MEMORANDUM - SEC · MEMORANDUM . To: Public Comment File on proposed Regulation Best Interest (File No. S7 -07 -18) From: Elizabeth Blase, Counsel to Commissioner Elad L. Roisman
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MEMORANDUM
To: Public Comment File on proposed Regulation Best Interest (File No. S7-07-18)
From: Elizabeth Blase, Counsel to Commissioner Elad L. Roisman
Re: Meeting with Fiduciary Benchmarks (“FB”)
On October 22, 2018, Commissioner Elad L. Roisman and his counsels (Elizabeth Blase, Christina Thomas, Matthew Estabrook, and Nicholas Losurdo) met with the following representatives from FB:
• Tom Kmak (CEO);
• Fred Reish (Partner at Drinker Biddle & Reath LLP, Outside Counsel); and
• Jim Lundy (Partner at Drinker Biddle & Reath LLP, Outside Counsel).
The participants discussed a number of issues, including the Commission’s proposed Regulation Best Interest. In particular, FB presented the materials attached here.
Fiduciary Benchmarks
i ndependent ~ C
omprehensive ~ Informative
October 2
018
Fiduciary Benchmarks
„~~pe„a~~~ i ~omo~~h
Fiduciary Benchmarks
Independc~. ~.
~ -~i p
rehensive~in(ormativc
R ecommenc(a.~r'on
3 •
~'
~%o'Uc
a ~1 ',
0
• ~ -ar
—
'i ~~
Cash Outs
Recommendation -this is w
here the Advisor wishes to really help the
participant understand the alternatives on an apples-to-apples basis
consistent with FINRA 13-45 a
nd the revoked Fiduciary Rule.
Education -this is w
here the Advisor provides education of the s
ame factors
that exist in the Recommendation. In this case, however, the participant is
left to sort through the issues on their o
wn.
Hire M
e -this is w
here the participant has already m
ade a decision to rollover
their balance from a plan to a
n IRA. A
n example would be a participant
wishing to rollover a small balance in a plan to a
n IRA with large balances that
is already managed by their Advisor.
Unsolicited R
equest -this is w
here the participant has assets that C
ANNOT
remain in the qualified plan because of the cash-out rules for the plan (e.g.
$1,000 or $5,000). While similar to Hire M
e, FBi tracks separately for
reporting, management and regulatory purposes.
02017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
2
Fiduciary Benchmarks
i ~~~, p",a~,,: ~ comp~~ne~:rv~ ~ i~ro~>u~~
Figure 2
Assumed to b
Percentage of Lump-Sum Recipients b
y Amount of
Most Recent Distribution, A
ges 21 and Over, 2012
Recommendati
~~
21.4
•~C1~'
C,I~r';
_~~,Assumed to be
2̀-"~
~ ~''t` t~' ~" '.•d' 50% Education
UU~Ia, 3
50%Hire Me
~o~ Assumed to be
Cash-Outs -Hire M
e15.846
t 5.8'11. 15.5'X
t 596 t 3.9'%
12.946
11.5'16
11.14is
10.1
10'0
5°fb
s.8% 5.2'16
~.t%
3 .4
Q96b t-5 9
9
5500-$9~9
51.000-52.499
52 500-5~ 9~9~9
35.O~Oa~i9.9S9 51U,000-519999 X20 000-~37 et9~9 5
37 500 Or M
Or~
Amount Of D►
StriDuRrDn
~ ouree _ m
ployee f~enebt Rese~rC
h InatRute estim
ates rrom ,20(18 P
anel d trie S
urvey of h~oorne arYd Prtigram
Parsgpa¢pn Zpp~C
al lAp
di~
11,V o!e
The cntnbuc~on amp~
nq are sop -cooed a~ 33
' SOCK
eon
02017 Fiduciary B
enchmarks Insights, LLC. A
ll rights reserved. 3
Fiduciary Benchmarks
~ ~,a~pe„ae.~~ ~ comp~~ne~:~.~ ~ i~to~,~~~~
• Based o
n Multiple Data Points f
rom BDs that process h
undreds of t
housands of rollovers per
y ear, the average advisor will encounter about 15 Rollover Opportunities per year
• Combining this data point with the prior p
age provides a distribution of rollover types as s
hown
b elow
Type of RalloWer
Percent
Per Year
Recommen anon
27%
4
Education
22%
3
Hire M
e21%
3
Cash but
30%
5
Rcall~verTy~~s key Advi~c~r per~e~r
■ RP- cr~~~iendaGi~n
■ Edutatian ■
Hire Me
tatil~ ~~_r.
