Welcome to Insider Insights, where we dive into hot topics facing the financial services industry. Today, we're excited to have with us Grace Rafferty, Corporate Vice President of Workplace Benefits Research at LIMRA and LOMA, and Deb Dupont, Assistant Vice President of Institutional Research and Workplace Benefits Research at LIMRA and LOMA, to discuss common misconceptions about who holds fiduciary responsibility and the risks and consequences of this misunderstanding.
Hello. Deb and I would like to welcome you to the podcast Fiduciary Blind Spots: What Plan Sponsors Don't Know Could Hurt Them.
As the title indicates, we're here to talk today about fiduciary.
While we would touch on roles and definitions, the purpose of this podcast is to highlight some areas of opportunities for fiduciaries as it relates to the specific knowledge of the function and the implementation. We recently conducted research among plan sponsors and found some surprising insights around the knowledge, or the lack thereof, around what the role actually entails.
This may or may not surprise some, but given the ever-changing landscape, particularly more recently, my guess is it may not be a surprise at all. And just think about it. The foundational regulation that defines when someone providing investment advice to retirement plans would be considered a fiduciary, the first formal regulation was issued by the DOL in 1975. May or may not have been before I was born. I'm not going to say that, Deb. I don't know about you. Things remain largely unchanged to the ruling for 35 years, not until 2010 was there proposed changes, but those changes were withdrawn after industry pushback. The definition was then broadened in 2016 and then reversed in 2018.
2020 and 2021 saw a new guidance, which was modified in 2023.
Then comes 2024, where we saw the introduction of the 2024 fiduciary rule, which is now facing some legal challenges. And I'm laughing just because there's just so much here. I don't think it's funny. It's difficult. And it's now partially paused. So thinking about it, 35 years without any change, and then we had several over the last few years.
So if your head isn't spinning thinking about all of this, well, then you're far ahead of most of us, I would bet.
So, Deb, I'm talking enough. So the fiduciary role is very complicated. It feels like it's ever-changing. Can you talk a little bit about this specific research and some of the key insights that we uncovered?
Sure. Thank you, Grace, and thank you to everybody who's listening today.
Before we dive into the details, though, I don't want to lose sight of why employers offer plans in the first place. And so for most of them, it's helping their employees save for retirement.
Certainly, plans can be a business advantage as well, but helping employees is the main goal. Their hearts are in the right places.
So all of this is happening at a time when the environment around plans is, as you said, increasingly litigious. You have Pantegra with a record-breaking settlement. We have Cornell, which opens up a whole new plaintiff's bar around record-keeping roles and functions.
And while that type of high-profile suit might not be something most small businesses will have to worry about, meeting fiduciary and regular obligations is relevant for every plan sponsor, and there are consequences to not getting it right.
Those could be direct, hard, punitive, and expensive, or indirect and soft, if you will, in terms of the effects on employees, their satisfaction, their retirement features, and the business itself. Employers need to design and monitor plans that stay in compliance, that pass tests, that are answerable to the best interest of employees.
They need to establish the guardrails and exercise due diligence over investments, and it can be a minefield for these plan sponsors who just want to do right by their employees and manage the stresses that they face managing their own organizations and regular responsibilities.
Yeah. It really is. And I'm excited to dive into the research. But just given what you said, I mean, that brings us back to the f word, fiduciary.
And I know I opened up diving into, you know, kind of how complicated the role is, but, you know, really, the ERISA fiduciary roles and responsibilities, it gives us the framework for how we supply and support plans as an industry, and also what employers need to consider when they're managing their plans. So I said earlier, I'm not going to go into, like, the, you know, details of definitions, but just to kind of level set, and then I promise we'll get into the research. So we have the three main types. The 3(38) investment managers, which basically, you know, full discretion over investments. The sponsors get to offload the liability. Then we have the 3(21), which is the investment adviser, and they offer advice, but the sponsor still retains the decision making. Then we have the 3(16), the plan administrator, and they basically handle things like compliance filing notices and all of that good stuff.
And let's not forget, we've touched on it, but this is so important that many, if not most plan sponsors have their day jobs to attend to and their businesses to run. Yes. Yes. So one of the interesting things we found that's not surprising but perhaps is disturbing is not many employers or plan sponsors consider themselves to be fiduciaries.
The plan isn't their day job for most of them, and relatively few employers actually have the benefits departments or even dedicated professionals that are dedicated to the plan itself.
