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Can robo advisors truly be 401(k) fiduciaries?

Financial Planning

By Scott MacKillop | September 2, 2020

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Taking on the mantle of a fiduciary under ERISA isn’t as easy as expanding a client niche.

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Technology from Vestwell, FiduciaryShield and Betterment’s recently announced Advised 401(k) are making it easier than ever for advisors to offer retirement plans to business-owner clients. By taking on much of the heavy lifting, these tools can make it look easy for any financial planner to moonlight as a retirement plan advisor.

But advisors thinking about entering the retirement plan space as a path to easy money should think twice before jumping in. Deciding to extend your niche market from serving doctors to serving doctors and dentists is one thing. Taking on the mantle of a fiduciary under ERISA is quite another.

The key question is whether a program that purports to give personalized advice to plan participants is using tools that are well-designed for that purpose. In 2015, not long after robo advisors arrived on the scene, the SEC’s Office of Investor Education and Advocacy and FINRA issued a joint investor alert discussing the risks and limitations of automated investment tools. They warned that robo advisors may rely on incorrect assumptions that do not apply to investors’ individual situations.

“Be aware that a tool may ask questions that are over-generalized, ambiguous, misleading, or designed to fit you into the tool’s predetermined options,” the alert stated.

The Massachusetts Securities Division has also expressed concern, stating in 2016 that robos, “cannot fully satisfy their fiduciary obligations” because of their depersonalized nature and inability to provide ongoing due diligence.

As far as I’m aware, no regulatory authority has ever brought an action based on a robo’s failure to meet applicable fiduciary standards, either under ERISA or the Investment Advisers Act of 1940. But advisors should be aware that this issue still lurks unresolved.

When considering these new tools, advisors need to ensure this issue does not undermine the fiduciary integrity of the program you are considering. Specifically, make sure that all aspects of the program that purport to provide plan participants with personalized advice or guidance do so in a way that is consistent with their fiduciary obligations.

For example, Betterment’s website says that in the Advised 401(k) program, “Employees are defaulted into one of 101 globally-diversified portfolios.” For features like this, it’s worth asking how such decisions are made.

Betterment and other robos are certainly capable of designing and offering fund options and even managed portfolios that 401(k) plan participants can select on their own. But once they hold themselves out as providing personalized guidance, they owe a fiduciary duty to those they guide.

Advisors need to ask themselves two questions. First, are you prepared to comply with the Employee Retirement Income Security Act of 1974? Second, are you prepared to do the due diligence necessary to determine if the program you are considering complies fully with ERISA?

As a service provider to a 401(k) plan you are likely to be considered a fiduciary under ERISA. The responsibilities that come with that are extensive and so are the potential liabilities. You should become familiar with them before getting too comfortable with the idea of getting paid to provide plan oversight and round up prospects using a customizable email feature, while someone else does the heavy lifting.

It is also worth noting that the Department of Labor’s regulations governing ERISA fiduciaries are in a state of flux. There has been a years-long battle to amend the applicable ground rules and the eventual outcome will affect you. Make sure you are ready to comply with new rules when they come.

We are all fascinated by technology and benefit greatly from the capabilities it has given us. These new retirement platforms handle onboarding and reporting, and serve as both a 3(16) administrative and 3(38) investment fiduciary. Advisors get paid an AUM fee they agree on with the client, which the tools collect, gain access to plan data and an inside track to invite plan participants to become clients. What’s not to like?

Advisors who are truly dedicated to entering the retirement plan business should give these programs a serious look. But as an advisor taking on responsibilities under ERISA for plan oversight, you should be sure that any technology used to provide personalized guidance to plan participants is up to the job.