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Welcome to the fourth episode of the Fiduciary U™ podcast. My guest today is Fred Reish, who is a partner in Faegre Drinker’s Benefits & Executive Compensation practice group, the Investment Management group, and the Financial Services ERISA Team. His practice focuses on fiduciary issues, prohibited transactions, tax qualification and retirement income. He works with both private and public sector entities and their plans and fiduciaries. He represents, plans employers and fiduciaries before the governing agencies like the IRS and the DOL, and much of his practice is focused on consulting with banks, trust companies, insurance companies, and mutual fund companies on 401k investment products and issues related to plan investments and retirement income.
And he also represents broker dealers and registered investment advisors on issues related to fiduciary status and compliance, prohibited transactions and internal procedures. Fred has written four books and over 350 articles on fiduciary responsibility, prohibited transactions, IRS and DOL audits and pension plan disputes. He authors a monthly column on 401k fiduciary responsibility for PLANSPONSOR Magazine, and he's written a quarterly column on that subject for the Journal of Pension Benefits. And he's also won multiple Lifetime Achievement Awards from various publications.
Let's just say that Fred is kind of like a legal rockstar in the retirement industry. He's also been a good friend and mentor of mine for 15 years, and I was fortunate to stumble across his writings and ideas when I first started to work with 401k plans, which played a huge role in shaping my knowledge and learnings and continues to this day. He wrote the foreword of my latest book, The Fiduciary Formula, and he also helped me create our online ERISA fiduciary training course that's available on the Fiduciary U™ website.
And as a client of his, our firm continues to benefit from his advice and his guidance. On today's episode, Fred and I discuss recent regulation like Regulation BI and the proposed DOL fiduciary advice rule that was announced at the end of June, and how these things impact plan sponsors and the industry in general, especially when it comes to rollovers. We talk about the SECURE Act and specifically the guidance around guaranteed income and multiple employer plans and pooled employer plans also known as MEPs and PEPs. We cover evolving litigation trends, specifically in the areas of cybersecurity and data privacy. And we also discuss recent DOL guidance on ESG and private equity investing for ERISA plans.
And be sure to listen to the end where Fred shares his thoughts on how the retirement industry needs to evolve from a focus on simply accumulation to decumulation and how to make that continuum work, as well as the single best piece of advice for making ERISA fiduciaries smarter. And so with that introduction, I hope you enjoy episode number four of the Fiduciary U™ podcast with Fred Reish from Faegre Drinker.
“I think if you talk to consumer advocates, they will say that the weakest part of the DOL guidance is that it relies heavily on disclosure.” - Fred Reish
“Bottom line is there will be a lot of offerings of guaranteed income coming out over the next couple years.” - Fred Reis
“It’s a fiduciary process to evaluate the provider. The more experience, the more capable, the better brand name, the easier it is to engage positively in that fiduciary process—even if you don’t know everything you’re supposed to do.” - Fred Reish
“How could you invest in Tesla, without considering environmental factors? I mean, you'd have to at least think about it. If you think that a company is a polluter and that, that kind of pollution is going to become more highly regulated, imposing significant expenses on that company and reducing its profits… how could you not consider that in selecting an investment? It’s inappropriate for the government to tell the private sector what they should be looking at in terms of which things affect the performance or the risk of investments going forward.” - Fred Reish
"Think in terms of not the plan as being a corporate responsibility or not just being part of your overall job. But at every meeting, say, "How do we get a better outcome for the participants? Whether it's lower costs, whether it's better investments, whether it's helping them save more through deferrals." Whatever it is, how do we do what's best for the participants? And most of the litigation I see is where people weren't willing to ask that question about every issue, and then they weren't taking the steps necessary to implement it. And what's best for participants is not what makes them happiest. It's tough love. What's best for participants is what produces the best results in terms of accumulating money for retirement. So don't worry so much about making people happy. Just worry about making things right." - Fred Reish
Josh Itzoe: Welcome Fred Reish to the Fiduciary U™ podcast. I'm so excited that you're a guest today. I can't wait for the audience to hear your insights. Thank you so much for agreeing to do this.
Fred Reish: Oh, Josh, thank you very much for having me. Hopefully, together today, we'll put together some good information for folks and help everybody out a little bit.
Josh Itzoe: I hope that's the case. I expect it will be. The fiduciary podcast is really kind of the focus is to make ERISA fiduciaries smarter. And you've actually had a huge impact on my career over the years, 15 plus years ago, when I first started to work with 401k plans, I came across you and your writings. And it really kind of helped shape my understanding of what it meant to be an ERISA fiduciary. You were kind enough to write the foreword to my latest book, The Fiduciary Formula. So I appreciate that as well. I would kind of describe you as like the EF Hutton of the retirement industry. When I was a little kid growing up in the 1980s, EF Hutton was this brokerage firm, you probably remember it and they had these commercials, it would say when "When EF Hutton talks, people listen." And so I think you're kind of that voice within the industry.
Fred Reish: That's very nice. And I do remember, I'm old enough to remember all that Josh. So that's good.
Josh Itzoe: And you've outlasted EF Hutton, because they're no longer around. So good job from that perspective. So I want to talk about a number of different topics and today I think we'll have a wide ranging discussion. I think there's some regulatory things to discuss. There's some legislative things to discuss, I'd love to dive into maybe some litigation trends that we're seeing and get your perspective. And then the DOL has been pretty active recently as well, providing guidance around things like ESG investing and private equity. And so I think we'll cover all of those different things, but where I'd like to start is really some regulatory updates that... Or some new regulations that recently went into effect a couple of years ago with the fiduciary rule had been put forth by the DOL. And the industry has spent a tremendous amount of time and money kind of working towards that fiduciary rule, which ultimately got vacated a couple of years ago on I think on appeal.
We have this Regulation Best Interest or what's called Reg BI that went into effect June 30. And really it was aimed at requiring brokers and brokerb-dealers to act in clients best interests when making investment recommendations and as I read it, and again, we're at Greenspring, a registered investment advisor. So not under the... We don't have a broker dealer. But it seemed like Reg BI, while it didn't impose a full fiduciary standard on brokers and broker-dealers, it did lift the standards of care to a certain extent. That being said, there was a lot of criticism around the fact that it was too lenient of a rule and actually kind of watered down some of the fiduciary protections, especially for ERISA plans. What are your thoughts? Can you talk a little bit about Reg BI, what it means, why it's important? Any challenges or shortcomings of the regulation and what should specifically plan sponsors and plans that be aware of as it relates to Reg BI?
Fred Reish: Oh, Josh, thank you very much for having me. Hopefully, together today, we'll put together some good information for folks and help everybody out a little bit.
Josh Itzoe: I hope that's the case. I expect it will be. The fiduciary podcast is really kind of the focus is to make ERISA fiduciaries smarter. And you've actually had a huge impact on my career over the years, 15 plus years ago, when I first started to work with 401k plans, I came across you and your writings. And it really kind of helped shape my understanding of what it meant to be an ERISA fiduciary. You were kind enough to write the foreword to my latest book, The Fiduciary Formula. So I appreciate that as well. I would kind of describe you as like the EF Hutton of the retirement industry. When I was a little kid growing up in the 1980s, EF Hutton was this brokerage firm, you probably remember it and they had these commercials, it would say when "When EF Hutton talks, people listen." And so I think you're kind of that voice within the industry.
Fred Reish: That's very nice. And I do remember, I'm old enough to remember all that Josh. So that's good.
Josh Itzoe: And you've outlasted EF Hutton, because they're no longer around. So good job from that perspective. So I want to talk about a number of different topics and today I think we'll have a wide ranging discussion. I think there's some regulatory things to discuss. There's some legislative things to discuss, I'd love to dive into maybe some litigation trends that we're seeing and get your perspective. And then the DOL has been pretty active recently as well, providing guidance around things like ESG investing and private equity. And so I think we'll cover all of those different things, but where I'd like to start is really some regulatory updates that... Or some new regulations that recently went into effect a couple of years ago with the fiduciary rule had been put forth by the DOL. And the industry has spent a tremendous amount of time and money kind of working towards that fiduciary rule, which ultimately got vacated a couple of years ago on I think on appeal.
We have this Regulation Best Interest or what's called Reg BI went into effect June 30. And really it was aimed at requiring brokers and broke-dealers to act in clients best interests when making investment recommendations and as I read it, and again, we're at Greenspring, a registered investment advisor. So not under the... We don't have a broker dealer. But it seemed like Reg BI, while it didn't impose a full fiduciary standard on brokers and broker-dealers, it did lift the standards of care to a certain extent. That being said, there was a lot of criticism around the fact that it was too lenient of a rule and actually kind of watered down some of the fiduciary protections, especially for ERISA plans. What are your thoughts? Can you talk a little bit about Reg BI, what it means, why it's important? Any challenges or shortcomings of the regulation and what should specifically plan sponsors and plans that be aware of as it relates to Reg BI?
Fred Reish: Josh, Reg BI is a mixed bag. There's some good and some not so good. And if there's any bad it makes people might think that broke-dealers are subject to a quasi-fiduciary standard now, which is partially true, but you can't totally rely on that. Okay. With that general introduction, yes, first it is based on fiduciary standards. For example, the standard of care is that recommendations by broker-dealers have to be developed with care, skill and diligence. Or if you look at the fiduciary rules, it says care of skilled diligence and prudence. The SEC dropped our word prudence but said that they didn't mean to change the standard by dropping it.
So it's actually very close. If you look at the process, and you have to go through in making an investment recommendation. So that's a higher standard, that's better. Also, there's a requirement that broker-dealers mitigate the compensation of their advisors, meaning that broker-dealers dampen the incentive effect of higher compensation so that advisors are focused on what's best for the customer, and not what's best for the advisor. So that's good, too. I mean, I think both of those are going to be very effective.
