Message from the Firm

By Fred Reish

Change is coming... and it is fast and furious!

The White House issued a White Paper calling for a fiduciary standard for all advisers—both broker-dealers and RIAs—who give investment advice to any retail investors, which would include most retirement plans. Then, the Administration followed up with proposed legislation to accomplish that purpose. Congressman Barney Frank and the Committee on Financial Services, which he chairs, are at work on that legislation.

At the same time, the House Education and Labor Committee approved an updated version of the investment advice bill which would restrict investment advice—to both plans and participants—to one of two arrangements. The first is the level-fee arrangement and, in a significant change, only RIAs would qualify to be level-fee advisers. That effectively cuts out brokerdealers and benefits brokers. The second alternative is computer model advice, which could be used by RIAs, broker-dealers and insurance companies. However, even for the computer model alternative, benefits brokers and banks and trust companies are excluded.

That bill has been assigned to the House Ways and Means Committee for its review. It is possible—perhaps even likely—that the Ways and Means Committee will expand the bill from just ERISA plans to include non-ERISA 403(b)s, IRAs and 457 plans.

At the same time, the DOL and SEC have held joint hearings on target date funds—largely because of the remarkable losses suffered by 2010 funds in the market meltdown of 2008. It was shocking to many politicians and regulators that a mutual fund that was represented as being appropriate for investors and participants approaching their retirement could lose 25% to 30% in one year. The hearing was held jointly by the agencies on June 18th. Testimony was given and comments were submitted, but the outcome is still unknown. (Our comments are posted on our website at http://www.reish.com/publications/pdf/testimonybyBRA061809.pdf)

The moral of the story to advisers is that target date funds are no longer immune from the requirement for a rigorous selection and monitoring process. In other words, target date funds no longer are entitled to a “free pass” just because the provider requires that its target date funds be used in connection with its recordkeeping system.

Some people are speculating that we are reaching a tipping point with target date funds where providers will be required, by the competitive marketplace, to include more than one on their recordkeeping platforms. We believe that, for focused 401(k) advisers, there has never been a better—or more challenging—time to be in the 401(k) business.

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