It’s Time for a Vendor Checkup

Re-validate your ERISA plan’s investment advisor

Last week’s announcement by Labor Secretary Alexander Acosta confirms what many investment firms that service the ERISA qualified plan space have been dreading…the investment fiduciary rule published by the DOL in April 2016 will finally go into effect on June 9, 2017.

Basically, this means any and all advisors, consultants, brokers, CPA’s, and insurance agents who provide advice to ERISA plans like 401(k) and 403(b), will be investment fiduciaries.  They will also be fiduciaries to investors in Individual Retirement Accounts (“IRA”) and must conform to the new Impartial Conduct Standards for any advice they provide to ERISA plans or IRA holders.

Advisors (regardless of what they call themselves) must be compliant with a new set of rules, and they must define their compliance to you, the plan sponsor, in just a couple of weeks. Final aspects of the standards take effect January 1, 2018.

If it walks like a duck…

There are many titles used by advisors in the ERISA space.  A prominent category is the Registered Investment Adviser (“RIA”).  These advisors usually charge an advice fee that’s not tied to any particular investment product.  RIAs have held somewhat of a competitive edge with ERISA plans because they are deemed fiduciaries under the law that regulates them, which is called the Investment Advisers Act of 1940.  RIAs usually engage with their clients in a written contract that discloses their fiduciary status.

Other categories of advisors include insurance companies and broker-dealers.  Until the advent of the DOL’s new fiduciary rule, insurance agents have not been regulated by any federal law.

Broker-dealers have operated under a federal law, which is non-fiduciary in nature, called the “suitability standard.” That term means the advice brokers render and the investment products they sell must at least be suitable, but not necessarily in the “best interest” (i.e., the fiduciary standard) of the client. Like insurance agents, advisors employed by broker-dealers typically receive commissions from investment product issuers rather than advice fees from their clients.

The Impartial Conduct Standards now require all advisors to make investment recommendations only in their clients’ best interests and to conform to new rules that affect RIAs, broker-dealers, and insurance companies equally. This has serious implications for ERISA plan sponsors.

Be sure your investment provider is qualified under the new standards

Plan sponsors now have to make procurement and retention decisions based on sound purchasing protocols, and investment advisors will have to show to their clients and prospective clients that they are not only qualified, but have in place the processes, compliance controls, and disclosures to adhere to the new Impartial Conduct Standards.  Plan fiduciaries are encouraged strongly to recheck their current investment providers’ status.

FSMA has the answer

FSMA offers plan sponsors a solution to the challenge of verifying an investment advisor’s compliance with the Impartial Conduct Standards.  It’s called the Procurement and Risk (“PAR”) rating.  Ask your ERISA plan’s investment advisor if they’ve obtained their rating.

A PAR rating is accompanied by a comprehensive report that not only helps plan sponsors in understanding advisors’ compliance processes, reasonableness of fees, and service delivery mechanisms….but advisors that attain a PAR rating prove through an independent 3rd party assessment of services and process that they and their firms align with the new standards.

Don’t wait.  Ask your advisor today for a copy of their PAR rating report because as of June 9, 2017 – it’s a new procurement world for investment advice services and your job just got more complicated.

Not a member yet of FSMA?


Author: fsma

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