OO 2017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
Fiduciary Benchmarks
Fiduciary Benchmarks
i; ~:iepc~~.u~_:,c ~ Comprehensive ~ Informacivc
j~~
Sometimes aeople need to take early withdravaals f
rom their retirement accounts for living expenses, but it is important to s
ee vahat y
ou might be giving u
p if y
ou
,~
do so. T
ake a look at the examples belote~, which reflect your account balance, income, federal a
nd state tax brackets and age, but not your specific account
investments. If you don't n
eed any cash n
ow, you can g
o to Step 3.
Cash Now
Taking $50,000 in C
ash Now
If you were to fake 5
50,000 of your ~efiremeri
account a
s cash right n
ow, the chart b
elow
es:imotes that you woz•!d only receive about
$28,500 becouse o
f taxes a
nd penalties.
State 55.000 l(►
~61R5 Penalty
Taxes5 1. Soo
Fede►al
Cash
Taxes ~
~a~
5 14.000 128,500
Value o
f $50,000 Rollover a
t Retirem
ent
~
`If, however, you chose to rollover the $SQ
000, anoyour account earned 7~e per year until you reach yourn orm
al retirement dote of I2/1/2a27, you w
ould haveX95,358 at retirem
ent uersus the $28,500 ycu would
ecei~e in cash today.
Cash Today$28,500
"Note that this exam
ple assumes an annual com
poundedearnings rote of 7%
, which is consistent (historically] w
ithreturns in on account invested m
ostly in equities.
Page 3 of 1:
02017 Fiduciary Benchm
arks Insights, LLC. All rights reserved.
Retirem
ent 12/1/2027$98,358
Fiduciary Benchmarks
i~dep~~dG~~ ~ ComP~~h~~~rve, ~~~o~„azi~~
~ ~ ,
~
D~StIAiMER: A
remmmendadon about your dlstri6uifon options, Indudlnq a
ro lbver recommendation, k Hdutiary a
dvke and %VZ Cansu~Hnt. w
hen making a
recommendation, F~ac a duly ro evaluate
your options and make a prudent a
nd sultabk r
ecommmdallonon your behaH. To help You with this d
echbn, 7M ConwlNng has hired Flducfary B
enchmarks - a Ieading
bcncbmarking service for defined contribution plans and IRAs.
Bebw, Fiduciary B
enchmarks presents the key characteristics of the various options available for your rollover B
ASED ON YOUR DATA AND PREFERENCES. This information will help X
YZ Consu king m
ake a prudent a
nd witabie
r ecommendation on your behaN. a
nd help y
ou make an informed dedslon about that recommendation.
Optia~ 1
Option 2
Rdfover Decision D
rne►r.
Your D
ata
an
d P
re%rences:
XY
Z Consulting
OR
EG
ON
CH
ER
RY
GR
OW
ER
S, /N
C.101(K
) PR
OFfT
SHA
RIN
G P
LAN
1
Financial Planning N
eeded:B
road financial planning• B
road fenancial planningR
etirement planning
~
Contact. M
ethod:Face to face
Rhone/em
ail/web conference
•Prim
arily w
eb, phone &p
rint
jr
psseis Consolidated:
Som
ewhat im
portant•Y
es -rxcept new
401ik}s•A
ssets not consolidated
~
f R
oth Option:
Som
ewhat im
portant•R
oo
t Conrersion A
vailable•R
ath
cornersion not available
p~pnnin~
+' Tax O
Dti~~zation A
lgorithm:
Som
ewhat im
portant•Y
es, offered
+ No, no[ offered
f G
oncemO
utliveAssets:
Very w
orried• Lum
Dsum
/installmentsJannuities
• Lum
p sum
°""" "" '
r
Irroesting Help N
eeded:A lot {delegatorj
• G
enerel advisor service team• 6nline &
800M support
~ P
referred Advisor:
Financial advisors A
dvisor -Firs[ choice
•Prio
r employer not prcterred
r
Investment flcxibiH
ty:Rca11Y im
portant• Ind"ruidual isw
es icash. bonds. stocksl• P
lan investment (in
rup
ETFs, Mutual Fvndz
l f1VlS
tliMnt
• Unit investm
entbusts arid/orSMAs
OpliW
ls. AlcernativeassetrLasses
• Annuities
~
Cash N
ow.
