What You Don t Know Can Hurt You

Download (0)

Full text



Hurt You –

Your 401(k) Plan Investment

Advisor May Be Forced to

Drop Your Retirement Plan.

What You Need to Know About

The Dodd-Frank Reform and

Consumer Protection Act

And the Meaning of

“Fiduciary Standard of Care”


The Dodd–Frank Reform and Consumer Protection

Act signed into law by President Obama could have

a serious impact on you as a 401(k) plan sponsor.

This new regulation could require you to change your

investment advisor, or force your investment advisor

to drop your 401(k) retirement plan.

The Issue is “Fiduciary Standard of Care.”

For years, 401(k) plan sponsors have used various types of financial advisors for their retirement plans. Those who offer financial advice use many different titles: wealth manager, financial advisor, registered representative, insurance agent, financial planner, or registered investment advisor.

Under existing SEC rules, there are two standards of care provided by investment advisors:


Suitability Standard of Care.

A broker, registered representative,

investment advisor, or insurance agent who is associated with a broker-dealer is generally held to a “suitability standard of care.” This means he or she can only provide general investment information and education that is “suitable” for the participants of a 401(k) plan. An advisor’s “suitability standard of care” can also

legally put his or her own interests ahead of the client’s interests.


Fiduciary Standard of Care.

Under the Securities Act of 1940, a Registered Investment Advisor (RIA) is required to act as a “fiduciary.”

This is a legal obligation to put the plan sponsor and plan participants’ interests above the interests of the RIA. It also requires the advisor to disclose all fees and any conflicts of interest that exist or that may arise.


The National Association of Professional Financial Advisors (NAPFA) defines “fiduciary” as:

A Financial Advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the Financial Advisor is required to act with undivided loyalty to the client. This includes disclosure of how the Financial Advisor is to be compensated and any corresponding conflicts of interest.

Many investment advisors do not operate under a “fiduciary standard of care.” Those advisors who legally operate under a “suitability standard of care” are under no obligation to put their client’s interests ahead of their own.

To avoid assuming the fiduciary standard of care, most broker-dealers will not authorize their advisors to enter into a fiduciary agreement with a 401(k) plan sponsor.

The Dodd-Frank Act – All 401(k) advisors

must accept fiduciary responsibility.

Under the Dodd-Frank Reform and Consumer Protection Act, signed into law by President Obama, the SEC delivered a report to Congress in January that recommends implementing a universal fiduciary duty to protect investors who, the study said, are confused by the differing standards that investment advisors and broker-dealers must meet.

The Dodd-Frank Reform and Consumer Protection Act will require those who advise any 401(k) plan to adhere to a “fiduciary standard of care.”

This raises the bar for investment advisors who currently do not accept fiduciary responsibility.

Under the act, advisors who currently operate under the “suitability standard of care” will be required to accept a fiduciary responsibility with plan sponsors or exit the


In a letter dated March 17, 2011 The House Financial Services Committee asked SEC Chair Mary Schapiro not to promulgate a fiduciary regulation until it did more work on its potential economic impact. Ms. Schapiro said the agency will turn its attention to the fiduciary rule sometime after July 21, 2011.

The U.S. Department of Labor is following suit with its own broader definition of “fiduciary.”

The U.S. Department of Labor’s Employee Benefits Security Administration has announced a proposed rule to update the definition of “fiduciary” to more broadly define the term as “a person who provides investment advice to employee benefit plans for a fee or other compensation.”

“We believe that this proposal more closely reflects the statutory language of ERISA and the realities of the current investment marketplace, and therefore will ensure those who provide investment advice are held accountable as fiduciaries under the law,” said Phyllis C. Borzi, assistant secretary of labor for EBSA.

This proposed rule from the Department of Labor reinforces the fact that advisors to employee retirement plans must accept fiduciary responsibility, something a majority of advisors have not been willing to do before.

Your responsibilities as a plan sponsor and

the importance of a fiduciary standard of care.

In a recent study of retirement plans conducted by Fidelity Investments, a survey found that plan sponsors’ concerns about their fiduciary responsibilities have doubled since 2008. The survey also revealed that 42 percent of plan sponsors are not satisfied with their current investment advisor.*

(*Online survey of 503 plan sponsors on behalf of Fidelity in June 2010.)

A retirement plan sponsor has legal duties and responsibility under ERISA (Employee Retirement Income Securities Act). However, many plan sponsors do not fully understand their duties and responsibilities as outlined by ERISA.


This fact should alert plan sponsors to the importance of having the

added protection afforded them when they retain an advisor willing to assume, in writing, a fiduciary standard of care.

What protection does your advisor provide?

If the current investment advisor for your 401(k) plan has not provided a

written document disclosing that they are acting as a fiduciary, the advisor has no vested interest in assisting you as the plan sponsor in your fiduciary responsibilities. If the financial advisor has provided a written service policy disclosing fiduciary status, you know they are a Registered Investment Advisor (RIA) who will serve as a

co-fiduciary and has a vested interest and has co-liability if you as the plan sponsor fail to meet your duties and responsibilities under ERISA.

Plan Sponsors may need to change investment advisors.

Some financial advisors will undoubtedly choose to exit the 401(k) business, rather than accept a fiduciary responsibility as required by the Dodd-Frank Act and the new rule proposed by the Department of Labor. Now is the time to ensure your financial advisor is willing to comply with this new requirement and is willing to accept, in writing, a fiduciary responsibility. If the advisor is reluctant, now is the time to prepare for the upcoming changes and hire a new investment advisor.


About Intermountain Wealth Management:

Intermountain Wealth Management (IWM) is a Registered Investment Advisory firm specializing in 401(k) and other defined contribution plans. Headquartered in the Intermountain West, IWM manages plans for employers across the country. As a defined contribution plan specialist, IWM offers expert assistance with most aspects of its clients’ plans, including helping them meet compliance requirements, employer liability protection, and employee education and consultation.

The advisors at Intermountain Wealth Management monitor the markets continuously, formulate solid, actionable recommendations for risk-based investment mixes, and provide that information for plan participants.

While plan participants still need to decide what investments they want to use in their portfolios, they can look to IWM for solid advice, to help them make those decisions in an informed manner.

Contact Us

We welcome the opportunity to discuss how Intermountain Wealth Management can help make your company’s 401(k) or other defined contribution plan easier to manage. Please contact us at:

Intermountain Wealth Management, Inc. 101 Park Avenue, Suite 2

Idaho Falls, Idaho 83402


Fax: 888-506-3345 Phone: 208-522-3344

Toll-Free: 866-801-3108

Email: IWM@IntmtnWealthMgt.com

Intermountain Wealth Management is an SEC-Registered Investment Advisor. The company manages several fee-based portfolios comprised of various equity and fixed-income securities. This report is published as a general informational source. This report is general in nature and is not intended to constitute legal, tax or investment advice in any manner. Intermountain Wealth Management does not warrant the content and is not responsible for errors or omissions in the content of this report.