As the year draws to a close and Washington remains stalemated, it is interesting to think about what an 'ideal' pension system would look like. In a sense this post is an unabashed commercial for a book I co-edited with my colleague, John A. Turner, Pension Policy Center. The book, Imagining the Ideal Pension System: International Perspectives, was published recently by the W.E. Upjohn Institute for Employment Research.
In the book, ten country experts discuss their views of the ideal pension system for their country. The chapters are an outgrowth of a conference that John and I led in Washington D.C. in 2010 on the topic for the European Network for Research on Supplementary Pensions. The U.S. and Japan are included, in part for contrast. The rest of the chapters are written by experts from Europe about the pension systems of their home countries.
As always when working with this group of scholars, I was impressed at the conference and when editing chapters with the depth and breadth of their vision. The viewpoints reminded me that 'ideal' systems of any kind are dependent upon the perspective of their creator. I believe that all the scholars who contributed to the book would agree that their viewpoints are influenced by the values and culture of their home countries.
Still, pension systems typically share a set of 'ideal' goals. Risks should be shared in a 'fair' and efficient way. Benefits must be adequate. And, increased longevity brings challenges as well as opportunities.
John and I currently are working on a paper entitled, "The Market for Financial Advisers" for a conference to be sponsored in May by the Pension Research Council at Wharton. So, as we move into the new year, you can expect to see more here about financial advisers and fiduciary issues.
Thursday, December 22, 2011
Tuesday, December 20, 2011
Investment Selection the #1 Priority of Plan Sponsors?
Christopher Carosa at Fiduciary News posted today on the eight "Hot Topics" with 401(k) plan sponsors. Fiduciary News crunched the numbers in the appendix of Deloitte Consulting's 2011 Edition of its Annual 401(k) Benchmarking Survey. http://fiduciarynews.com/2011/12/new-survey-reveals-how-401k-plan-sponsors-rank-8-hot-topics/ According to Carosa's post, the top priority of plan sponsors is "Providing the right investment to help participants achieve retirement goals."
Although Carosa notes that some might find the 2nd priority, 'reducing plan risk and potential fiduciary responsibility' surprising, I think the top two priorities may reflect some of the same concerns. Are plan's offering the 'best' menu of investment options? And, if not, is there risk to the plan sponsor?
In earlier posts I've raised the question of why plan sponsors haven't taken a stronger position in the debate on DOL's proposed re-definition of fiduciary. Carosa raises the same question and interprets the emphasis on potential fiduciary liability as a possible indicator that plan sponsors recognize the interests they have at stake in the debate.
Although Carosa notes that some might find the 2nd priority, 'reducing plan risk and potential fiduciary responsibility' surprising, I think the top two priorities may reflect some of the same concerns. Are plan's offering the 'best' menu of investment options? And, if not, is there risk to the plan sponsor?
In earlier posts I've raised the question of why plan sponsors haven't taken a stronger position in the debate on DOL's proposed re-definition of fiduciary. Carosa raises the same question and interprets the emphasis on potential fiduciary liability as a possible indicator that plan sponsors recognize the interests they have at stake in the debate.
Monday, December 19, 2011
Boards of Directors and 401(k) Plans: Wal-Mart's Experience
The $13.5 million settlement agreement that Wal-Mart and Bank of America Merrill Lynch entered into regarding Wal-Mart's 401(k) has gotten some visibility. Typically the commentary is on the fact that Merrill Lynch will be responsible for $10 of the $13.5 million. Employers with less bargaining power or where employees had fewer allegations against the platform provider might find themselves paying a larger chunk of settlements in similar cases.