So what's not so good? Well, it doesn't create a private right of action, an investor feels like her broker-dealer advisor doesn't make a recommendation in their best interest, there's no way to file a lawsuit on that and recover your losses. So it can only be enforced by FINRA, a self regulatory organization for broker-dealers, and by the Securities and Exchange Commission.
Josh Itzoe: And that was just to be clear, that was one of the things that the kind of prior DOL fiduciary rule allowed was this private right of action? Correct?
Fred Reish: That's exactly right. And that's reducing some of the tension in the system. But that's not to say that there isn't any tension because the regulators can still come in and enforce rules. It's just, there's only so many regulators and there are millions of transactions. So it's weaker than the best interest contract exemption which is the name of the old DOL rule that applied to this, but it is nonetheless higher than what the rules were previously.
I think if you talk to consumer advocates, they'll say that the weakest part of the DOL guidance Reg BI. I mean, of the SEC guidance Reg BI is that it relies heavily on disclosure, and there's a lot of studies, there's a lot SEC literature, that says that disclosures aren't particularly effective. If you give somebody to go to my website at this page, and there's like 20 pages of fine print of disclosures. The general thinking is that most people aren't going to go read all that, and therefore won't prove to be very effective at all.
So there is some good and some bad and how you see it depends on where you stand. It does say though, that if say for example, if an advisor and a broker-dealer recommends to a participant that they take a rollover, that that recommendation has to be in the best interest of the purchaser. Because the big worry that the SEC has and for that matter, the DOL has tha that when a participant, let's say retires takes their money out of the plan or is considering taking their money out, that will be the largest single financial transaction that that participant has ever entered into, in their entire life or will ever enter into.
And a lot of participants in plans become fairly large account balances, say accumulated over 20 or 30 years, don't have the financial sophistication to really understand all the consequences of leaving a fiduciary run well priced, high quality plan, enrolling into a retail IRA, which higher expenses and conflicts of interest. So if that's an area of particular focus now among the regulators, both the SEC and the DOL. So that's another way in which the rules are converging, as well as what I mentioned earlier about care, skill, diligence and prudence, the standard of care.
Josh Itzoe: Under ERISA.
Fred Reish: The word prudence under ERISA drops the word prudence in Reg BI.
Josh Itzoe: Right, right. And so what is that, just on the surface may not seem like dropping one word makes that much of a difference. Does it make a difference? And what's the difference, do you think, if so, between the DOL approach and the SEC approach. Like how important is that word prudence, what does that mean in kind of real world terms?
Fred Reish: You know, the SEC in the preamble to the rule, the so called doctrine release to Reg BI says it doesn't make a difference. They don't intend for it to make a difference. But it's possible that it would. My personal view is that most of these cases are pretty clear cut. If you violated the rule, you weren't careful, diligent and skillful then the word prudence doesn't matter, if it ever does matter. It'll be in a very close call case. I mean, it's something that could tilt either away. So for 95%, 98% of the cases, I think it's going to end up being pretty much the same thing.
And what it means is that the regulators will look at the process and how did the advisor go about gathering information about the customer, analyzing that information in light of the customer's needs and circumstances and make a recommendation. Another big change that is going to be I think is getting a little bit of play right now, but it's going to end up being a big deal is that the SEC says in Reg BI that the advisor, that the cost of the investment has to be a consideration and the development of every investment recommendation by any broker-dealers from now on.
So it's going to make it harder to justify higher cost products, and particularly those where the cost may be hidden and the investor can't really see it. And often that cost is attributable to compensation for the advisor of the broker-dealer or to compensation for whoever's managing the investments that may end up being shared as revenue sharing. So that's a big deal, in my opinion. So Josh, in a nutshell, I'm pretty happy with it. I think it's a big step forward. I don't think that's the same as a fiduciary rule that more generally prohibits conflicts of interest, pure conflicts of interest can be handled by disclosure. So I would say if I were an investor, and I wanted to... And so the question was, what do I still need to be really aware of, I would say conflicts of interest, and particularly conflicts of interest involving compensation to the broker-dealer, the advisor or the investment manager. That would be the area that I think is least well managed by the new rule.
Josh Itzoe: Which you can probably find on page 77 of the disclosure that you're going to get if you make it that far in the reading. That seems to be the big challenge in the real world, right. It's important to know ask the right questions, but what's even more important once you ask the right questions is being able to interpret that and it's interesting just in terms of... Like if I think about Reg BI, and you can correct me if I'm wrong here, but it's really about you've had this kind of different standard of conduct between brokers and broker-dealers and then registered investment advisors who are held to a full fiduciary standard.
And it seems as though Reg BI is the effort to try to harmonize and raise up at least the standards of care for the broker and broker-dealer community to get closer if you will, to, I think the standards or the regulations that are imposed upon registered investment advisors. It's not fully there, it's a step in the right direction. But it's not fully there. And one of the biggest challenges I think we've seen in the industry is that consumers, whether that's a plan sponsor, or whether that's an individual investor, have a really hard time knowing what the difference, really understanding what it means to be a fiduciary or not. And it sounds like this is a step in the right direction, and certainly better than what was in place. But there's still the opportunity for confusion, whether it be disclosure-based or just not kind of understanding the interplay between the two types of professionals, if that makes sense.
Fred Reish: Yeah, and a significant difference, also, Josh, is that in the typical case, to be a broker-dealer, it's just giving transaction based advice. In other words, I recommend you buy this or I recommend you sell that. For an investment advisor, the fiduciary relationship, covers the whole arrangement, a whole relationship between the parties, not just that particular transaction. And a good example of that is monitoring.
Broker-dealers can't do continuous monitoring of an investors account, that is reserved to Investment Advisors. That's definitional. That is what an investment advisor is. And where investment advisors obviously can actively manage accounts that can continuously monitor them. And the fiduciary relationship covers the whole relationship. So if I had to pick a handful of differentiating factors, it would be those active management, continuous monitoring a fiduciary relationship of... The whole relationship is fiduciary. Any advice given, any recommendations is fiduciary. It's getting closer together. But fundamentally understanding one is transactional based, the other is relationship based, is what you need to know. Just understand the difference between broker-dealers and investment advisors.
Josh Itzoe: Right. So I think that brings up another good question is that not to be left out. So you had Reg BI, from the SEC, not to be left out in late June, the DOL announced a proposed new regulation to cover investment advice and retirement accounts that was really meant to replace that vacated fiduciary rule. Can you talk a little bit about this proposed rule and how do you think that impacts Reg BI, if it does at all; And really with all of these things? How did these things impact plan sponsors? What should they be aware of? In order to be what I would call knowledgeable retirement consumers? Like how do they need to think about these things?
Fred Reish: Well, let's start off with the DOL proposal. Basically, what it says is that advisor that is a broker-dealer, who receives variable compensation, and what I mean by variable compensation is if I recommend this to you, I get so much up front and so much per year. But if I recommend this other investment to you, I get more in my front end commission and more trailing payments every year.
Josh Itzoe: And that's the conflict right there. Right? That's the issue.
Fred Reish: Exactly, exactly. I can feather my own nest. Yeah, I can feather my own nest to make more money by recommending a more expensive product. That's always been prohibited by ERISA, and by the Internal Revenue Code, just prohibited. And the DOL has issued a proposal that says, "Hey, we're going to allow that going forward if you follow a handful of requirements." And one of the requirements is that effectively they follow ERISA's duty of loyalty and a duty of care, which people will take into calling the best interest standard.
But this is truly ERISA, it has the word prudence in there if that does make a difference, at least in the wording. If you want to get conflicted compensation as a broker-dealer by making recommendations to plans, participants or IRA owners, you have to adhere to the best interest standard of care, you can receive no more than reasonable compensation. And you can't mislead the investor about the investments. There's more to it than that. But that's the general scenario. This is very controversial.
Josh Itzoe: How does that work in practice? That seems like strange bedfellows there.
Fred Reish: Well what's interesting the difference is advice to plans and participants, is already subject to a fiduciary standard if you're a fiduciary. And there is a private right of action there. So this doesn't take that private right of action away. And for those of you who don't talk lawyer, private right of action means you can sue. Or otherwise, just the agencies, the government agencies could enforce it, but individuals couldn't. But with regard to conflicting advice to IRAs, there is no private right of action, although there's a concern among the broker-dealer community that the standard that the government could enforce will be adopted by courts and by arbitration panels.
So maybe it's moving closer to a private right of action for IRAs. Forget all that lawyerly stuff. The DOL proposal also relies on disclosure, which, like I said, a lot of people, probably most people don't think it's particularly effective. But it does impose a higher standard of care, the best interest standard of care plus the Reg BI standard, care plus the word prudence. It has some really interesting things in there. One is that every year, the firm, let's call it a broker-dealer has to do a retrospective review of how well they've complied with a rule. And if they haven't complied with those requirements, they have to improve there or their conduct.
And that review has to be reduced to a written report and the CEO of the company has to sign off on it. Well, needless to say, there's a lot of negative comments about that because... But if you think about it, it really introduces some tension under the system, which, whether it's the CEO or the CCO... The Chief Compliance Officer or whatever. Having that kind of requirement means that there really has to be a tough review every year because high level officers are going to be putting their name on one way or another if it goes final the way it's written right now. So that's one. And then the other thing just to follow up on what I mentioned earlier, it takes a really strong stance on rollover recommendations in two ways.
One way it says if you make a rollover recommended and if this rule becomes final, because remember, it's just a proposal. But when it becomes final there has to be written documentation of why the recommendation is in the best interest of the participant. Well, that's a cut above any other recommendation. There's generally not a requirement in the law that there be written documentation of why a fiduciary rule is satisfied. Now, a lot of people do that, because it's a way to show compliance, but it's not generally required. Here it would be. So they're elevating rollover recommendations to a higher level, and than other recommendations.
