Competition between service providers can create the incorrect image that the industry is rife with conflict.
A common theme in many lawsuits and regulatory investigations is a “conflict” between a party providing services and a benefits plan or plan participants. However, this discussion is often one of image versus reality.
Someone could argue that everything in the retirement industry presents some conflict. Even paying for plan expenses out of a plan could be a conflict because the decider could find another way of paying.
However, ERISA and regulatory exemptions recognize that fear of conflicts could be harmful if it went too far and prevented common activities—such as payment of reasonable compensation and the use of proprietary mutual funds in a plan—from taking place and, conversely, permitted activities even where someone could argue there is a “conflict.”
Without exemptions, participants would face worse retirement outcomes because the retirement system would have significant operational challenges merely functioning and would likely be far more expensive to operate.
Despite the reality that the retirement system has tools that adequately mitigate or eliminate conflicts, competition between service providers and related marketing can create the incorrect image that the industry is rife with conflict. This circular firing squad arises in several ways:
• Competing Solutions. One of the great benefits of the private retirement market is innovation and competition among solutions. An example of this competition was between investment funds and insurance solutions as long-term investments for plan participants. However, in a world of innovative “blender” products, this divide has significantly faded. A downside of competing products has been that one product will say it is “best practice” or “more prudent” than another from a marketing perspective—even though ERISA, by its terms, does not favor one product, whether historical or innovative, over another. Then, when litigation or enforcement ensues, the collateral or statements behind one solution is often cited against another party.
• Devaluation. Many years ago, I sat in a meeting with a retirement industry participant who said, “in five years, recordkeeping will be free.” Recordkeeping is a complex business with significant breakage risk and remains far from a devalued “free” process. In fact, despite statements from prognosticators to the contrary, recordkeeping services, support levels, and activities are not just a cookie-cutter set of activities. However, when industry participants go to the simplistic bottom line that all recordkeeping, wellness, managed account, or advisory services are the “same” and commoditized, all it does is devalue the distinctions and create an incorrect image that the retirement industry is one cookie-cutter solution—an answer far from reality.
• Services and Products. In recent years, plaintiffs’ firms have brought a significant number of lawsuits claiming conflicts in the activities of advisors, recordkeepers, plan sponsors, and other service providers. These lawsuits challenge “proprietary” funds, managed accounts, wellness, recordkeeping services, and more. As already noted, ERISA does not bar someone from offering a solution they are related to. However, the number of times I have heard and seen industry “experts” and “thought leaders” immediately say, “We’re not like that,” and then later get challenged on their own solutions and activities is rapidly growing. The retirement industry has quickly consolidated, and the vast majority are now in a situation where proprietary and related solutions are more common than ever. Simply throwing stones or saying, “We’re not like that,” only encourages the incorrect image of impropriety, even when activities are structured in an ERISA-compliant manner.
Click here to browse past columns by David Levine.
Competition is a great part of a capitalist system. However, there are many common goals to keep in mind.
Advisors and other industry participants regularly spar with each other. However, remember that it’s easy to throw stones at each other’s houses—all of which are made (to some extent) of glass.
Advocating for an industry as a whole—especially the benefits to participants and beneficiaries— should always remain a priority rather than devolving into an “image” of endless conflict.
David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column originally appeared in the Summer issue of NAPA Net the Magazine.