The original allegations in the case were that Wal-Mart breached its fiduciary duties to its employees by offering only a handful of high cost, retail mutual funds and two index funds as investments in its 401(k) plan. Forbes noted back in 2009, in the early days of the litigation, that this lack of attention to costs was at odds with Wal-Mart's reputation for hard-nosed bargaining with its suppliers. http://www.forbes.com/forbes/2010/0118/investing-walmart-retirement-401k-paying-retail.html
Boards of directors should take note. Back in 2005 the New York Times carried a story about a proposal presented to the Wal-Mart Board of Directors as part of a review of the cost of employee benefits. http://printfu.org/read/wal-mart-memo-suggests-ways-to-cut-employee-benefit-costs-c14f.html?f=1qeYpurpn6Wih-SUpOGum6ynh8PQ4pLBydfkkrbT4dWVwNrT1tvY6NuFx9Pi4ZTa5I2o4eOWquHY0d_rztOUqNrbytLY6oW319jk5Yup56Cnp4fg45ig56KWoayL2OnZ6drVvL_b0dmKoOOsmqiWzJeo2KanqZ-W0Nnk4qOdo93s5JPf0deT4d3U2NvYnNnK6pzK4tTk3NmXyN_n2-HZ2aTSyNuirJajzpWlodvT1cre28zfnu3G4NXG4uaOoKTI2tvK0tjq2KLYydaUpOs That memo is still available at: http://www.nytimes.com/packages/pdf/business/26walmart.pdf . It recommends that Wal-Mart reduce its overall 'investment' in its profit sharing and 401(k) program in order to "reduce costs and help Associates better save for retirement." The reasoning appears to have been that if Wal-Mart amended its plan to stop providing 401(k) benefits to all Associated and instead only made plan contributions as 'matching' contributions, then it would help Associates by encouraging them to save for their own retirement. The debate on whether matching contributions are 'better' for employees, especially in a low-wage work place where employees also make substantial contributions to health care costs, is one we can leave for another day.
The interesting point from the 27-page review of Wal-Mart's benefit plans is that nowhere does the Wal-Mart board of directors seem to be given any information on the limited and expensive menu of investment options in the 401(k) plan. If any part of the concern in the benefit plan review was with helping "Associates better save for retirement," one would think that investment options might have been mentioned. Or, an attentive board member may have asked about those options.
Do boards of directors have a fiduciary obligation to delve into the details of 401(k) plans? No. Do they have a fiduciary obligation to appoint and monitor plan fiduciaries? Yes, without question.
Boards of directors of those relatively few companies with DB plans have an interest in the performance of the plan investments and the level of benefits provided by the plans. Those factors play a prominent role in the company's obligation to contribute to its DB plan. In other words, the board's fiduciary obligation to monitor the DB plan aligns with its business interest in the level of the company's plan contribution.
The move to 401(k) plans, however, seems to have given boards license to hand off as insignificant such plan 'details' as selection of plan investment options and its service providers. The questions that go to the board are those that directly impact the company's cost: the amount of the company's contribution and the number of employees entitled to receive contributions.
But, the Department of Labor has been clear. The selection and monitoring of investment options and service providers is a fiduciary function. In the coming year plan participants will begin to receive more disclosure on costs and fees associated with their 401(k) plans. Companies, including their boards of directors, need to understand those disclosures and be sure that they are pursuing the best interests of their employees.