The second thing is that historically, the Department of Labor has had their rollover recommendations. If they're not made by a fiduciary. You don't have to follow these fiduciary rules, obviously. But if they are made by a fiduciary, then you do. But they've had a relatively weak definition of fiduciary. What the DOL all has said gratuitously in the preamble to the proposal, is if we think that an advisor has a continuous relationship. And this isn't an exemption. There are no conditions. This is the DOL saying we think this today. If an advisor has a continuous relationship with a participant and recommends a rollover, then that advisor satisfies the requirement that they be giving advice on a regular basis, which is one of the conditions to be a fiduciary, and which is the main one that would apply here.
So in other words, it's going to make it much, much easier to show that an advisor is a fiduciary when they make a rollover recommendation. For example, if an advisor, the DOL says if an advisor makes a rollover recommendation, and the recommendation is to rollover to an IRA with an advisor, and the advisor... And it's anticipated that the advisor will be giving ongoing advice, functionally, not an agreement, there's no requirement for an agreement, it can just be an understanding. Ongoing advice about that IRA. Then that's continuous advice. And that satisfies the regular basis requirement.
But when an advisor makes a rollover recommendation but isn't to go over with the advisor. Who says, "Hey, roll over with somebody else." That wouldn't be very common. And so that's going to mean a lot of people, if the DOL sticks to its guns, on that one it means a lot of people that haven't thought that they were fiduciaries in the past will be fiduciaries, for rollover recommendations. And just to go back to what I said earlier, Josh, this shows how important the government thinks several of our recommendations are. We now have roughly 10,000 people a day reaching age 65, 10,000 people a day retiring, 10,000 people a day filing for Social Security benefits. We have over $500 billion a year rolling out of retirement plans. Yeah, it's a big deal. And that's an area that's going to be increasingly scrutinized by all of the government regulators, not just the Department of Labor.
Josh Itzoe: Well, I would say to the higher level of ERISA standards, if you will, have often, I think protected individual investors in a way that potentially the kind of more brokerage, retail, once you get out of an ERISA plan, especially call it financial professionals that haven't been held to a fiduciary standard it creates a lot more of kind of a wild west environment, if you will. At least ERISA being fenced around those assets, created, I think standards of conduct protections, if you will.
So it definitely seems from a consumer perspective, this is a step in the right direction. Obviously, there's a lot of competing priorities. It would be better if there was just one fiduciary standard that was kind of applied across the board. But obviously, we're not there yet. Let's talk a little bit about the kind of legislative environment and the Secure Act, which was passed at the end of 2019. And then we have obviously the CARES Act, which was related in response more to COVID-19.
I'd love to talk a little bit about the SECURE Act, though, because we're starting to see things having gone into effect. I would say probably the two biggest components, at least in my opinion, that came out of that Act was number one, some of the provisions on retirement income. And then I think, secondly, guidance around multiple employer plans and pooled employer plans, what are called MEPs and PEPs. So let's take a couple of minutes and maybe talk about those things. Why don't we start with guaranteed income. Can you provide some insights into these provisions in the SECURE Act and what did this guidance provide?
Fred Reish: Just as background, Josh, a second ago I said 10,000 people a day are retiring, and over $500 billion each year is being rolled out of plans, viewed slightly differently, taking those same numbers. Those same people are doing it differently. Once that money gets rolled out into an IRA or let’s say it's in a plan, that stays in the plan that then has to last for 20 or 30 years or more in retirement. My mom died a year and a half ago, she was 101 years old. She had retired at 65. That would have been 36 years.
Josh Itzoe: That was probably almost as much more time than she actually was in the workforce. She was retired.
Fred Reish: Yeah, it's about the same. Exactly. Although she was from another era, I mean, she started working like at 16. So, but generally, yes, that's right. What I'm trying to say is that we're now... Up until now 401k plans have been judged to a large degree on what are their features? Do they have great investments that have low cost to them. A good website? Do they make people happy? Then we sort of evolved to "Well, are our people accumulating enough benefits, which is where we are now." And then the next iteration is going to be how do we make all that money last for my mom's case? 36 years, but certainly for most people, 20 years or more.
Because 20 years is roughly the average of how long people have after age 65. And then when you take into account that people in 401k plans are white collar, college educated, not entirely, but largely. It's longer than 20 years, so how do we make that work? So along comes the SECURE Act. And it did two big things. Number one, about a year and a half from now, 401k plans are going to have to project retirement income for every participant at least once a year.
Now, plan sponsors don't need to worry about that. Because their recordkeepers will take care of it for them. But it is going to happen. And so every year participants are going to get a projection that when you're 65 or 67, your account balance will produce so much income for you in retirement. So all of a sudden it's being, that I think will cause a shift of viewing and account balance has evolved and shift it over to viewing an account balance at least equally as income in retirement.
Josh Itzoe: Which behaviorally speaking, I think it's interesting when we think about account balances, that's not how people financially live their lives, right? Everything is usually like, what am I spending per month? What is my mortgage cost or my rent? How much is my car payment, how much is my utility bill or my cable bill? You don't think about those things in terms of like the total kind of value or balance of what those things look like, right?
Fred Reish: I agree.
Josh Itzoe: So this idea of lifetime income, it seems like it's really to kind of to help people behaviorally and probably psychologically kind of understand what that money represents in terms of living their lives on a day to day, month to month, year to year basis.
Fred Reish: Yeah. And I think if we project out Josh, it is monthly, it's absolutely monthly. Their cell phone bill comes monthly or once monthly, their mortgage is monthly, everything is monthly. So what will happen is participants will get this number, you will have $1,500 a month in retirement. Well, next question. What does that mean? Is that enough? Well, I think that the industry, the government won't require it. But I think the industry will come along and say, "Well a common benchmark was a 70% or 80%, income replacement ratio in retirement, based on what you made while you were working, including Social Security as a part of that."
And so I think that there will be what's called gap analysis provided by the private sector where there's a benchmark given and then you see if somebody's... If there's a gap between what the benchmark for reasonable retirement and what they're actually projected to have. I think there'll be tools to help participants but then you get to the third step. So first is requiring a projection, second is gap analysis. Third is so how do I actually do that? How do I get that income of so much per month? As a part of this, there are really two basic solutions to that. One is an insurance type solution. And the other is... Which is guaranteed. And the other is security solution investments, which is not guaranteed but which may provide a higher return but a more variable return that bounces all around. After my dad passed away, I went to my mom and said, "Mom, do you feel financially secure even though dad's gone?" She said, "No." I said, "Well, what about all the mutual funds, stocks and bonds and everything he left for her?" She said, "Those don't count." I said "What do you mean they don't count?" She said "They all they go up and down every day, you have no idea what they're worth." So some people, many people perhaps, will want more financial security. So the SECURE Act says "Hey, we're going to make it really easy to have guaranteed income in retirement plans." It could be annuities, there's a thing called a guaranteed minimum withdrawal benefit which is not a traditional annuity but which guarantees a certain level of income. Insured products, in effect. So you can buy insured products with confidence for your plan. And here's a fiduciary safe harbor to let you do it. And it's a fiduciary safe harbor that's easy comply with. And so bottom line is, there will be a lot of offerings of guaranteed income coming out over the next couple of years, they'd be out... I think some of them are already out. But there would be more out right now if it weren't for the pandemic. It's just really tough to roll stuff out right now. Because with new things, you need to sit down and talk about it. And nobody's sitting down and talking about things right now other than Zoom or WebEx or whatever. I mean, that's not quite the same, it's good, but it's not quite the same.
So anyway, that's the SECURE Act, project retirement income. That'll be about a year and a half from now. Safe Harbor for including insurance products in your plan, guaranteed retirement income insurance products in your plan. And that's right now, that's already here, but progress has been slowed down with the pandemic. So those are big. And then you mentioned pooled employer plans. What about so called PEPs? I'm doing a lot of work in that area. I think they're great. Essentially, it's where financial institutions can set up. A financial company could be an investment advisor, or broker dealer, a trust company, an insurance company and mutual fund company, a recordkeeper, but some financial entity will set up a plan and say, "Hey, this is a group of assets. I'll take on the fiduciary responsibility for the plan and then in that case, the law calls me a PPP, a pooled plan provider." Some people calling that a 3P.
Josh Itzoe: Not to be confused with the Paycheck Protection Program if you will.
Fred Reish: No, not at all.
Josh Itzoe: The government loves these acronyms, but essentially the PEP being a pooled plan and decided that's been talked about for a long time, I think. And there have been MEPs, multiple employer plans, but it's the SECURE Act really what it did was it made it easier for a whole host of reasons. But for, like you said, the sponsoring organizations, these PPPs to kind of put together call it a 401k plan, if you will, that lots of companies potentially could adopt and utilize as their own 401k plan, instead of having their own kind of custom one just for their company. And there's some things that you get from there potentially scale, fiduciary-wise, possibly fee wise as well.
Fred Reish: Yeah, there are three advantages that are going to be touted. Cost savings if the plan gets big enough, because the main cost savings will come from having institutional share classes of mutual funds, the lowest cost mutual funds, and having collected investment trusts, or so called CITs. So if they get enough money, they'll be able to drive down the investment costs. The administration cost I think will be as much as or more as it would have been. So no big break there in any event, but on the investment side, I think they can drive down the cost. They take over 90%, 95% of the fiduciary responsibility. So for employers who say I'm really fearful of being sued, they'll be able to largely unload it.
Josh Itzoe: And assuming a ERISA 3(38) investment manager is appointed to oversee the investments which I suspect within these PEPs, like that's going to be the primary structure. Absent of that, my understanding is that plan sponsors still would have responsibility for selecting investments unless there's a3 (38) in place.