No
• Taw
s and Penally m
ay aPt~Y• Taxes and penalty m
ay a~P~V
✓ Prr59 ~4 W
ith~dravrals:Somewhat important
• No 1U% Lax for [gllege e
xpenses
•Pay 10~; tax for college r
xpenscs
• Pay 109ti tax if rclirc 5
5+
• No 1096 tax ii retire 5
5+
✓ loans Later:
Not important
• Loans not available b
y law
• No loans
~ Withdrawal
r
Bankruptcy Protection:
Not important
+Same as the plan f
oryour state
•More proration
Options
r Fee PrefererKe:
~eve~ teeAccount Fees:
% veor
s month
Account Fees:
E¢„~g$_ 3 month
i nvestment fees:
0.2746 f250
irrvestrt~ent fees: O.Si,6
5743
adman fees:
0.0094 44
adman ices_
0.05%
E46
advice fees -ongoing=
0.5996 f34Z
total fees: 0.86%
f788
Foes
tata~ees:
0.&'796 f746
~ Recommendatlon:
a RoNovat to IRA
xYZ tonwf[ing aril T
om Kmok4 make tMe re c
ommmdatbn above after taking irrto a
uount the pnslidtwnt'c o(ten+atives !
o a rouove.. incluJing kwving the m
oney in
the plpn If permitteA. the evalua[bn o(!he participant's allernatiwe5 took into accotmt, a
mong other things. the (ees a
nd expenses associateQ w
Rh both the pkrn a
nd
R c~ammertding ldvisor. fDateJ
~ ~Rp; wheth~~ tJ~ e
mpbyer pays (or sornt a
all of Ehe plan § adminisbative e
xprnxs: anti the difiorrtt kvcJs ofservices a
nd lrtvesimmts available under such
option. SpecfimPy. the reasons w
hy the recanmertdvtion is in the best interest a
( the participant are:
- Imes[or Nelp Needed - A
lot fdefegata), Imestmen[ Flexi6iltty -Realty important. Financial Planning N
eeded ~ Broad hrroncla! planning, Roth Option -
Reviewed mid Apprrovrd by Investor:
(pivtrJ~++~~f lmportanl, a
nd Concern Over Oufliv~ny Assets - Yery w
orded.
!'?ll1E Kidiriary P~.rhmariz. 4A M,}✓..
pnxr~.~.
02017 Fiduciary Benchmarks Insights, LLC. All r
ights reserved.
Fiduciary Benchmarks
i~aep~~a~,~e ~ como~~he~:~~~ ~ ioro~su~~
1. There are 4
different types of Distribution/Rollover Services
2. Fee Differences can b
e substantial —
thus use real data
3. Recommendation can b
e done quickly a
nd easily
4. FINRA 13-45 & DOL Fiduciary Rule are a
solid regulatory approach
OO 2017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
~`
Fiduciary Benchmarks
In dependent ~ C
omprehensive ~ informaxivc
Range of Fees for $
5mm Plan, A
vg Balance $
70k
Low
Medium
Hieh
Fixed Income
50%
0.30%
0.45%
0.67%
Large Cap Value
10%
0.41%
0.57%
0.79%
Large Cap Growth
10%
0.39%
0.61%
0.89%
Large Cap Index
10%
0.06%
0.10%
0.21%
Mid C
ap Value
5%
0.48%
0.69%
0.90%
Small C
ap Value
5%
0.62%
0.82%
1.09%
Foreign/International10%
0.46%
0.65%
0.91%
Investment Fee
Advice F
ee
Recordkeeping Fee
Total F
ee
0.34%
0.49%
0.72%
0.00%
0.63%
0.78%
0.14%
0.36%
0.69%
0.47%
1.48%
2.18%
Above example does not include T
PA fees or Advisor fees, w
hich
could exacerbate the difference in fees.