The original allegations in the case were that Wal-Mart breached its fiduciary duties to its employees by offering only a handful of high cost, retail mutual funds and two index funds as investments in its 401(k) plan. Forbes noted back in 2009, in the early days of the litigation, that this lack of attention to costs was at odds with Wal-Mart's reputation for hard-nosed bargaining with its suppliers. http://www.forbes.com/forbes/2010/0118/investing-walmart-retirement-401k-paying-retail.html
Boards of directors should take note. Back in 2005 the New York Times carried a story about a proposal presented to the Wal-Mart Board of Directors as part of a review of the cost of employee benefits. http://printfu.org/read/wal-mart-memo-suggests-ways-to-cut-employee-benefit-costs-c14f.html?f=1qeYpurpn6Wih-SUpOGum6ynh8PQ4pLBydfkkrbT4dWVwNrT1tvY6NuFx9Pi4ZTa5I2o4eOWquHY0d_rztOUqNrbytLY6oW319jk5Yup56Cnp4fg45ig56KWoayL2OnZ6drVvL_b0dmKoOOsmqiWzJeo2KanqZ-W0Nnk4qOdo93s5JPf0deT4d3U2NvYnNnK6pzK4tTk3NmXyN_n2-HZ2aTSyNuirJajzpWlodvT1cre28zfnu3G4NXG4uaOoKTI2tvK0tjq2KLYydaUpOs That memo is still available at: http://www.nytimes.com/packages/pdf/business/26walmart.pdf . It recommends that Wal-Mart reduce its overall 'investment' in its profit sharing and 401(k) program in order to "reduce costs and help Associates better save for retirement." The reasoning appears to have been that if Wal-Mart amended its plan to stop providing 401(k) benefits to all Associated and instead only made plan contributions as 'matching' contributions, then it would help Associates by encouraging them to save for their own retirement. The debate on whether matching contributions are 'better' for employees, especially in a low-wage work place where employees also make substantial contributions to health care costs, is one we can leave for another day.
The interesting point from the 27-page review of Wal-Mart's benefit plans is that nowhere does the Wal-Mart board of directors seem to be given any information on the limited and expensive menu of investment options in the 401(k) plan. If any part of the concern in the benefit plan review was with helping "Associates better save for retirement," one would think that investment options might have been mentioned. Or, an attentive board member may have asked about those options.
Do boards of directors have a fiduciary obligation to delve into the details of 401(k) plans? No. Do they have a fiduciary obligation to appoint and monitor plan fiduciaries? Yes, without question.
Boards of directors of those relatively few companies with DB plans have an interest in the performance of the plan investments and the level of benefits provided by the plans. Those factors play a prominent role in the company's obligation to contribute to its DB plan. In other words, the board's fiduciary obligation to monitor the DB plan aligns with its business interest in the level of the company's plan contribution.
The move to 401(k) plans, however, seems to have given boards license to hand off as insignificant such plan 'details' as selection of plan investment options and its service providers. The questions that go to the board are those that directly impact the company's cost: the amount of the company's contribution and the number of employees entitled to receive contributions.
But, the Department of Labor has been clear. The selection and monitoring of investment options and service providers is a fiduciary function. In the coming year plan participants will begin to receive more disclosure on costs and fees associated with their 401(k) plans. Companies, including their boards of directors, need to understand those disclosures and be sure that they are pursuing the best interests of their employees.
Friday, December 16, 2011
Fiduciary Advice on Pension Assets - the U.S. and Australia
This week I've blogged about the Australian superannuation (pension) system and the regulation of investments and investment advice. In sum, Australia is in the midst of reconfiguring its system, which ranked significantly higher than the U.S. patchwork of 401(k)s, DBs, etc. in terms of adequacy, sustainability and integrity (e.g. regulation, governance, etc.).
The reforms include the development of a robust set of low cost default investment products for workers who are not interested in making their own investment decisions. Although Australian employers are required to make contributions to an account (similar to U.S. 401(k)s) for their employees, the employers will have virtually no legal liability for choosing the default investment product for employees who do not make a choice. Employees who want advice on their investments, whether in a superannuation account or otherwise, will receive that advice from an investment adviser who must provide advice in the best interest of the client, and who will be prohibited from receiving commissions, rewards for scale and soft dollars.
The Australian pension system holds less than ten percent of the pension assets of the U.S. employer-based system (A$1.28 trillion v. $17.5 trillion). Perhaps the smaller size enables the Australian system to be more nimble. Or maybe it means there is less available money for lobbying to retain the status quo of a system that is very lucrative for the financial services industry. My question for the week harks back to my question of last Friday. It surprises me that employers and employees do not join together to demand a better system in the U.S. It appears to me that in a 401(k) system employer and employee interests align for a low cost, high performance system that does not require employers to be experts in financial products. Australia is ahead of us. Why can't the U.S. at least make progress?