Fred Reish: Exactly. And the ones that I've worked on that are being put together now, all have a 3(38) because they want to be able to go to market and to say to plan sponsors "We'll be the fiduciary. We'll have the target on our back, you won't have it on yours." So it's possible, legally to have one without a 3(38). And one or more may roll out, particularly if they roll out for very large plans and they want to use their own 3(38). But for smaller plans, it's going to be a package deal, because they do want to be able to pitch "We're going to take all fiduciary responsibility off you." By the way-
Josh Itzoe: As it relates to selecting and monitoring the investments.
Fred Reish: And administration, the 3(16) fiduciaries responsibility also.
Josh Itzoe: So speak about that for a minute, this idea of taking all... What will with these PEPs... I guess, a couple of questions. One, do you think these things will go up market or do you think a lot of the target and kind of the argument is that small plans can achieve some of this scale and protection on their own, which I would argue is not necessarily the case. But that's kind of seems the way these solutions are being marketed for kind of more on the smaller end of the market to leverage economies of scale, if you will.
So number one, what do you think in terms of that? Do you think they'll be successful in moving up market with these pooled employer solutions? And then I guess the second question would be, what is for these adopting employers, let's say my company, Greenspring Advisors. Let’s say we don't want to have our own 401k plan, just for us anymore for a variety of reasons. We're going to join a PEP, and we're going to kind of turn the keys over. How much can we turn the keys over? What is our responsibility as an employer who chooses that for our company and for our people?
Fred Reish: Well, first off, going up scale, I'm actually working with one CPA to do an upscale PEP, pooled employer plan, and it's going to look very different than the small plan scenario. These will be negotiated individually with each employer, for example, for one employer might be $20 a participant for another employer might be $50 a participant, depending on the number of participants and total assets. They may be able to accommodate company stock on and on and on, they'll look very flexible vis-a-vis each individual employer. That's for the bigger plans.
For the smaller plans where I think the need or not the need, but where I think the sales opportunities are the greatest right now. They'll be more vanilla in the sense that they'll have more of a set lineup. They'll have a set way of doing things. There'll be some design flexibility, but not total design flexibility. So what the plan sponsor wants to do on a practical level... Or the employer wants to on a practical level, and see if it's adequate. I think for a lot of small plan employers, they may say "I just want to write a real straightforward plan to get to my employees, so they have a 401k plan, but I don't have the internal staffing to really manage it myself, I don't want to be that involved. I make widgets, not plans. So I just want to plug and play."
This is the ultimate plug and play plan the PEP is. That's practical. Now legally, from a fiduciary responsibility, they need to look at the package and make a determination that it would be prudent for their company to hire that package, to do it. So for example, if let's say you were a PEP, Josh, your firm were, you know plans how they run, you know what the investments are like what the fees are like, I mean, I could look at you as a PPP and say, "Wow, it's pretty safe to hire Josh’s PEP for my plan, because he's competent, he's capable. He's really good. He knows what he's doing. He's got a lot of experience."
So that's the kind of analysis, is it a competent organization, does it know what it's doing. Are these people with experience in 401k plans? That's the responsibility of the employer. So it's a fiduciary process to evaluate the provider, the more experienced the more capable, the better brand name, the easier it is to engage them positively on that fiduciary process. Even if you don't know exactly everything you're supposed to do, because a small employer wasn’t born knowing everything there is to know about 401k plans. No. So yeah, I think it's going to be pretty easy because I think the people that are going to bring them out, the firms that'll be PPPs are going to be true, capable, competent, 401k players. So initially, at least I don't think there's going to be... I don't think it'd be very tough for a plan sponsor to prudently select one of the providers.
Josh Itzoe: And then once they've selected, let's say, and they've made a prudent decision, there, just operationally what is the employer, the plan's sponsor. Is it really remitting payroll contributions and distributing communications and making sure that their internal processes, just like any other employer or kind of aligning with whatever the provisions within the plan document are? Is that just administratively? They don't have to sit in committee meetings anymore. they don't have to evaluate fees outside of the overall is it prudent to select this PEP, if you will? What's the plan sponsor do moving forward day to day?
Fred Reish: I think there's two things they have to do. One is that evaluation. And clearly even if somebody hired like you, Josh, or your firm or a comparable firm, on a consulting basis to help them select a PEP and maybe on an ongoing consulting basis to help them review the PEP annually. From a fiduciary perspective, that would be helpful because I do have a concern as I sort of implied a minute ago that plan sponsors may not know enough to really do it properly. And my concern is particularly on the cost side is that expense structure appropriate for that plan.
But that aside, that's legal, on a practical level. The big difference here is, when it's a single employer plan, the employer is in charge of a lot of that. Now, they may give it to a third party, the data to a third party administrator, or to the recordkeeper. But here, they have a limited set of responsibilities. One is just data, payroll data, getting the right data to the provider, the PPP so that the plan can be administered, so that the discrimination tests can be done, so that the money can be allocated to the right accounts and so on.
The second thing, as you mentioned, is payroll. You got to get that money there pretty shortly after you take it out of the employee's paycheck. It's not employers money, it's the employees money that needs to be deposited into the account. But that's already there. That's just an existing responsibility. Then the third one is that there are a whole series of disclosures that are required under the law. For example, there's an annual... It's called a 404(a)(5) disclosure, as you know Josh, but some of the people listening may not know. But that's an annual thing that has to be given to participants about investments in the plan and the cost in the plan and so on.
But now, a lot of this is going to go electronic with the new electronic rules permitting a lot of this to be delivered electronically. So I think they'll need to be some coordination between the pooled employer plan and the employer to get email addresses for all the employees so that they can communicate right electronically. But I think some of that paperwork stuff was going to go away. Not because of PEPs but for this whole new electronic disclosure.
Josh Itzoe: eDelivery, which was another positive, I would say overall very, very much a positive thing for plan sponsors. Okay, so I think really, really helpful. We'll see, with a lot of these things. So I would consider we're in the first inning of a nine inning baseball game, if you will, just because there's a lot of product development and a lot of things that need to be created and implemented and see what the uptake starts to look like. Let's shift gears and talk about just litigation trends for a couple of minutes, we continue to see, I think fee litigation. In fact, it feels like recently I saw today even a couple of articles about fee litigation, which has really been, as much as the industry I think, in some cases likes to fear monger around like selecting bad investments.
I think if you look at the past 10 or 15 years, most of the ERISA litigation has been fee focused. Excessive fees and share classes and revenue sharing and conflicts. But there are two areas which I actually think could be the next frontier, kind of the evolving frontier of litigation. And they're just starting, I think, to come online. I'd love to get your perspective. So the first is just as it relates to cybersecurity. And then the second is as it relates to data privacy.
So, April, I believe there was a complaint that was filed in Illinois against Abbott Laboratories, and it alleged fiduciary breaches of duty for cyber fraud. Basically, a retired participant claims that she had $245,000 stolen from her account by a hacker due to ineffective security measures with the benefits department and the recordkeeper. And so I'd just love to get kind of your perspective on that and what do you think the future holds as it relates to cases like this and how should plan sponsors specifically be addressing these types of issues and risks as they're trying to make prudent decisions and kind of fulfill their fiduciary responsibilities?
Fred Reish: The issue of cybersecurity really falls into two categories. One is the one you mentioned. I tend to call that cyber theft, because it's somebody who's trying to access the participants account and get their money transferred to some bank. And then often it's immediately transferred from that bank to overseas, to Russia, to Europe, to Africa. And they're gangs doing this. I mean, there are international groups doing this. They're constantly trying to get into people's 401k accounts, from a lawyer perspective, really ought to look and see what the agreement is for the recordkeeper. What's the allocation of responsibility between the recordkeeper and the plan sponsor, and the recordkeeping agreement, if any?
I am reviewing those agreements now for people and we're tightening them up some because of this. And what I'm hearing is that with the CARES Act, changes the extra loans and distributions under the CARES Act, that the a recordkeepers, the providers are being... There are more and more calls for people trying to somehow persuade the people in the recordkeeper call center to transfer the money out. And they're working very hard to fight that off.
So what can the plan sponsor do other than looking at the agreement, see what our responsibility is? I think the best thing they can do is to work with a recordkeeper to educate your employees on not giving away data, not giving away their password, not giving away their login information, not having it out anywhere, not sharing it via email. Just a huge education campaign. Most recordkeepers will work with plan sponsors to do that. And I'm not talking about a one time education program. I'm talking continuous like reminders every month. And I think employers have the same issue with their data.
So yes, that's a big deal. Cyber theft is here. It's worse than ever. It takes a partnership between employers and the recordkeepers to do the most effective job of combating. And the participants have to help because if a participant gives away their information to a family member, or to somebody who just asked for it that seems credible on the phone, don't give it to anybody, period. If you have to contact the recordkeeper then get the number from HR and call the recordkeeper. But don't talk to somebody who says that they're from the recordkeeper. And they're just trying to... And they ask you for personal information.
There's always a backdoor, a legitimate backdoor where you don't have to talk to the person who's on the phone or respond to that email. But that has to be communicated and people have to be educated. So that's cyber theft. The other is what I call cyber security or you could call it the privacy of data, but it sort of falls in between those two. There are three sources of important data on the employer's computer, on the recordkeepers computers, and the transmission from the employer to the recordkeeper, all of those have to be secure. If an employer is confident that... First off, they ought to know that the recordkeeper is secure. And I can tell you the recordkeepers I work with are putting a huge amount of effort into being secure.
Josh Itzoe: So what you're talking more about is so in the first case, with more what I would call kind of call it a user error, if you will, that's somebody that did not protect their own kind of personally identifiable information, if you will, themselves. The second one you're talking about is more around security measures to lock data down itself so that it's not accessible by hackers. That Abbott Laboratories case was interesting in that the woman who brought suit or filed the complaint claimed that somebody had called the benefits department of the recordkeeper on her behalf, basically claiming to be her.
