“Let’s face it, the advisor community is changing.” With that, David Levine, Principal, Groom Law Group, Chartered, captured the message and import of a March 23 workshop session at the 2015 NAPA 401(k) Summit on opportunities for growing 3(16), 3(21) and 3(38) practices.
The session looked at some of what administrators under ERISA Section 3(16), fiduciaries under ERISA Section 3(21) and investment managers under ERISA Section 3(38) have and are facing. Levine was joined by Fidelis Fiduciary Management CEO W. Michael Montgomery and Marc Roggenkamp, Institutional Consulting Director, Graystone Consulting, Morgan Stanley.
“To say that ERISA is a well-drafted law — not so much,” said Levine. He observed that “a larger and larger part” of the advisor community are exercising fiduciary functions, and warned that “the proposed [fiduciary definition] rule will upend the situation even more.”
Some advisors are going beyond the letter of the law, according to Levine. “The catch is that what advisors offer is beyond what 3(16) says.” Advisors have squeezed the margins of vendors and vendors are better now at managing their risk, he said, adding, “3(16) services have arisen and grown to fill the gap when vendors don’t offer certain services. The trick is to understand carve in, carve out responsibilities.”
The functions of fiduciaries under ERISA Section 3(21) have many facets, too, said Levine. And as with advisors, functions under 3(21) also have expanded and lines have blurred. Montgomery joined Levine in striking a note of caution regarding some advisors not being able to take on a fiduciary role, and at a time in which there is an “increasing trend” of non-fiduciary advisors having to make decisions regarding the functions they will fulfill in order to say in the business.
Montgomery noted that employers are “not always interested in fiduciary details,” and are “mostly just concerned that fiduciary duties are taken care of.” He added that “sometimes employers can be lulled into a false sense of security.” But employers need to be careful, he warned, noting that they still may need to show where the fiduciary guidance they receive comes from.
Roggenkamp emphasized that it is very important to educate clients, help them develop investment policies, and report to the client concerning what was done. And he indicated that it’s important to be proactive, remarking, “It’s important that you start the conversation, or your competitors will.”
Roggenkamp observed that in general, investment managers under 3(38) have two kinds of clients — those to whom one makes a recommendation which the client does not follow, and those that want to mitigate risk to such a degree that they may follow a recommendation but want to offload as much risk as possible. And interest in mitigating risk is not going away, he said.
Also critically important to functions performed under 3(21) and 3(38), according to Montgomery, is oversight. “Who’s going to mind the minder?” he asked, a question that takes on added poignancy at a time in which the panelists noted that “everybody tries to do everybody’s job in this industry.”