The reforms include the development of a robust set of low cost default investment products for workers who are not interested in making their own investment decisions. Although Australian employers are required to make contributions to an account (similar to U.S. 401(k)s) for their employees, the employers will have virtually no legal liability for choosing the default investment product for employees who do not make a choice. Employees who want advice on their investments, whether in a superannuation account or otherwise, will receive that advice from an investment adviser who must provide advice in the best interest of the client, and who will be prohibited from receiving commissions, rewards for scale and soft dollars.
The Australian pension system holds less than ten percent of the pension assets of the U.S. employer-based system (A$1.28 trillion v. $17.5 trillion). Perhaps the smaller size enables the Australian system to be more nimble. Or maybe it means there is less available money for lobbying to retain the status quo of a system that is very lucrative for the financial services industry. My question for the week harks back to my question of last Friday. It surprises me that employers and employees do not join together to demand a better system in the U.S. It appears to me that in a 401(k) system employer and employee interests align for a low cost, high performance system that does not require employers to be experts in financial products. Australia is ahead of us. Why can't the U.S. at least make progress?
Thursday, December 15, 2011
A "Best Interests" Standard for Financial Advice to be Effective on July 1, 2012
Yes, you read that correctly. It is likely that a standard requiring providers of individual advice to retail clients to act in the best interests of their clients will be effective on July 1, 2012. Advice providers will be banned from receiving a variety of payments that raise concerns of conflicts of interest including: many commissions; payments based on volume; and significant soft dollar payments Legislation and regulation are in process after multiple years of study and consultations. There are no exceptions for broker-dealers who happen to provide advice or for those who provide advice on money employees are saving for retirement through their work-based retirement account.
Not aware that this is so close to implementation? That is because it is happening in Australia, not in the U.S. The project is known as the Future of Financial Advice (FoFA). In general, the new FoFA standards and requirements will be imposed across the board on the provision of individual advice to retail clients.
This week the Australian Securities & Investments Commission (ASIC) announced, http://www.asic.gov.au/asic/asic.nsf/byHeadline/11-294AD%20ASIC%E2%80%99s%20plans%20for%20FoFA%20reforms?opendocument its plans to issue guidance on the reform. AS part of the FoFA reforms, ASIC's powers will be expanded.
Australia's approach should be interesting to everyone in the U.S. watching the DOL and SEC efforts to enhance the quality of financial advice to individual, retail investors, including those investing through their 401(k) accounts and IRAs.
Not aware that this is so close to implementation? That is because it is happening in Australia, not in the U.S. The project is known as the Future of Financial Advice (FoFA). In general, the new FoFA standards and requirements will be imposed across the board on the provision of individual advice to retail clients.
This week the Australian Securities & Investments Commission (ASIC) announced, http://www.asic.gov.au/asic/asic.nsf/byHeadline/11-294AD%20ASIC%E2%80%99s%20plans%20for%20FoFA%20reforms?opendocument its plans to issue guidance on the reform. AS part of the FoFA reforms, ASIC's powers will be expanded.
Australia's approach should be interesting to everyone in the U.S. watching the DOL and SEC efforts to enhance the quality of financial advice to individual, retail investors, including those investing through their 401(k) accounts and IRAs.
Wednesday, December 14, 2011
Investment Advice and Complaints about Advice in Australia
Another interesting report out of Australia this week is the annual report of the Financial Ombudsman Service (FOS). http://fos.org.au/centric/home_page/publications/annual_review.jsp
Instead of having a dispute resolution system for securities customers (like our FINRA arbitration and mediation system), another for 401(k) investments (in the U.S. an internal plan complaint system followed by lawsuits in the federal courts), another for insurance (in the U.S. complaints to state regulators), etc., FOS covers all of those areas.
Disputes involving superannuation (the Australian term for pensions) increased in the past year. The largest category of disputes (32% of the total) was disputes involving "self-managed superannuation funds" (SMSFs) (the closest equivalent in Australia to U.S.IRAs). That shouldn't be surprising, in part because in terms of both assets and numbers of funds, SMSFs constitute the largest category of funds. In terms of the issue in dispute, advice constituted the largest category (at 26%) followed closely by service complaints (at 22%).