And then actually the benefits representative, the way that the complaint read, provided some personally identifiable information, something along the lines of "Do you still live at this address?" So they actually gave out this information, which was validated, and then a third party as I understand it, a bank account was then changed. And then a few days later, money was transferred. That's different than a computer being hacked, if you will. And it seems like that's what you're talking about is in where data lives and then to the transmission. It being accessible via some type of hacking attempts. Is that fair?
Fred Reish: Yeah, the cyber theft was the one you were talking about with the Abbott example. And this one would be the holding on transmission. We're working on both of those right now. When I say we, I mean, my law firm. We're working on helping clients with both of those right now. But they're both active areas in which lawyers that work in the retirement plan area are working. So there's that.
And then the other source of litigation is the privacy. There's two sets of privacy issues, one are new laws like California's which have new, very strong privacy laws where there can be enormous penalties if it's violated if you gather information from your customers or consumers. The other, the one I'm seeing more of in the litigation right now, is where an employer gives information about their participants to their providers, which obviously they need in order to administer the plan. But then the providers take that information and use it to sell other stuff to participants. Now that has been the source of a number of allegations and a number of complaints by the Schlichter law firm, which is the best known class action 401k law firm and 403b law firm out there.
Josh Itzoe: I know in the Vanderbilt University settlement, which was 14 and a half million dollars. With all these lawsuits, right, there's monetary damages, but then there's non-monetary terms as well. And I know that within that case, specifically, the plan fiduciaries agreed to prohibit current and future recordkeepers from using participant data in that way to really cross sell unless it was requested by the participants. So that seems like kind of an emerging angle that you're starting to see plaintiff's attorneys take.
Fred Reish: Yes, that's very definitely emerging. I mean, John Hopkins was another... There are four or five of those now that have been settled where part of the settlement agreement creates a condition that participants have to opt in to receiving those additional services or recommendations of products. Rather, what I think employers can do, though and again a certain amount of writing on this where if they engage in process to have the representative of the recordkeeper come in and say, "What are you using the data for other than to add nothing to our plan." So again, it all laid out for the plan committee, so they understand exactly how that data is being used.
And then go through the different uses and say, "Well, we think this one helps our participants. We're glad to have you use it that way, because it seems like a positive." But we still want to know that you're making recommendations that are in their best interest, and we still want to understand that the conflicts are being clearly explained to our participants. Tell me what you do about that. In other words, I think if properly done by the plan fiduciaries that Jerry Schlichter's concerns are dealt with through a fiduciary process rather than through a lawsuit. But I think if you're a recordkeeper using that data, you do want to have a... Which most are, not all, but most. You do want to have a process in place for the committee who reviews it, understands it and approves of it or disapproves of it.
Josh Itzoe: And clearly document that entire process just like in any other decision that you make.
Fred Reish: Right. Always document it. At least, the process, I mean, part of the documentation you'll get, because hopefully, the recordkeeper will provide you with some sort of memo or written explanation of what they do. That can be part of your documentation. The minutes of that meeting can be part of your documentation. It doesn't have to be like you have to sit down and create a separate document. But make sure there's evidence and you keep it in your file that you engaged, reviewed, had your advisor with you in the meeting so that advisor can explain some of the stuff to the committee members. And then you keep that in your files for at least six years. Absolutely.
Josh Itzoe: Just like any other decision you would make.
Fred Reish: Yes.
Josh Itzoe: Okay. Two things I want to touch on as we, as we wrap up is guidance that was recently provided by the DOL. So the first was around ESG investing. This is something fairly recent - ESG generally stands for environmental, social and governance factors. So incorporating those into traditional investment solutions. It's also often described as socially responsible investing or maybe sustainable investing. But there was guidance provided recently by the DOL, it wasn't very favorable, and it drew a lot of criticism from the industry. In fact, I heard the other day that during the comment period, which I think ended last week, there were over 1,500 comments around that guidance. And so can you talk a little bit about this? What did the DOL say as it related to ESG investing? And what plan sponsors need to be aware of either those who are currently taking that approach and incorporating these types of investments in their plans or are considering it.
Fred Reish: Sure, I mean, in the interest of full disclosure, we represent some of the mutual fund families that use ESG factors. So, whatever I say, have that in mind, but, the DOL came out and said, "If the plan committee selects investments that use ESG factors in picking the investments, then the plan committee... They can only do it properly. If the factors are pecuniary." I'll explain pecuniary in a moment. And even then they have to document in writing why they selected that particular investment with the ESG factors. Which you don't have to document inwriting for any other kind of investment. I mean, in theory investments can be made with a Ouija board, you wouldn't have to document it. But here because it's-
Josh Itzoe: I think that's actually how a lot of advisors actually pick investments!
Fred Reish: The flip of a coin. What I've learned through this process is that there's the old ESG, that you think of many years ago, where investments were made primarily by union pension plans to try to affect certain environmental or political outcomes. And the DOL is still thinking the old way, but the new way is that many investment, perhaps most investment managers now consider ESG factors. So let me give you some examples. How could you invest in Tesla, without considering environmental factors? I mean, you'd have to at least think about it.
If you think that a company is a polluter, and that that kind of pollution is going to become more highly regulated, imposing significant expenses on that company and reducing its profits? How could you not consider that in selecting investments. I could go on and on and in other examples. But the point being that we're a pretty complex world now. And in my view, at least, it's inappropriate for the government to tell the private sector, what the private sector should be looking at in terms of which things can affect the performance or the risk of investments going forward. They don't have the expertise, they're not investment experts. The private sector has investment experts.
The government can just say look, you have to focus on participant outcomes, you have to look at the potential returns and you have to look at the potential risk and determine that a prudent investment favors either better return or less risk or a combination of the two. Now you the private sector go decide what it is, you're going to look at. What are the factors that should be considered for that? Because one, we're the government, we don't have the expertise. But two, we're the government, we shouldn't tell the private sector what to do unless we absolutely have to. And number three, we don't have the internal... Or number three, this involves factors that were important 20, 30 years ago, are less important now. And new factors are more important.
So bottom line. Josh, I just think they're totally off base. I think it's a political agenda. This particular administration favors old line companies, ESG factors favor new line companies. Solar power, for example, might be a good investment, but you would consider what's going to happen in the future and that has nothing to do with the environment in thinking it. So I just think they're totally off base. They're trying to use regulations to achieve a political objective and the thing should be withdrawn. But that's me. There you go, Josh. Thanks for allowing me to have my little rant.
Josh Itzoe: There you go. We'll see if your crystal ball is accurate and what happens.
Fred Reish: It's not my crystal ball, I think they're going to do it. Put that aside.
Josh Itzoe: It definitely is interesting when you look at I think the different... Even over the past two administrations you do see a different approach, for instance, the DOL, a different approach that they take. It seems very much that the current administration is, there's been in some ways, like a deregulation if you will approach. And I don't think that's surprising given some of the... I think early on, I think it was kind of mandated that for every one new rule that was I think created, there had to be two that went away or something along those lines. So it definitely is something where you've had a lot of companies who have invested I think in ESG. And a lot of investment managers and getting 1,500 comments during the comment period is pretty significant if that number is in fact the case.
Fred Reish: That's an amazing number of comments from the private sector.
Josh Itzoe: Right. Okay, so last topic as we wrap up, and then I will let you go. But the other thing is private equity and the DOL recently provided an information letter, which was requested by two private equity firms, Pantheon and Partners Group, but they inquired about the use of private equity investments in defined contribution plans like 401k plans. And the letter I think was viewed as favorable in the sense that the DOL didn't exclude private equity as an investment alternative. As long as the selection and monitoring of these types of investments followed the prescribed kind of fiduciary standards and practices outlined in ERISA.
There's obviously some really major hurdles, I think, that need to be solved like high fees and lack of transparency and liquidity evaluation and due diligence. But it certainly opens the door, I'm sure for more investment providers to come up with solutions. What are some of the most important things do you think for fiduciaries to be mindful of? I mean, I've been getting some questions, right, when that was announced, around like, "Hey, what should we do around this? Should we include this?" And kind of my perspective was, "Hey, let's wade slowly into the pool, if you will." There's going to be a lot of time now, between how these hurdles get addressed how these problems get kind of solved. Hopefully, it's going to take time for product to be built, if you will, but what do you think as it relates to private equity and how should plan sponsors be thinking about considering these types of investments within their plans?
Fred Reish: Again, Josh, my firm represents-
Josh Itzoe: You represent everybody, Fred!
Fred Reish: Private equity investment, so consider what I say in that light. But when it came out, I wasn't particularly surprised. I was wondering, why were they issuing guidance because ERISA's investment principles are based on generally accepted investment theories. The most generally accepted investment theory is modern portfolio theory, which suggests you have a wide range of asset classes that have different risk and return profiles such that the old umbrellas and sunglasses. You've got some investments that are good when it's raining and some are good when the sun is shining. So a lot of non-highly correlated investments.
The guidance was similar to that. I mean, the guidance was consistent with that. So as a lawyer who's practiced in this area for decades, to me it just seemed like "Well, that's pretty obvious." Now, that's the legal analysis. What about process, what about the practical considerations? The guidance said that it applied to a portfolio arrangement where the was managed by a professional manager.
Josh Itzoe: So within like an asset allocation approach, as opposed to like an individual fund in a lineup. It would be more of a call it a sleeve within maybe a target date fund or a managed account.
Fred Reish: Exactly. A managed account, a target-date fund, a balanced fund, a multiple asset class collective trust. But a portfolio arrangement managed by a professional. So that's what it talks about. So now I think it's up to the professional managers to decide whether to include it in their portfolios, but it clearly did not apply to a standalone, private equity investment. The DOL dealt with some of the major issues in the guidance like, okay, 401k plans are generally daily traded. How are you going to maintain liquidity? Will you be able to do daily trading? How are you going to value it so you can trade daily?
