OREANDA-NEWS. February 03, 2016. Even when the calendar flips to a new year, fiduciary duties don't change. Basic fiduciary duties remain the same today as they've been for more than 40 years. Being a fiduciary carries a very high level of responsibility: It means plan sponsors must have participants' interests ahead of other interests and always act accordingly.

However, changes are expected later this year when the Department of Labor (DOL) issues its final guidance on who is considered a fiduciary when providing investment advice. According to Stephanie Napier, Vanguard senior counsel, DOL's proposal includes a much broader definition of fiduciary advice—or investment advice that would lead to fiduciary status.

"Under this proposal, you can become a fiduciary if you make recommendations about investments, proxy votes, or appraisals, or you make recommendations about anyone who provides those services," Ms. Napier said. "And the word 'recommendation' has its own definition under this new regulation. The DOL broadly defines it as making a suggestion that someone take action or refrain from action, so it can include a lot of behavior."

According to Ms. Napier, even if you say you aren't a fiduciary, but you make individualized recommendations or generic recommendations specifically directed to a person, then you'll be considered a fiduciary under this new definition.

Potential fiduciary impact

Teresa Gould, a senior consultant in Vanguard Strategic Retirement Consulting (SRC), said the potential impact of the DOL's new fiduciary rule could affect those who may not have previously viewed their role as a fiduciary one.

"The primary change may be for those individuals who did not recognize their fiduciary role or who tried to act in a way that insulated them from being considered a fiduciary. That's where the biggest impact of this new fiduciary definition is going to hit," Ms. Gould said. "As proposed, it's going to affect people who were acting as investment advisors; they're going to fall into the category of being fiduciaries, and they may not have been fiduciaries before. This includes individuals who advise on IRA accounts and people who advise retirees on how to invest for lifetime income. The DOL did receive a large number of comment letters on the proposed guidance, though, so we'll need to see the scope of the final guidance—expected in the spring."

Also on the fiduciary agenda: Fees

The DOL proposal isn't the only item for fiduciaries to have on their radar screen in 2016. One key job of plan sponsors is to evaluate fees and determine if they're reasonable. And if the fees are reasonable, are they going to be paid by employees, the employer, or a combination of the two? The industry trend is for plans to move to the lowest-cost share class, eliminate revenue sharing, and establish a separate per-participant recordkeeping fee.

Now more than ever, plan fiduciaries must also be able to demonstrate that they followed a prudent and deliberative process in reviewing plan investments, fees, and services. Committees should meet regularly to review these issues and should have the flexibility to meet on an ad hoc basis if necessary. Committees should be sure to follow the process established in the plan document, investment policy statement, and any committee charter defining the committee members' duties. The committee's discussion and decisions should also be memorialized in documents such as meeting minutes and other supporting materials.

Using data for decision-making

Sponsors seeking to evaluate the effectiveness of their plan can use Vanguard data analytics. The Vanguard Plan Effectiveness Index™ (VPEI) is one example of the data-driven tools available to help sponsors determine how well their employees are using the plan for retirement savings.

"VPEI can help sponsors evaluate their plan and see where their opportunity areas are," Ms. Gould said. The analysis illustrates ways to improve their plan design and focus on communications that are more personalized, relevant, and targeted to individual participants.

"Some of the statistical information in VPEI can be a real eye-opener to sponsors," Ms. Gould said. "For instance, I've met with sponsors who were focused on the participant savings rate statistics across different age bands, tenures, and compensation levels. Whether I'm meeting with human resources groups or committee members, they are taken aback when they see, for example, that 20% of their employees with ten or more years on the job are not contributing to the plan. And in almost every case, they make plan-design changes to address the issue, often with a reenrollment campaign."

Addressing plan design

As a Vanguard relationship manager working with large plan sponsors, Maria Bruhin has helped many clients institute the kind of plan-design changes that can help guide participants toward a more secure retirement.

"The basics for sponsors are still the three pillars," Ms. Bruhin said. "Getting people in the plan is first, and autoenrollment can help sponsors boost participation. Reaching Vanguard's suggested savings rate of 12%–15% is next, and adding an automatic increase feature can certainly help participants achieve those savings deferral rates sooner. And pillar number three is diversification; defaulting participants into a target-date fund investment option offers the benefit of instant diversification."

Ms. Bruhin's other plan-design recommendations include:

  • Sweep. If participants were in the plan and subsequently dropped out, doing a sweep can get them back into the plan and saving for retirement. For plans with automatic increase, a sweep can be used to add the increase for employees who don't have it. Employees always have the chance to opt out.
  • Enroll Now™. Particularly good for sponsors without autoenrollment, Enroll Now gets employees voluntarily into the plan with automatic increase and a default investment option—all in one click. Employees can choose the defaults or select their own savings rate and investments.
  • Savings nudges. Perfect for plans with suboptimal deferral rates, these nudges suggest savings increases based on age, compensation, and employer contributions.

A new year can be a good time for a plan tune-up. Vanguard's SRC and client services teams can help sponsors fulfill their fiduciary responsibilities and design a plan that can help participants achieve their retirement goals.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments (stocks) to more conservative ones (bonds and short-term reserves) based on its target date. An investment in a target-date fund is not guaranteed at any time, including on or after the target date.
  • Diversification does not ensure a profit or protect against a loss.