So, as in the U.S., advice on pension-related savings can be problematic in Australia. Unlike the U.S., Australia has a project in place to review and make revisions to the its regulation of financial advice. Check in here for more on that soon.
Instead of having a dispute resolution system for securities customers (like our FINRA arbitration and mediation system), another for 401(k) investments (in the U.S. an internal plan complaint system followed by lawsuits in the federal courts), another for insurance (in the U.S. complaints to state regulators), etc., FOS covers all of those areas.
Disputes involving superannuation (the Australian term for pensions) increased in the past year. The largest category of disputes (32% of the total) was disputes involving "self-managed superannuation funds" (SMSFs) (the closest equivalent in Australia to U.S.IRAs). That shouldn't be surprising, in part because in terms of both assets and numbers of funds, SMSFs constitute the largest category of funds. In terms of the issue in dispute, advice constituted the largest category (at 26%) followed closely by service complaints (at 22%).
So, as in the U.S., advice on pension-related savings can be problematic in Australia. Unlike the U.S., Australia has a project in place to review and make revisions to the its regulation of financial advice. Check in here for more on that soon.
Monday, December 12, 2011
Australia Releases Draft Legislation on Pension Fiduciary Obligations
As part of its effort to reform its private-sector, employer-based pension (known there as superannuation) system, Australia just issued proposed legislation and an accompanying explanation on revised fiduciary obligations. http://strongersuper.treasury.gov.au/content/Content.aspx?doc=exposure_drafts/trustee/default.htm
Australia has been engaged in a methodical review of its mandatory superannuation system, which currently requires a 9% contribution to DC accounts on behalf of nearly all workers, since mid-2009. One of the major changes being implemented is a new set of default investment products, known as "MySuper" products.
The new fiduciary standards and general requirements enhance the duties of the trustees (typically entities) that are legally responsible for superannuation funds (each 'fund' is a collection of investment products). Australia's reform also addresses the duties of the trustee-directors (the individuals who are directors of the trustees). And, additional duties will be imposed on trustees and trustee-directors with respect to MySuper products.
The Australian superannuation guarantee system is quite different from the U.S. system (for more detail, see my article: Building Value in the Australian Defined Contribution System: A Values Perspective at 33 Comparative Labor Law & Policy Journal 93-135 (2011) or email me an I'll be happy to send you a copy). Australia's system is mandatory, employees have very broad choices on which fund and which product within the fund holds contributions made on their behalf, and their government-administered system (the closest parallel to U.S. the Social Security system) is means tested through both asset and income tests. It also is far smaller in terms of numbers of employers and employees and overall asset levels.
A few things standout though about the Australian approach to private-sector employer-based savings for retirement. Its system was recently rated second in the world (true, a limited number of countries were studied but they included the leading countries in pension provision) whereas the U.S. came in below the median. Over the past two and a half years Australia has performed a thorough review of its system, accepted most of the recommendations in that review, and is in process of implementing them. It has imposed fiduciary obligations on the financial services entities that provide investment funds and products. And, it is in the process of enhancing the obligations of those entities and the individuals responsible for governing the entities.
In short, Australia is moving ahead with reform of its employer-based system while the U.S. remains stuck with a legal framework enacted back before 401(k) plans even existed.
Australia has been engaged in a methodical review of its mandatory superannuation system, which currently requires a 9% contribution to DC accounts on behalf of nearly all workers, since mid-2009. One of the major changes being implemented is a new set of default investment products, known as "MySuper" products.
The new fiduciary standards and general requirements enhance the duties of the trustees (typically entities) that are legally responsible for superannuation funds (each 'fund' is a collection of investment products). Australia's reform also addresses the duties of the trustee-directors (the individuals who are directors of the trustees). And, additional duties will be imposed on trustees and trustee-directors with respect to MySuper products.
