.  However, it can be outsourced to a third-party administrator (TPA) and/or ERISA 3(16) provider.
    4. Named Trustee – This is the party acting as the trustee on behalf of the plan. Again, this is typically carried by the plan sponsor, but can be outsourced to a trust company or other third parties.

As the industry thankfully moves towards simplistic, fee-based, low-cost, and transparent environment, understanding the moving parts of retirement plans will become far less confusing for those less adept to 401k and 403b plans.

In every change, there is opportunity; the DOL rule may change the industry, in our eyes for the better.

If you have any questions around how the DOL rule impacts you as an advisor, company or employee, feel free to contact us here at Vestwell.  We are happy to help.