PLANADVISER - July/August 2017 - 3

What Does the
Department of
Labor Fiduciary
Rule Mean for
Benchmarking?
A DISCUSSION WITH TOM KMAK,
CEO AND CO-FOUNDER OF
FIDUCIARY BENCHMARKS
PLANADVISER:
What
does
the
Department of Labor (DOL) fiduciary
rule mean for benchmarking?
TOM KMAK: Under ERISA [Employee
Retirement Income Security Act], there's
always been the requirement
that plan
sponsors need to determine fee reasonableness.
But, because of the fiduciary
rule, there's a prohibited transaction if the
service provider receives unreasonable
compensation. If a provider is operating
under a BIC [best interest contract], it
has to ensure that the fees are reasonable under the best interest
contract exemption [BICE] and prohibited transaction exemption
[PTE] 84-24.
With an IRA [individual retirement account], the Department
of Labor [DOL] put the onus on the service provider for fee reasonableness,
since there is no plan fiduciary to help. The service providers
must make sure their fees are reasonable because the onus is
on them, not the participant, who frankly doesn't know enough to
make these determinations.
PA: For the last eight years, your firm has been tracking
plans-what have you learned, and what has changed during
that time?
KMAK: First, we've learned that folks in government know that,
mathematically, lower fees don't trump better savings behavior,
better investing behavior or better spending behavior. So there's
an established legal high road that fees have to be reasonable, not
necessarily low.
Secondly, we've discovered a simple mental model that works
very well with plan sponsors. You've got fees on the left hand; what
you should consider on the right hand is what we have an acronym
for called QSVE. Q is the quality of the provider, S stands for the
services it is delivering, V for the value it supplies, and then E is for
extra credit it might be giving. We've seen some things that, frankly,
you just can't benchmark. We've seen plan sponsors ask for a large
number of participant meetings, or require relatively rare but more
testing because of the complexity of their plan. Those things fall into
PA: What's next?
KMAK: We've launched our first IRA
service related to the fiduciary rule; it's
a best interest determination tool on
rollovers that, besides fees, presents
16 different factors to consider-things
such as
retirement planning issues,
investment flexibility issues, how you
want to take your money in retirement,
annuities versus loans versus bankruptcy
issues. This tool has been chosen by some of the largest institutions
in the country that handle rollovers, which has been pretty
exciting.
We knew there was a surge in pricing changes, fiduciary
services changes and provider service changes, so we're now starting
to build our benchmarking practice for IRAs. We'll take what
we did for DC [defined contribution] plans and move it over to the
IRA side.
The final thing we'll do, related to IRA services, is provide an
analysis of level fees versus commissions. We think it will be important
for advisers to have a way to show a client, " Look, in terms of
commission versus level fee analysis, here's what's actually better
for you on an objective basis. "
All three of those services are consistent with our tagline-
they all involve independent, informative and comprehensive analysis,
which is what we specialize in. We're the folks that, when you
have a multi-billion-dollar plan and somebody's trying to make a
decision, we supply a document and a file that would stand up as a
procedurally prudent process.
You'll also see us start to move our DC business more aggressively
into the 457 space, [even though those plans are not ERISA
plans] because they are realizing the value of good fiduciary
management practices.
We may consider expanding our benchmarking services to
DB [defined benefit] plans, taking the existing methodology and
moving it into other market spaces that, again, require independent,
comprehensive, informative input.■
SPONSORED SECTION
what we call " the E-component, " which is extra credit. That way, plan
sponsors can grasp the concept that fees should reflect the quality,
service, value and extra credit they receive.
Our product design incorporates that quality, service, value
and extra credit model, which resonates very well with plan sponsors,
and service providers. Considering more than just fees is
better protection for the plan sponsor, improves outcome for
participants and ensures service providers are treated fairly for all
they do for both parties.
PA: What are best practices in benchmarking now, in this
current environment?
KMAK: Advisers need to be proactive and assertive. If you can
understand what your book of business looks like in terms of the
market and what prices are being charged for services-and what
should be charged-you can point out any problems to your client
before somebody else does. That engenders trust.
Our biggest clients and plans generate a benchmarking report
every year, and some others every three years, so the plan becomes
part of the cycle. Make this part of how you work with your clients
on an ongoing basis, just like you would analytics for investments
or analysis of plan design.
PLANADVISER - July/August 2017

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