Fidelity's approach to DOL fiduciary rule rankles some 401(k) advisers

The largest record keeper is being more aggressive than its peers in pushing fiduciary services for retirement plans and participants, observers say

May 15, 2017 @ 2:20 pm

By Greg Iacurci

Fidelity Investments is aggravating some retirement plan advisers.

Their ire stems from changes that Fidelity, the largest record keeper of defined-contribution plans, is making to its business in relation to compliance with the Labor Department's fiduciary rule, set to take effect in about a month.

Fidelity is taking on fiduciary responsibility for both plan-level and participant-level advice in some DC plans, which itself may not seem out of the ordinary since the conflict-of-interest regulation is creating a massive shift in the way retirement plan providers operate.

The way Fidelity is going about it, though, is where there's tension.

The firm is staking out its fiduciary position in a manner that's much more aggressive than other record keepers, in some cases undercutting the plan adviser and confusing plan sponsors, according to several advisers and attorneys familiar with their approach, many of whom spoke on the condition of anonymity due to concerns about their business relationship with Fidelity.

"Fidelity is saying, 'I'll exploit this new set of rules to my advantage,'" said Philip Chao, principal and chief investment officer at Chao & Co., which provides fiduciary advice services to retirement plans. "They mean no malice, but it's draconian. I totally get it from a business standpoint, but in the fiduciary business, it doesn't make any sense."


Fidelity is a behemoth among record-keeping peers. It administers $1.6 trillion in DC assets, about $1.1 trillion more than its closest competitor, for approximately 30,000 plan sponsors. Similar to other record keepers such as Empower Retirement, Fidelity plans to offer fiduciary advice to participants for recommendations such as rolling over 401(k) accounts into individual retirement accounts.

For some smaller DC plans with less than $50 million, Fidelity is amending client contracts through negative consent, advisers and attorneys said. This is done via an addendum to existing service agreements authorizing Fidelity to provide ERISA fiduciary investment advice to participants once the DOL rule comes into force, according to a document viewed by arjuna-design.

For larger plans, Fidelity is being more explicit in terms of plan sponsors' ability to opt out of participant-level fiduciary services by presenting employers with a communication that seeks their active confirmation, advisers and attorneys said.

The Department of Labor's fiduciary rule will raise investment-advice standards in retirement accounts when its implementation begins June 9, but the entirety of the rule's provisions won't be active until 2018. Many providers that aren't currently considered fiduciaries with respect to employer and participant interactions will take on a fiduciary designation under the regulation, exposing such companies to more risk. The Trump administration has already delayed the rule once, from April 10, and some believe it may be delayed further or amended from its current version.

Fidelity says its business decisions have been guided by engagements such as webinars and one-on-one meetings with plan sponsors and advisers over a course of months.

"Based on their feedback, as well as our unique insights, we chose to put the needs of our plan sponsor, participant and adviser customers first by offering to provide financial advice," Fidelity spokesman Stephen Austin said.

Keith Metters, senior vice president and workplace investments team leader in the relationship management services group at Fidelity Investments, added: "We take great pride in how we partner closely with advisers to support their clients and always respect those relationships."

However, Mr. Chao and other advisers familiar with the firm's communications say Fidelity has presented information to clients in a way that isn't entirely clear. Mr. Chao said it "exploits the plan sponsor's ignorance and insecurities" and makes it difficult for them to decline the service.

Mr. Metters of Fidelity countered this point, saying: "Plan sponsors tell us they want the same level of service their employees receive from Fidelity to continue, which due to the new regulations, requires that we offer participant-level advice."

Mr. Chao provided an example involving one of his Fidelity record-kept clients, a plan sponsor with more than $100 million in DC plan assets. Fidelity approached the employer directly with a list of services it was currently receiving, and explained that to maintain the "exact same level of services" after the fiduciary rule's implementation date, the plan sponsor would need to assent to Fidelity being a fiduciary to participants, Mr. Chao said.

Fidelity said it would offer a pared-down service level if the employer declined, and would take away participant services such as education sessions and executive benefits. Fidelity presented the reduced service level as being the same price as the fiduciary services.

Not all of the services that would have been taken away, such as participant education, were what would be considered fiduciary advice under the rule, leading Mr. Chao to question why Fidelity would have taken those away.