Those are two big issues related uniquely, to 401k plans and their daily trading feature. Now in talking with some private equity managers they seem to have that in control. But that would be an obvious question for a plan sponsor, or a committee to ask because they're considering having a portfolio that includes private equity. And then always, every investment of any kind and any 401k plan anywhere, is the issue of cost, is this reasonably priced relative to what you're getting? And I think the major target date fund providers, for example, will take that into account because they want to keep their expense ratios as low as possible in order to compete.
But that is an issue and I think they're going to need the help of their advisors. Your clients, Josh, I think will need your help. Because unless you're just taking a humongous company, you don't have internal private equity or hedge fund expertise. So you need to get an outside advisor to help you evaluate it. And then how long the managers have been doing this, what their track record is, just all the regular stuff. But it's a little more complicated because it's really just on all the reports and all the information you get on mutual funds. So it's a little harder. But I'm not competent to qualify whether it's a good investment, or not, that would be in the province of folks like you Josh. But legally, it can be done. And I think we all know the factors to be considered in the selection of any investment for a 401k plan, include cost and quality. So there you go.
Josh Itzoe: You know what'll be interesting. And I think part of this came up, and I want to move on and kind of wrap up but I seem to remember that the Intel lawsuit really centered around kind of these custom portfolios that Intel had built. And whether those were prudent and fiduciary breaches, I seem to remember they might have had private equity in them as well. And that was part of the arguments by plaintiffs, am I remembering that correctly?
Fred Reish: Yeah, my memory on that one's a little foggy too. I know they had hedge funds, but I can't remember if private equity or not. But in any event, you have similar issues, which are, they're not publicly traded.
Josh Itzoe: They're not liquid.
Fred Reish: They're not liquid. They tend to be higher cost based on the promise of either less volatility, greater return or both. And that's the kind of stuff that that plan committees would have to evaluate. And if they didn't have the internal skill sets, they had better hire an advisor to help them. I mean, the process is just the same for everything. It's just that these are more complicated.
Josh Itzoe: Right. Yeah, it'll be interesting to see... And, again, this is I would say, I'm not even sure we're in the first inning. I think we've probably still in spring training as it relates to private equity. So it'll be interesting to see how things develop. And that actually, as we close, kind of leads me into my last couple of questions. I like to ask these at the end of each one of these episodes. So first, how do you think the retirement industry is going to change and evolve over the next five to 10 years? And then what would be, Fred, your single best piece of advice to make ERISA fiduciaries smarter?
Fred Reish: In terms of how we're going to evolve. I think, up until now, Josh, most of us have thought in terms of retirement plans. But I think the perspective has to expand - it has to be retirement. Including working, accumulating, and retiring, distributing. So there's a continuum that starts in the 20s, perhaps, and that goes all the way to a person's death. And we have to start thinking, how do we make that continuum work. One example would be we talked about projection of retirement income. We talked about guaranteed benefits. But also we're seeing more and more employers, plenty of participants leaving money in the plan and making monthly payments to retirees.
So just a different perspective on it. And I think in terms of future developments, I don't know why we can't have something like super IRAs that are retirement plans for retirees, where instead of providing financial wellness and advice on accumulating and investing, to get ready for retirement, they provide advice on everything about retirement, how to have sustainable lifetime income, but they also provide the pooled plan benefits, of lower cost shares, and they're set up flexibly to distribute. And so I can see a whole new set of inventions of services like these super IRAs, as I call them. And products that are specifically designed for retirees.
So if people would just implement everything available like automatic enrollment, automatic deferral increases, QDIAs. I think we've got the accumulation thing pretty well understood and we have the tools to make it work. The place we're really missing is coverage. There's just so many people that aren't covered by a retirement plan yet. We'll have to go to work on that and perhaps IRAs are part of the answer there. State run IRA plans are part of the answer. But in terms of accumulation, that's when the focus I think, will primarily be in terms of de-cumulation or distribution.
Golly, the picture is still warming up. And we're still in spring training as you said a minute ago. But that hasn't even really started in earnest yet in terms of thinking creatively and developing really nifty products and services. So that's what I think the future holds for all of us in the retirement industry. And I think each of us can be a player for the full spectrum that we can help people get enough money and we can help people live on the money in retirement. I would urge everybody, even plan sponsors to have a broader look at how to make this work out. Okay. The other question was, what can I do to help plan sponsors understand their fiduciary responsibilities?
Josh Itzoe: Well I would say your single best piece of advice since this podcast is all about making ERISA fiduciaries smarter. What would be your single best piece of advice for fiduciaries?
Fred Reish: There's a line I love Josh, no one ever called a lawyer to ask how to help their mother invest her money. My point there being a fiduciary responsibility, a fiduciary relationship is a very odd relationship. The closest we have to that is family relationships where you actually put somebody else's interests ahead of your own. So if you go to work everyday, saying what can I do to get the best possible outcome for participants, then you're really going to get the essence of what a fiduciary relationship is. It is literally putting somebody else's interests ahead of yours.
So that's my single best piece of advice. Think in terms of not the plan as being a corporate responsibility or not just being part of your overall job. But at every meeting, say, "How do we get a better outcome for the participants? Whether it's lower costs, whether it's better investments, whether it's helping them save more through deferrals." Whatever it is, how do we do what's best for the participants? And most of the litigation I see is where people weren't willing to ask that question about every issue, and then they weren't taking the steps necessary to implement it. And what's best for participants is not what makes them happiest. It's tough love. What's best for participants is what produces the best results in terms of accumulating money for retirement. So don't worry so much about making people happy. Just worry about making things right.
Josh Itzoe: They'll thank you later.
Fred Reish: Yeah, well, and being a fiduciary is a thankless job Josh.
Josh Itzoe: Right. We often say internally that we're working for the thank you’s we'll never hear in a lot of ways. And I think, I love that piece of advice, because and that's one of the things in The Fiduciary Formula that I try to impress upon readers is that this idea of being a fiduciary is an incredibly high calling, and it takes courage, and it takes leadership. At the end of the day as a parent of four kids a lot of times I have to do things, I have to make decisions for them that they may not like but I know in the long run, it's going to be what's best for them.
And I love what you're saying and kind of that idea that we really need more and more plan sponsors, more fiduciaries, more committee members, and quite frankly, the ecosystem, those of us who support them to really step their games up, and to take this responsibility more seriously. Because they have a huge impact on the outcome, I would argue probably the greatest impact on the financial outcome for the people who work for them and their families over time. So great advice, as always. Where can people go to connect with you or follow what you're up to? And we'll be sure to put those in the show notes. But how can people stay connected with you?
Fred Reish: I think the best way is my blog. It's FredReish. My name is one word first last name, one word, no periods or anything. Dot com. So fredreish.com. It's a blog for, I slowed down production during the pandemic a little bit, but usually I post an article every week or two, so it's regularly updated for the issues of the day.
Josh Itzoe: That's great. We'll make sure to put those in the show notes so people can connect with you. And I'm glad to hear things are going well, and you're dealing with this new kind of COVID-19 world that we live in. But thank you so much for your time and your insights. And as I mentioned at the outset, you've probably had maybe the biggest impact on my career over the years in terms of helping me develop technical knowledge. And I'm so excited about and happy to be able to get you some exposure to the audience of the Fiduciary U™ podcast. So thank you so much for your insights and for taking the time, Fred.
Fred Reish: Josh, it's a pleasure. Thank you so much.
Josh Itzoe: Thanks for listening to today's episode with Fred Reish from Faegre Drinker. I hope you enjoyed our discussion, you have a better understanding about many of the regulatory, legislative and litigation issues facing the industry today, and it helped make you a smarter ERISA fiduciary. If you'd like more information or you'd like to connect and learn more, please go to www.fiduciaryu.com. I've got some great resources there for you including each episode along with show notes, articles, free tools and online courses. And if you've got questions you'd like me to answer, topics you'd like me to discuss, guests you think would be a good fit for the show or any other feedback, I'd love to hear from you. Also head over to Amazon and check out my two books, The Fiduciary Formula and Fixing the 401k. And if you want an easy way to support the show, I'd really appreciate you leaving a review on iTunes. It's the best way to help other people find the show, and I read each one. Until next time, thanks again for listening to the Fiduciary U™ podcast.
-dealers to act in clients best interests when making investment recommendations and as I read it, and again, we're at Greenspring, a registered investment advisor. So not under the... We don't have a broker dealer. But it seemed like Reg BI, while it didn't impose a full fiduciary standard on brokers and broker-dealers, it did lift the standards of care to a certain extent. That being said, there was a lot of criticism around the fact that it was too lenient of a rule and actually kind of watered down some of the fiduciary protections, especially for ERISA plans. What are your thoughts? Can you talk a little bit about Reg BI, what it means, why it's important? Any challenges or shortcomings of the regulation and what should specifically plan sponsors and plans that be aware of as it relates to Reg BI?
Fred Reish: Josh, Reg BI is a mixed bag. There's some good and some not so good. And if there's any bad it makes people might think that broke-dealers are subject to a quasi-fiduciary standard now, which is partially true, but you can't totally rely on that. Okay. With that general introduction, yes, first it is based on fiduciary standards. For example, the standard of care is that recommendations by broker-dealers have to be developed with care, skill and diligence. Or if you look at the fiduciary rules, it says care of skilled diligence and prudence. The SEC dropped our word prudence but said that they didn't mean to change the standard by dropping it.
So it's actually very close. If you look at the process, and you have to go through in making an investment recommendation. So that's a higher standard, that's better. Also, there's a requirement that broker-dealers mitigate the compensation of their advisors, meaning that broker-dealers dampen the incentive effect of higher compensation so that advisors are focused on what's best for the customer, and not what's best for the advisor. So that's good, too. I mean, I think both of those are going to be very effective.