In addition, fo
r a participant a
pproaching retirement, t
he 50%
allocation to Fixed I
ncome could h
ave these differences:
• Stable Value o
r General Account earning 3
.00%
• Money Market Fund earning 0
.75%
FEE"The 1 percent
difference in fees a
nd
expenses wouldreduce your account
balance at retirement
by 2
8 percent."
02017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
Fiduciary Benchmarks
1. There are 4
different types of Distribution/Rollover Services
2. Fee Differences can b
e substantial —
thus use real data
3. Recommendation can b
e done quickly a
nd easily
4. FINRA 13-45 & DOL Fiduciary Rule are a
solid regulatory approach
02017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
Recommenc(~.~+'on
?
r
i1
~~U~a
~'`.. X10 r,
,.
_
~~ _
Cash Outs
Fiduciary Benchmarks
Inecper.denc ~ Comprchcnsivc ~ Informacivc
Recommendation
• Old Qualified Plan —Participant Statement, 404(a)(5) Statement, 9
questions
• New Qualified Plan —Participant Statement, 404(a)(5) Statement, 9
questions
• IRA —
Can be customized for type of customer with o
ne click
Education•
Old Qualified Plan — Benchmarking data based o
n plan size with o
ne click
• New Qualified Plan —
Benchmarking data based on plan size with o
ne click
• IRA —
Can be customized for type of customer with o
ne click
Hire M
e• No data is necessary
Unsolicited R
equest
• No data is necessary
02017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
Fiduciary Benchmarks
i,~a~p~„v~„~ ~ comp~~n~~~~.~ ~ i~ro~a~n,~
..R.c..wrru on«asu~E:..1cr,~.rt
cwodawn ~0/1~1 s
a~^P~ stn ~"rvw~"~
~pM ae.lot~
w
p,..........,
Participant Statement:
RolloverAmountRoth or Pre -TaxRenew: Each T
ime
*~.soae.n ar~.e~. ~.o.,aaar~«~s+~~~~.m.,• ~~r,~,
~r~*+w ~e, •c.T nIMwlm~P~~atln~OntlMbleOK
s-rar...,n.
~ n.~-.~.. lk4n~WecMafy•tmH
Unv..
.ti M1m
~►]n n
M fU
Mm
~M ~f i~
MM
x M
tti,Yv~
+aT
.a
404(a)(5) Statem
ent:■ Investm
ent fees■
Advice Fees■
Admin Fees
■ Renew
: Calendar Year
Every Recordkeeper th
at FB
I has surveyedhas the 404(a)(5) inform
ation imm
ediatelyavailable via the Recordkeeper's Internetw
eb site.
~~
~
_ ..
~1. (111 ~ ;
~~..
~ ,- (t
M~
.
Plan Questions:
• R
eviewed 500+ Provisions
■ 9 questions
NO
T on 404(a)(5)m
NO
T on Part S
tatement
NO
T on Form 5500
Tested with M
ajor RKsRenew
: Calendar Year
These provisions seldom change and
should be answered 1
time per year.
02017 Fiduciary Benchm
arks Insights, LLC. All rights reserved.
Fiduciary Benchmarks
~,:d~F~nd~„~ ~ C
omp~ehe~irve, ~~fortnatrv~
1. There are 4
different types of Distribution/Rollover Services
2. Fee Differences can b
e substantial —
thus use real data
3. Recommendation can b
e done quickly a
nd easily
4. FINRA 13-45 & DOL Fiduciary Rule are a
so lid regulatory a
pproach
02017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
y~
Fiduciary Benchmarks
~ ~, ,gyp
Fiduciary Benchmarks
i„d~p,..,a~~~ ~ comp~~n~~:~.~ ~ i~ro.,n~o.~
These rollovers, which will be one-time a
nd not "on a
regular basis"
and thus not covered b
y the 1
975 standard, will b
e the m
ost
important financial decisions that m
any consumers make in their
lifetime. An ERISA plan investor w
ho rolls h
er retirement savings into
an IR,4 could lose 1
2 to 2
4 percent o
f the value o
f her savings o
ver 30
years of retirement b
y accepting advice f
rom a conflicted financial
advisor.
Timely regulatory action to redress advisers' conflicts is
warranted to avert s
uch losses.