The Australian superannuation guarantee system is quite different from the U.S. system (for more detail, see my article: Building Value in the Australian Defined Contribution System: A Values Perspective at 33 Comparative Labor Law & Policy Journal 93-135 (2011) or email me an I'll be happy to send you a copy). Australia's system is mandatory, employees have very broad choices on which fund and which product within the fund holds contributions made on their behalf, and their government-administered system (the closest parallel to U.S. the Social Security system) is means tested through both asset and income tests. It also is far smaller in terms of numbers of employers and employees and overall asset levels.
A few things standout though about the Australian approach to private-sector employer-based savings for retirement. Its system was recently rated second in the world (true, a limited number of countries were studied but they included the leading countries in pension provision) whereas the U.S. came in below the median. Over the past two and a half years Australia has performed a thorough review of its system, accepted most of the recommendations in that review, and is in process of implementing them. It has imposed fiduciary obligations on the financial services entities that provide investment funds and products. And, it is in the process of enhancing the obligations of those entities and the individuals responsible for governing the entities.
In short, Australia is moving ahead with reform of its employer-based system while the U.S. remains stuck with a legal framework enacted back before 401(k) plans even existed.
Friday, December 9, 2011
Why are Plan Sponsors ERISA Fiduciaries in 401(k) Plans?
Why are plan sponsors ERISA fiduciaries to their 401(k) plans, especially when it comes to the selection and monitoring of investment vehicles?
I know that is how ERISA and the current regulations are written. My question is why from a policy perspective this hasn't been changed?
I think employers fiduciary status in these situations is an anachronism attributable to the fact that 401(k) plans did not exist when ERISA was enacted and the fiduciary definition has not been appropriately updated to reflect the new reality.
It is not sensible to expect employers to be experts on the ever changing world of investment products, especially in a system where benefit plan sponsorship is voluntary. And, it really is not sensible to let many of the individuals and entities who provide advice to employers about investment selection and monitoring off the 'fiduciary' hook when we leave employers dangling on that hook. I'm not sure why employers and the employer organizations involved in benefits policy haven't supported the DOL's attempts to rationalize the definition of ERISA fiduciaries. It seems to me that it would be in employers' interests, both in the short and long term, to have their advisers held to fiduciary standards. Anyone have any answers?
I know that is how ERISA and the current regulations are written. My question is why from a policy perspective this hasn't been changed?
I think employers fiduciary status in these situations is an anachronism attributable to the fact that 401(k) plans did not exist when ERISA was enacted and the fiduciary definition has not been appropriately updated to reflect the new reality.
It is not sensible to expect employers to be experts on the ever changing world of investment products, especially in a system where benefit plan sponsorship is voluntary. And, it really is not sensible to let many of the individuals and entities who provide advice to employers about investment selection and monitoring off the 'fiduciary' hook when we leave employers dangling on that hook. I'm not sure why employers and the employer organizations involved in benefits policy haven't supported the DOL's attempts to rationalize the definition of ERISA fiduciaries. It seems to me that it would be in employers' interests, both in the short and long term, to have their advisers held to fiduciary standards. Anyone have any answers?
Thursday, December 8, 2011
Investor Confusion - Who is to Blame?
Yesterday I wrote agreeing with the House Republican letter stating, among other things, that fiduciary regulation should not add to investor confusion. I also wrote about the myriad of overlapping, inconsistent, technical, and detailed regulation that creates that confusion.
Ultimate responsibility for the regulatory morass, though, lies with Congress. Back in 2009 Congress, as a result of the financial crisis, could no longer ignore the need for regulatory reform. There was hope that the structure of the regulatory system could be streamlined to accomplish more, decrease the problems that fell between the 'cracks' of the agencies' boundaries, and ensure responsibility for regulatory failures could be established. I wrote at the time of the oddity that the same investment products and advisers are regulated by different agencies depending on whether the money being invested happens to be in a 401k vs a 'regular' account. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1331042 That paper is now dated because Congress failed to address that problem, as part of its failure to stand up to the self-interest of the individual agencies and engage in significant structural reform.