So ERISA says that while making some plan decisions are business decisions, not fiduciary decisions, actually taking steps to implement those does make someone a fiduciary. So, essentially, actually working with a plan makes that employee a fiduciary. And the criteria we use in doing this research to screen plan sponsors when we talk to them means that we talk to plan fiduciaries. We literally screen out those folks who don't have an active and therefore fiduciary role.
And yet less than half of them actually consider themselves to be fiduciaries. Wow. And yeah. And only 19 percent say that they hire a dedicated fiduciary outside service to take on that role. And think it's also important right now to realize that these are single plans that we're talking about here, not PEPs. So at the same time, fiduciary responsibilities can be thought of as a safety blanket for sponsoring employers.
They help to find how to do it right. How to hire the right support entities and functions for a plan or organization.
So when we asked plan sponsors to identify these three very common flavors of the fiduciary role, as you've outlined, they were consistently incorrect about how they understood these services. So overall, maybe between 20 and 30 percent of our plan sponsors correctly identified the high-level descriptions with the section of the of ERISA that defines it. For example, about 39 percent were able to identify 3(16) as administration. Yet very similar numbers confidently misidentified administration as belonging to one in the investment categories.
We even threw in a red herring on education, and sponsors consistently misidentified this as well by classifying it under these administration and investment buckets.
We did see a slight jump in how well sponsors understood fiduciary roles. It's only slightly significant, though. And that sponsors of larger plans, they're more consistently able to identify what these tags mean.
So remember, these sponsors, the larger ones, are more likely to be more fully dedicated to the plan itself or at least to benefits generally than in a smaller organization where the employer wears all those hats.
What this really points to is the biggest gap in understanding does come from that smaller end of the market, and that's also where we're seeing so many efforts to increase the number of plans that are available in the first place.
Yeah. And if I can just add to that. Not add to that, but comment that that was one of the biggest surprises for me. Like, you know, we knew there was some confusion, when you mentioned the word that there some of the confusion is a little to a disturbing level just to, you know, how low some of the awareness was of the fiduciary responsibilities, but the degree to which there was confusion. But, also, you know, you would kind of expect, as you mentioned, you know, the larger plans would have, you know, more of an understanding of the role that they play probably because they have more of a dedicated rep where with the smaller plans, they probably have someone who's wearing even more hats. You know? They're doing some accounting, probably over here and other things.
But the fact that it was only slightly greater was what was surprising to me. So given this and then kind of shifting into, like, what, you know, what can we do about it? So thinking about, you know, record keepers and advisers. So shifting into kind of how can they play a part in terms of kind of increasing this the awareness of this role and what they can do for those in these positions where they have fiduciary responsibility?
I think there's a lot that advisers and record keepers can absolutely do and come in and add value.
First, we think about this, employers are actually more likely to consider their advisor to be a plan fiduciary than they are to consider themselves to be plan fiduciaries. So a trusted adviser is critical to helping these employers, especially those smaller ones, manage a compliant plan. Right?
So if clients can't consistently identify what support services actually are, that elevates the emphasis on plan advisers as trusted support and resources who do know what these responsibilities entail.
For the most part, advisers sort of agree. About 6 in 10 say they do act as investment fiduciaries to those plans that they advise. To get more granular, that's nearly all advisers who specialize in plans, those specialist advisors, and closer to maybe 4 or 5 in 10 for those advisors who dabble in plans as an adjunct to their wealth management business.
So this calls up another potential gap, and there is another role for record keepers in helping these non-specialist advisors manage a retirement plan business that comes with these responsibilities, these expectations that they may not be well equipped to be taking on.
So record keepers also have a role with clients themselves.
Other research we see finds that once a plan is in place, the record keeper is the most preferred resource for information about the regulatory and legislative environment.
So while somewhat fewer plan sponsors are going to identify the record keeper as active fiduciaries to their plan, the record keeper is actually a critical resource for them from an education and overall administrative perspective.
For sponsors and participants also, the record keeper is usually the face of the plan overall. It's the record keeper's portal that's the gateway to the plan, and what better place for education and informational resources than that portal?
Also, the recordkeeping platform is the gateway to investment fiduciary services. So at the end of the day, this lack of clarity on fiduciary support and plan oversight, it creates a challenge and an opportunity for all of these plan support.