So what's not so good? Well, it doesn't create a private right of action, an investor feels like her broker-dealer advisor doesn't make a recommendation in their best interest, there's no way to file a lawsuit on that and recover your losses. So it can only be enforced by FINRA, a self regulatory organization for broker-dealers, and by the Securities and Exchange Commission.
Josh Itzoe: And that was just to be clear, that was one of the things that the kind of prior DOL fiduciary rule allowed was this private right of action? Correct?
Fred Reish: That's exactly right. And that's reducing some of the tension in the system. But that's not to say that there isn't any tension because the regulators can still come in and enforce rules. It's just, there's only so many regulators and there are millions of transactions. So it's weaker than the best interest contract exemption which is the name of the old DOL rule that applied to this, but it is nonetheless higher than what the rules were previously.
I think if you talk to consumer advocates, they'll say that the weakest part of the DOL guidance Reg BI. I mean, of the SEC guidance Reg BI is that it relies heavily on disclosure, and there's a lot of studies, there's a lot SEC literature, that says that disclosures aren't particularly effective. If you give somebody to go to my website at this page, and there's like 20 pages of fine print of disclosures. The general thinking is that most people aren't going to go read all that, and therefore won't prove to be very effective at all.
So there is some good and some bad and how you see it depends on where you stand. It does say though, that if say for example, if an advisor and a broker-dealer recommends to a participant that they take a rollover, that that recommendation has to be in the best interest of the purchaser. Because the big worry that the SEC has and for that matter, the DOL has tha that when a participant, let's say retires takes their money out of the plan or is considering taking their money out, that will be the largest single financial transaction that that participant has ever entered into, in their entire life or will ever enter into.
And a lot of participants in plans become fairly large account balances, say accumulated over 20 or 30 years, don't have the financial sophistication to really understand all the consequences of leaving a fiduciary run well priced, high quality plan, enrolling into a retail IRA, which higher expenses and conflicts of interest. So if that's an area of particular focus now among the regulators, both the SEC and the DOL. So that's another way in which the rules are converging, as well as what I mentioned earlier about care, skill, diligence and prudence, the standard of care.
Josh Itzoe: Under ERISA.
Fred Reish: The word prudence under ERISA drops the word prudence in Reg BI.
Josh Itzoe: Right, right. And so what is that, just on the surface may not seem like dropping one word makes that much of a difference. Does it make a difference? And what's the difference, do you think, if so, between the DOL approach and the SEC approach. Like how important is that word prudence, what does that mean in kind of real world terms?
Fred Reish: You know, the SEC in the preamble to the rule, the so called doctrine release to Reg BI says it doesn't make a difference. They don't intend for it to make a difference. But it's possible that it would. My personal view is that most of these cases are pretty clear cut. If you violated the rule, you weren't careful, diligent and skillful then the word prudence doesn't matter, if it ever does matter. It'll be in a very close call case. I mean, it's something that could tilt either away. So for 95%, 98% of the cases, I think it's going to end up being pretty much the same thing.
And what it means is that the regulators will look at the process and how did the advisor go about gathering information about the customer, analyzing that information in light of the customer's needs and circumstances and make a recommendation. Another big change that is going to be I think is getting a little bit of play right now, but it's going to end up being a big deal is that the SEC says in Reg BI that the advisor, that the cost of the investment has to be a consideration and the development of every investment recommendation by any broker-dealers from now on.
So it's going to make it harder to justify higher cost products, and particularly those where the cost may be hidden and the investor can't really see it. And often that cost is attributable to compensation for the advisor of the broker-dealer or to compensation for whoever's managing the investments that may end up being shared as revenue sharing. So that's a big deal, in my opinion. So Josh, in a nutshell, I'm pretty happy with it. I think it's a big step forward. I don't think that's the same as a fiduciary rule that more generally prohibits conflicts of interest, pure conflicts of interest can be handled by disclosure. So I would say if I were an investor, and I wanted to... And so the question was, what do I still need to be really aware of, I would say conflicts of interest, and particularly conflicts of interest involving compensation to the broker-dealer, the advisor or the investment manager. That would be the area that I think is least well managed by the new rule.
Josh Itzoe: Which you can probably find on page 77 of the disclosure that you're going to get if you make it that far in the reading. That seems to be the big challenge in the real world, right. It's important to know ask the right questions, but what's even more important once you ask the right questions is being able to interpret that and it's interesting just in terms of... Like if I think about Reg BI, and you can correct me if I'm wrong here, but it's really about you've had this kind of different standard of conduct between brokers and broker-dealers and then registered investment advisors who are held to a full fiduciary standard.
And it seems as though Reg BI is the effort to try to harmonize and raise up at least the standards of care for the broker and broker-dealer community to get closer if you will, to, I think the standards or the regulations that are imposed upon registered investment advisors. It's not fully there, it's a step in the right direction. But it's not fully there. And one of the biggest challenges I think we've seen in the industry is that consumers, whether that's a plan sponsor, or whether that's an individual investor, have a really hard time knowing what the difference, really understanding what it means to be a fiduciary or not. And it sounds like this is a step in the right direction, and certainly better than what was in place. But there's still the opportunity for confusion, whether it be disclosure-based or just not kind of understanding the interplay between the two types of professionals, if that makes sense.
Fred Reish: Yeah, and a significant difference, also, Josh, is that in the typical case, to be a broker-dealer, it's just giving transaction based advice. In other words, I recommend you buy this or I recommend you sell that. For an investment advisor, the fiduciary relationship, covers the whole arrangement, a whole relationship between the parties, not just that particular transaction. And a good example of that is monitoring.
Broker-dealers can't do continuous monitoring of an investors account, that is reserved to Investment Advisors. That's definitional. That is what an investment advisor is. And where investment advisors obviously can actively manage accounts that can continuously monitor them. And the fiduciary relationship covers the whole relationship. So if I had to pick a handful of differentiating factors, it would be those active management, continuous monitoring a fiduciary relationship of... The whole relationship is fiduciary. Any advice given, any recommendations is fiduciary. It's getting closer together. But fundamentally understanding one is transactional based, the other is relationship based, is what you need to know. Just understand the difference between broker-dealers and investment advisors.
Josh Itzoe: Right. So I think that brings up another good question is that not to be left out. So you had Reg BI, from the SEC, not to be left out in late June, the DOL announced a proposed new regulation to cover investment advice and retirement accounts that was really meant to replace that vacated fiduciary rule. Can you talk a little bit about this proposed rule and how do you think that impacts Reg BI, if it does at all; And really with all of these things? How did these things impact plan sponsors? What should they be aware of? In order to be what I would call knowledgeable retirement consumers? Like how do they need to think about these things?
Fred Reish: Well, let's start off with the DOL proposal. Basically, what it says is that advisor that is a broker-dealer, who receives variable compensation, and what I mean by variable compensation is if I recommend this to you, I get so much up front and so much per year. But if I recommend this other investment to you, I get more in my front end commission and more trailing payments every year.
Josh Itzoe: And that's the conflict right there. Right? That's the issue.
Fred Reish: Exactly, exactly. I can feather my own nest. Yeah, I can feather my own nest to make more money by recommending a more expensive product. That's always been prohibited by ERISA, and by the Internal Revenue Code, just prohibited. And the DOL has issued a proposal that says, "Hey, we're going to allow that going forward if you follow a handful of requirements." And one of the requirements is that effectively they follow ERISA's duty of loyalty and a duty of care, which people will take into calling the best interest standard.
But this is truly ERISA, it has the word prudence in there if that does make a difference, at least in the wording. If you want to get conflicted compensation as a broker-dealer by making recommendations to plans, participants or IRA owners, you have to adhere to the best interest standard of care, you can receive no more than reasonable compensation. And you can't mislead the investor about the investments. There's more to it than that. But that's the general scenario. This is very controversial.
Josh Itzoe: How does that work in practice? That seems like strange bedfellows there.
Fred Reish: Well what's interesting the difference is advice to plans and participants, is already subject to a fiduciary standard if you're a fiduciary. And there is a private right of action there. So this doesn't take that private right of action away. And for those of you who don't talk lawyer, private right of action means you can sue. Or otherwise, just the agencies, the government agencies could enforce it, but individuals couldn't. But with regard to conflicting advice to IRAs, there is no private right of action, although there's a concern among the broker-dealer community that the standard that the government could enforce will be adopted by courts and by arbitration panels.
So maybe it's moving closer to a private right of action for IRAs. Forget all that lawyerly stuff. The DOL proposal also relies on disclosure, which, like I said, a lot of people, probably most people don't think it's particularly effective. But it does impose a higher standard of care, the best interest standard of care plus the Reg BI standard, care plus the word prudence. It has some really interesting things in there. One is that every year, the firm, let's call it a broker-dealer has to do a retrospective review of how well they've complied with a rule. And if they haven't complied with those requirements, they have to improve there or their conduct.
And that review has to be reduced to a written report and the CEO of the company has to sign off on it. Well, needless to say, there's a lot of negative comments about that because... But if you think about it, it really introduces some tension under the system, which, whether it's the CEO or the CCO... The Chief Compliance Officer or whatever. Having that kind of requirement means that there really has to be a tough review every year because high level officers are going to be putting their name on one way or another if it goes final the way it's written right now. So that's one. And then the other thing just to follow up on what I mentioned earlier, it takes a really strong stance on rollover recommendations in two ways.
One way it says if you make a rollover recommended and if this rule becomes final, because remember, it's just a proposal. But when it becomes final there has to be written documentation of why the recommendation is in the best interest of the participant. Well, that's a cut above any other recommendation. There's generally not a requirement in the law that there be written documentation of why a fiduciary rule is satisfied. Now, a lot of people do that, because it's a way to show compliance, but it's not generally required. Here it would be. So they're elevating rollover recommendations to a higher level, and than other recommendations.