And, Fidelity gave the client 60 days to make a final decision, Mr. Chao said.

"They're sort of strong-arming the plan sponsor, giving them very little time to make a decision about something that's quite frankly very important, because you're naming a fiduciary," Mr. Chao said.


Mr. Chao's experience isn't singular. Other advisers as well as attorneys who've reviewed Fidelity's process and communications described a similar experience, whereby there's a perceived penalty or service takeaway if a client turns down Fidelity's participant-level fiduciary service.

According to a document obtained by arjuna-design that outlines Fidelity's approach to retirement plan distribution advice, which was posted on a website for advisers and plan sponsors outlining the firm's client engagement strategy, Fidelity's "tool-based methodology" will only allow call-center representatives to consider the firm's proprietary products when making distribution recommendations to participants, such as a rollover from a 401(k) plan to an IRA.

"The tool and our licensed representatives will only evaluate and provide distribution advice on Fidelity IRAs and Fidelity record-kept workplace plans and will not be able to include external IRA and plan accounts in this analysis, or recommend that participants roll over to such accounts," the document says. "Participants will be fully informed of this limitation."

However, "additional insights on non-Fidelity IRA selections will be available starting in 2018," according to a separate plan-sponsor communication also viewed by arjuna-design.

Fidelity also may recommend its proprietary funds when giving plan-level fiduciary advice, another sticking point with some advisers. As with recommendations to proprietary IRAs, Fidelity can do this by using a mechanism of the DOL regulation known as the best-interest contract exemption, which allows firms to make recommendations otherwise deemed conflicted as long as they adhere to certain requirements.

"It kind of seems to muddy the water in terms of what's a conflict of interest, and that's what the whole regulation was trying to get to the bottom of," said Chad Larsen, president and CEO of MRP, a registered investment adviser with more than $3 billion in retirement plan assets.

Some record keepers, such as Wells Fargo Institutional Retirement and Trust offer plan-level fiduciary services, too. But Wells doesn't offer proprietary funds, for example.

"It is not surprising to me that varying levels of compliance efforts are materializing among providers in the market," said Andrew Oringer, co-chair of the employee benefits and executive compensation group at Dechert, a law firm.

"I do not think it should be assumed that any particular approach when viewed from the outside looking in is necessarily inadequate or insufficient," Mr. Oringer added.


There's an additional source of adviser consternation: Fidelity taking on "point-in-time" fiduciary status at the plan level, for investment advice on the 401(k) fund menu.

"I think the reason most advisers are irked at Fidelity — and I don't know that I'm irked, but I think they're causing unnecessary confusion — is signing off as a fiduciary at the plan level, which I don't think any of the other providers are doing," said Susan Shoemaker, a partner at Plante Moran Financial Advisors.

Fidelity is planning to do this for plans with less than $50 million in qualified retirement assets and without a fiduciary adviser when the rule comes into force.

Advisers question how Fidelity can take fiduciary status at a point in time, which they call a restricted fiduciary duty, that would cover an initial fund recommendation but leave the 401(k) plan sponsor with responsibility for ongoing monitoring.

That offers little protection for plan sponsors and could confuse clients, advisers said.

"For me, it's super conflicted with what a basic fiduciary is," said Shawna Christiansen, a retirement consultant at Retirement Benefits Group.

Observers say Fidelity has historically distributed services direct to plan sponsors, rather than through retirement plan advisers, and that this is a return to form.

"For plans in which an advisor is acting in a fiduciary capacity, Fidelity will not," Mr. Metters of Fidelity said. "We will respect that relationship. For plans where the advisor is not [acting as a fiduciary], we can fill that fiduciary gap because doing so is in the best interest of our customers and what they're asking for."

Indeed, the aforementioned business changes only seem to apply to those plans on the firm's legacy direct-sold platform, in which distribution is direct to plan sponsors rather than through advisers. However, many of these plans do have advisers.

But some advisers concede the fiduciary rule has put all providers in a difficult position.

"I don't like that [Fidelity is] a point-in-time fiduciary, but I respect the reason they are doing it," said Aaron Pottichen, retirement services practice leader at CLS Partners.

Ms. Shoemaker agreed about the point-in-time fiduciary status.

"I don't like it, but does that mean Fidelity isn't a good provider? No," she said. "There isn't a perfect provider. If I could find one I'd be a happy woman."


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