So, yes, House Republicans identify an important concern when they write about investor confusion. But, Congress passes the buck down the chain when it gives multiple agencies regulatory responsibility over different bits and pieces of the financial services industry and then complains when the agencies attempt to do the impossible job they have been given.
Ultimate responsibility for the regulatory morass, though, lies with Congress. Back in 2009 Congress, as a result of the financial crisis, could no longer ignore the need for regulatory reform. There was hope that the structure of the regulatory system could be streamlined to accomplish more, decrease the problems that fell between the 'cracks' of the agencies' boundaries, and ensure responsibility for regulatory failures could be established. I wrote at the time of the oddity that the same investment products and advisers are regulated by different agencies depending on whether the money being invested happens to be in a 401k vs a 'regular' account. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1331042 That paper is now dated because Congress failed to address that problem, as part of its failure to stand up to the self-interest of the individual agencies and engage in significant structural reform.
So, yes, House Republicans identify an important concern when they write about investor confusion. But, Congress passes the buck down the chain when it gives multiple agencies regulatory responsibility over different bits and pieces of the financial services industry and then complains when the agencies attempt to do the impossible job they have been given.
Wednesday, December 7, 2011
Investor Confusion and Investment Advice
On Monday, House Republicans wrote to Secretary Solis about the Department of Labor's expected re-proposal of its regulation on the definition of an ERISA fiduciary. One of the points of contention has been the extension of fiduciary obligations to those who provide advice on the investment of pension, 401(k) and IRA assets.
The letter makes a good point - any regulation by the Department should not the increase investor confusion identified by the SEC (and, in a separate report, the GAO). The confusion being referred to is the confusion by investors on whether they can count on their advisers to act in their best interests.
The reason for the current confusion is that sometimes investment advisers are fiduciaries, in which case they do have an obligation to act in the best interest of their clients. At other times the providers of investment advice are not fiduciaries. In those cases, they may only have an obligation to provide 'suitable' advice. In non-legalese, an obligation to provide 'suitable' advice means that it is legal for the adviser to provide advice that is in the adviser's best interest (e.g. pays the highest commission to the adviser or has the highest fees) so long as the advice is appropriate to the client's circumstances. In more direct terms, a non-fiduciary may advise a client to make an investment that pays higher fees to the adviser even though the adviser knows there are equivalent, lower fee investments available.
So, when is an adviser a fiduciary? That answer is extraordinarily complex and the source of the investor confusion that worries the House Republicans, the SEC, and GAO. If the advice is about pension, 401(k), or IRA assets, it currently depends on a 5-part test written in 1975 by the Department of Labor. If the advice is about other assets, the answer probably depends on laws and regulations overseen by the SEC. Confused yet?
The letter makes a good point - any regulation by the Department should not the increase investor confusion identified by the SEC (and, in a separate report, the GAO). The confusion being referred to is the confusion by investors on whether they can count on their advisers to act in their best interests.
The reason for the current confusion is that sometimes investment advisers are fiduciaries, in which case they do have an obligation to act in the best interest of their clients. At other times the providers of investment advice are not fiduciaries. In those cases, they may only have an obligation to provide 'suitable' advice. In non-legalese, an obligation to provide 'suitable' advice means that it is legal for the adviser to provide advice that is in the adviser's best interest (e.g. pays the highest commission to the adviser or has the highest fees) so long as the advice is appropriate to the client's circumstances. In more direct terms, a non-fiduciary may advise a client to make an investment that pays higher fees to the adviser even though the adviser knows there are equivalent, lower fee investments available.
So, when is an adviser a fiduciary? That answer is extraordinarily complex and the source of the investor confusion that worries the House Republicans, the SEC, and GAO. If the advice is about pension, 401(k), or IRA assets, it currently depends on a 5-part test written in 1975 by the Department of Labor. If the advice is about other assets, the answer probably depends on laws and regulations overseen by the SEC. Confused yet?
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