I would say that this is especially so for advisers, their firms, and for record keepers, and also for TPAs who are really already taking on that 3(16) role. Yep. And they're so prevalent in the smaller plans market.
Yep. Yep. I'll give you a break from talking. Take a glass of water. Sorry.
What I'm hearing is just we need to focus on the, you know, the simple way to put it, but not a simple thing to implement. The three e's. Education, education, education.
And, really, I mean, from what you're outlining here and what we've seen is it starts with the record keeper. The record keeper helping advisers and their firms making the content and the tools available.
So it's not that that's not happening right now. It definitely is, but we can't overestimate the importance of this. And we're going to be talking about this a lot, you know, for particularly for those advisers who may not exclusively or even mostly focus on DC plans. And that from your research that you completed, Deb, it is at least half of advisers, if I'm not mistaken.
Nope. You're absolutely right. At least half of advisers who sell DC plans only dabble in them. It's the specialist that's the rarer. I call the specialist advisers unicorns because they're difficult to find.
So the educational and service need is in fact greatest among the smallest plans who are served by those dabbler advisors, and especially when you think about the host of incentives and mandates that we have right now to get more employers offering workplace retirement savings. So this is a need and a knowledge gap that's going to grow as we hopefully solve for the coverage gap.
Yep. And then this growing knowledge gap. And then also kind of to tie that back into, you know, businesses, particularly small businesses having more of a lack of awareness, that makes me think of PEPs. And you mentioned earlier that was not part of the research, but shifting to think about PEPs for a little bit. Do you see and how do you see PEPs playing a part in all of this?
That's a good question. You know, I think PEPs might be part of, but not all of the answer. Right? It's interesting that we've also seen unanticipated interest even in mid to large plans in the sort of fiduciary offloading that a PEP promises to supply.
So in addition to that, not losing focus on those tools and services, the education, whether that's in-house or partnership offerings, and not forgetting supporting advisers themselves in helping their shared clients. Of course, working with TPAs and other administrative vendors on the administration aspect of fiduciary. There are a whole lot of things in play right now that have part of the answer. Right?
But it's also really important that sponsors that our clients understand what they need and what they're getting.
So I think one of the major implications of this research is that they really don't know what those parameters are.
So the first step is probably a much more in-depth education. That education it can be part of the sales process, be part of the ongoing relationship management process with clients. The nature of how this business is set up really positions that record keeper well to play a gateway to these services. And again, the environment is so difficult and confusing. Yep. Yet even if an actual lawsuit is perhaps unlikely, keeping a plan compliant and properly managed in the investment lineup is absolutely in the benefits of the participants.
No plan sponsor wants to fill a test. They don't want to be vulnerable to not monitoring investments or to participant complaints that can come with that.
And what we found in this research for sure illustrates that despite all the products and services on the market today, most sponsors still don't really understand what do they need or what they're getting. So most of them have other things on their minds and in their workdays?
They have their day jobs still. Yep.
Exactly.
And so when add to that, the many, many plans that are serviced by those advisers who don't specialize or focus on plans either, we have a gap that's pretty wide, and it's going to widen further, as we've said, with increased availability and coverage. And it's also a gap that's shaped very well for our record keepers to fill with education tools and services.
Absolutely. You know what? I mean, being a plan sponsor is not easy. That's for sure.
You covered a lot in here. You went from the extreme, you know, lawsuits all the way to the other side of just doing the right thing and helping people get to where they need to be for retirement. And there's so much in the middle. So it's a lot to think about.
And, again, with this ever-changing climate that we're going through over the last few years doesn't make it any easier. But, again, we all have a common goal in helping our participants, you know, reach their retirement goals. We are kind of getting to the end of time here. But, you know, here at LIMRA, we're not going anywhere. We've been here over a hundred years, you know, and many hundreds more. We'll continue to focus on, you know, the changing environments of institutional retirement plans in addition to other workplace benefits, etc., to bring you, you know, up to date information to maximize the impact all of us can have in this space.
Keep in mind, you know, we're not here to provide specific advice, but just to, you know, reiterate our mission statement here at LIMRA and LOMA is to advance the financial services industry by empowering our members with knowledge, insights, connections, and solutions.
So with that, that does wrap up this particular podcast. Deb, thank you so much for your thoughtful insight. And just a reminder that LIMRA and LOMA members can access all of our research on LIMRA.com.
Thank you, Grace, and thank you to everybody who's listened.
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