OO 2017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
15
Fiduciary Benchmarks
Independent ~ C
omprehensive ~ Informacivc
Q14. C
an an adviser a
nd financial institution rely o
n the level fee provisions o
f the B
IC
Exemption for investment advice to roll over f
rom an existing plan to a
n IRA if the adviser
does not h
ave reliable information a
bout the existing plan's expenses a
nd features?
As described in Q
13, in the case of investment advice to roll over assets f
rom an E
RISA plan to
an Ilt
A, the streamlined level fee provisions o
f the B
IC Exemption require advisers and financial
institutions to document the reasons w
hy the advice w
as considered to be in the best interest o
f
the retirement investor. The documentation m
ust take into account the fees and expenses
associated with both the existing plan and the IRA; whether the employer pays for s
ome or all o
f
the existing plan's administrative expenses; and the different levels o
f services and investments
available under each option.
To satisfy this requirement, the adviser and financial institution m
ust make diluent and prudent
efforts to obtain information on the existing plan. In general, such information should be readily
a vailable as a result o
f DOL regulations mandating plan disclosure o
f salient information to the
plan's participants (see 2
9 CFR 2550.404a-5). If, despite prudent efforts, the financial institution
is unable to obtain the necessary information or if the investor is unwilling to provide the
information, even after fair disclosure of its significance, the financial institution could rely o
n
alternative data sources, such as the most recent F
orm 5500 or reliable benchmarks o
n typical
fees and expenses for the type and size of plan at issue. If the financial institution relies o
n such
alternative data, it should explain the data's limitations and the written documentation should
also include an explanation of how the financial institution determined that the benchmark or
other data were reasonable.
Although the documentation requirement is only specifically recited in the level fee provisions o
f
the BIC Exemption, the documented factors and considerations are integral to a
prudent analysis
of whether a
rollover is appropriate. Accordingly, any fiduciary seeking to m
eet the best interest
standard as set out in the exemption would engage in a
prudent analysis of these factors and
considerations before recommending that an investor roll over plan assets to a
n IRA or other
investment, regardless of whether the fiduciary w
as a "level fee" fiduciary or a
fiduciary
complying with the full BIC Exemption.
02017 Fiduciary B
enchmarks Insights, LLC. All rights reserved.
1(
Fiduciary Benchmarks
Independent (Comprehensive ~ Informative
Q26. I
participated in a ~O1(k) plan at a
n old joU. C
an I get in~-estment ad~~ce o
n ~vhat to
do «ith m
~ account in the ~Ol(k) at m
~ old e
mployer'
A. Yes. Deciding h
ow to handle yow.- 401(k) account a
nd whether to lease the account in yotu•
old employer's plan, take a distiYUution and piuchase an aimuity or roll it over into another plan
or IRA is o
ne of the m
ast iuigortant financial decisions that y
ou can m
ake. Yoiu fuiancial
adviser is actuig as a fiduciary and must act iu yotu best interest if she provides advice about
takuig money out o
f the plan a
nd rolling it into another plan or IR.A. or about leaving yotu
money iu the plan. even if there is n
o specific recouuneudariou o
u how to invest the assets.
If yoiu• fuiancial adviser recoiuuieuds that y
ou roll over a 401(k) plan accotuit to a
n IRA that
titi-ill result in couipensatiou to lulu or her. special protecrions apply. Yrnu financial adviser
must consider yotu alternatives to the rollover. iuchidiug leaving the m
oney ui yoiu 401(k)
a ccotmt at yotu old eiuployer. Yoiu financial adviser should ask y
ou for information o
n tl~e
fees and expenses charged b
y yoiu 4
01(k) plan ni order to c
ompare it to fees that will b
e
cUar~ed for voiu IRA.
02017 Fiduciary Benchmarks Insights, LLC. All rights reserved.
17
Fiduciary Benchmarks
Independent ~ C
omprehensive ~ Informative
This material has b
een prepared solely for
informational and educational purposes. It is
not intended to provide, and should not b
e
relied upon for, investment, accounting, legal
or tax advice.
www.fiduciarybenchmarks.com5335 Meadows Road, Suite 2
10
~ Lake O
swego, OR 97035
~ 866.516.4909
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