Innovative solutions hold the potential to improve outcomes for participants. But innovation can be scary in today’s litigious environment.
Concepts in the retirement industry come and go — and some stick around. Over the past few years, concepts like convergence, aggregation, decumulation and others have become a big part of the retirement industry lexicon. One word that never seems to go away is innovation.
Whether a new feature, program, option or service is “innovative” is in the eye of the beholder. Commonly these days, innovation can mean a new managed account solution, an investment option that integrates new asset classes or distribution features, or a new wellness solution.
Prudent Concerns
However, as advisors encounter those and other innovative solutions, there a number of concerns they may want to keep in mind:
Litigation and Regulatory Enforcement. Ideally, for a plan sponsor, its fiduciaries and its advisor, enforcement and litigation concerns would not be a concern in reviewing innovative solutions. But the practical reality is that the specter of enforcement and litigation hangs over any innovative product. Is the risk of enforcement or litigation a reason to not look at an innovative solution? No. However, advisors can support their clients by helping them approach decisions whether or not to use innovative solutions under ERISA’s fiduciary standards. Despite what might be asserted in litigation, there is usually no one “right” way to make a decision, so an advisor can help each client chart their own individual path.
Prohibited Transactions. For those trained in securities laws, disclosure is often viewed as a fundamental premise of conflict avoidance. However, ERISA’s prohibited transaction rules may require more than simple disclosure to avoid legal compliance concerns. While there are many ways to comply with the prohibited transaction rules, an advisor, with the help of legal counsel, can help clients review innovative solutions to consider the risk of prohibited transaction concerns proactively.
Click here to browse past columns by David Levine.
Other Solutions. The history of the modern retirement system is filled with solutions that have been adopted widely — such as target date funds, for example — as well as solutions that, while considered promising, have not been adopted widely. No provision of ERISA requires that a fiduciary scour the ends of the earth for every potential investment option, plan feature or other solution. As such, a plan sponsor, fiduciary or advisor is not required to consider — or not consider — a potentially innovative solution. In some cases, however, reviewing multiple potential options may be a beneficial approach.
Documentation. ERISA is not a prescriptive law; plan sponsors, fiduciaries and advisors have wide latitude in their decisions. As recent litigation trends have illustrated, no type of feature or investment, from target date funds to low-cost solutions and other innovative products, appears to be “safe” from a legal challenge. As a result, regardless of whether a plan sponsor, fiduciary or advisor recommends or utilizes a widely adopted solution or a newer, more innovative solution, documentation in whatever form might be appropriate for the situation is key.
Conclusion
The retirement industry has long benefitted from innovative solutions. Nearly 25 years ago, automatic enrollment, a core of many 401(k) plans in 2023, was an innovation. As automatic enrollment highlights, innovative solutions hold the potential to improve the outcomes for participants in the modern retirement system. However, innovation can be scary in a litigious environment. But keeping in mind that ERISA is flexible can allow advisors and their clients to further improve the retirement services they offer plan participants and beneficiaries.
David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column originally appeared in the Spring issue of NAPA Net the Magazine.