The second thing is that historically, the Department of Labor has had their rollover recommendations. If they're not made by a fiduciary. You don't have to follow these fiduciary rules, obviously. But if they are made by a fiduciary, then you do. But they've had a relatively weak definition of fiduciary. What the DOL all has said gratuitously in the preamble to the proposal, is if we think that an advisor has a continuous relationship. And this isn't an exemption. There are no conditions. This is the DOL saying we think this today. If an advisor has a continuous relationship with a participant and recommends a rollover, then that advisor satisfies the requirement that they be giving advice on a regular basis, which is one of the conditions to be a fiduciary, and which is the main one that would apply here.
So in other words, it's going to make it much, much easier to show that an advisor is a fiduciary when they make a rollover recommendation. For example, if an advisor, the DOL says if an advisor makes a rollover recommendation, and the recommendation is to rollover to an IRA with an advisor, and the advisor... And it's anticipated that the advisor will be giving ongoing advice, functionally, not an agreement, there's no requirement for an agreement, it can just be an understanding. Ongoing advice about that IRA. Then that's continuous advice. And that satisfies the regular basis requirement.
But when an advisor makes a rollover recommendation but isn't to go over with the advisor. Who says, "Hey, roll over with somebody else." That wouldn't be very common. And so that's going to mean a lot of people, if the DOL sticks to its guns, on that one it means a lot of people that haven't thought that they were fiduciaries in the past will be fiduciaries, for rollover recommendations. And just to go back to what I said earlier, Josh, this shows how important the government thinks several of our recommendations are. We now have roughly 10,000 people a day reaching age 65, 10,000 people a day retiring, 10,000 people a day filing for Social Security benefits. We have over $500 billion a year rolling out of retirement plans. Yeah, it's a big deal. And that's an area that's going to be increasingly scrutinized by all of the government regulators, not just the Department of Labor.
Josh Itzoe: Well, I would say to the higher level of ERISA standards, if you will, have often, I think protected individual investors in a way that potentially the kind of more brokerage, retail, once you get out of an ERISA plan, especially call it financial professionals that haven't been held to a fiduciary standard it creates a lot more of kind of a wild west environment, if you will. At least ERISA being fenced around those assets, created, I think standards of conduct protections, if you will.
So it definitely seems from a consumer perspective, this is a step in the right direction. Obviously, there's a lot of competing priorities. It would be better if there was just one fiduciary standard that was kind of applied across the board. But obviously, we're not there yet. Let's talk a little bit about the kind of legislative environment and the Secure Act, which was passed at the end of 2019. And then we have obviously the CARES Act, which was related in response more to COVID-19.
I'd love to talk a little bit about the SECURE Act, though, because we're starting to see things having gone into effect. I would say probably the two biggest components, at least in my opinion, that came out of that Act was number one, some of the provisions on retirement income. And then I think, secondly, guidance around multiple employer plans and pooled employer plans, what are called MEPs and PEPs. So let's take a couple of minutes and maybe talk about those things. Why don't we start with guaranteed income. Can you provide some insights into these provisions in the SECURE Act and what did this guidance provide?
Fred Reish: Just as background, Josh, a second ago I said 10,000 people a day are retiring, and over $500 billion each year is being rolled out of plans, viewed slightly differently, taking those same numbers. Those same people are doing it differently. Once that money gets rolled out into an IRA or let’s say it's in a plan, that stays in the plan that then has to last for 20 or 30 years or more in retirement. My mom died a year and a half ago, she was 101 years old. She had retired at 65. That would have been 36 years.
Josh Itzoe: That was probably almost as much more time than she actually was in the workforce. She was retired.
Fred Reish: Yeah, it's about the same. Exactly. Although she was from another era, I mean, she started working like at 16. So, but generally, yes, that's right. What I'm trying to say is that we're now... Up until now 401k plans have been judged to a large degree on what are their features? Do they have great investments that have low cost to them. A good website? Do they make people happy? Then we sort of evolved to "Well, are our people accumulating enough benefits, which is where we are now." And then the next iteration is going to be how do we make all that money last for my mom's case? 36 years, but certainly for most people, 20 years or more.
Because 20 years is roughly the average of how long people have after age 65. And then when you take into account that people in 401k plans are white collar, college educated, not entirely, but largely. It's longer than 20 years, so how do we make that work? So along comes the SECURE Act. And it did two big things. Number one, about a year and a half from now, 401k plans are going to have to project retirement income for every participant at least once a year.
Now, plan sponsors don't need to worry about that. Because their recordkeepers will take care of it for them. But it is going to happen. And so every year participants are going to get a projection that when you're 65 or 67, your account balance will produce so much income for you in retirement. So all of a sudden it's being, that I think will cause a shift of viewing and account balance has evolved and shift it over to viewing an account balance at least equally as income in retirement.
Josh Itzoe: Which behaviorally speaking, I think it's interesting when we think about account balances, that's not how people financially live their lives, right? Everything is usually like, what am I spending per month? What is my mortgage cost or my rent? How much is my car payment, how much is my utility bill or my cable bill? You don't think about those things in terms of like the total kind of value or balance of what those things look like, right?
Fred Reish: I agree.
Josh Itzoe: So this idea of lifetime income, it seems like it's really to kind of to help people behaviorally and probably psychologically kind of understand what that money represents in terms of living their lives on a day to day, month to month, year to year basis.
Fred Reish: Yeah. And I think if we project out Josh, it is monthly, it's absolutely monthly. Their cell phone bill comes monthly or once monthly, their mortgage is monthly, everything is monthly. So what will happen is participants will get this number, you will have $1,500 a month in retirement. Well, next question. What does that mean? Is that enough? Well, I think that the industry, the government won't require it. But I think the industry will come along and say, "Well a common benchmark was a 70% or 80%, income replacement ratio in retirement, based on what you made while you were working, including Social Security as a part of that."
And so I think that there will be what's called gap analysis provided by the private sector where there's a benchmark given and then you see if somebody's... If there's a gap between what the benchmark for reasonable retirement and what they're actually projected to have. I think there'll be tools to help participants but then you get to the third step. So first is requiring a projection, second is gap analysis. Third is so how do I actually do that? How do I get that income of so much per month? As a part of this, there are really two basic solutions to that. One is an insurance type solution. And the other is... Which is guaranteed. And the other is security solution investments, which is not guaranteed but which may provide a higher return but a more variable return that bounces all around. After my dad passed away, I went to my mom and said, "Mom, do you feel financially secure even though dad's gone?" She said, "No." I said, "Well, what about all the mutual funds, stocks and bonds and everything he left for her?" She said, "Those don't count." I said "What do you mean they don't count?" She said "They all they go up and down every day, you have no idea what they're worth." So some people, many people perhaps, will want more financial security. So the SECURE Act says "Hey, we're going to make it really easy to have guaranteed income in retirement plans." It could be annuities, there's a thing called a guaranteed minimum withdrawal benefit which is not a traditional annuity but which guarantees a certain level of income. Insured products, in effect. So you can buy insured products with confidence for your plan. And here's a fiduciary safe harbor to let you do it. And it's a fiduciary safe harbor that's easy comply with. And so bottom line is, there will be a lot of offerings of guaranteed income coming out over the next couple of years, they'd be out... I think some of them are already out. But there would be more out right now if it weren't for the pandemic. It's just really tough to roll stuff out right now. Because with new things, you need to sit down and talk about it. And nobody's sitting down and talking about things right now other than Zoom or WebEx or whatever. I mean, that's not quite the same, it's good, but it's not quite the same.
So anyway, that's the SECURE Act, project retirement income. That'll be about a year and a half from now. Safe Harbor for including insurance products in your plan, guaranteed retirement income insurance products in your plan. And that's right now, that's already here, but progress has been slowed down with the pandemic. So those are big. And then you mentioned pooled employer plans. What about so called PEPs? I'm doing a lot of work in that area. I think they're great. Essentially, it's where financial institutions can set up. A financial company could be an investment advisor, or broker dealer, a trust company, an insurance company and mutual fund company, a recordkeeper, but some financial entity will set up a plan and say, "Hey, this is a group of assets. I'll take on the fiduciary responsibility for the plan and then in that case, the law calls me a PPP, a pooled plan provider." Some people calling that a 3P.
Josh Itzoe: Not to be confused with the Paycheck Protection Program if you will.
Fred Reish: No, not at all.
Josh Itzoe: The government loves these acronyms, but essentially the PEP being a pooled plan and decided that's been talked about for a long time, I think. And there have been MEPs, multiple employer plans, but it's the SECURE Act really what it did was it made it easier for a whole host of reasons. But for, like you said, the sponsoring organizations, these PPPs to kind of put together call it a 401k plan, if you will, that lots of companies potentially could adopt and utilize as their own 401k plan, instead of having their own kind of custom one just for their company. And there's some things that you get from there potentially scale, fiduciary-wise, possibly fee wise as well.
Fred Reish: Yeah, there are three advantages that are going to be touted. Cost savings if the plan gets big enough, because the main cost savings will come from having institutional share classes of mutual funds, the lowest cost mutual funds, and having collected investment trusts, or so called CITs. So if they get enough money, they'll be able to drive down the investment costs. The administration cost I think will be as much as or more as it would have been. So no big break there in any event, but on the investment side, I think they can drive down the cost. They take over 90%, 95% of the fiduciary responsibility. So for employers who say I'm really fearful of being sued, they'll be able to largely unload it.
Josh Itzoe: And assuming a ERISA 3(38) investment manager is appointed to oversee the investments which I suspect within these PEPs, like that's going to be the primary structure. Absent of that, my understanding is that plan sponsors still would have responsibility for selecting investments unless there's a3 (38) in place.
Fred Reish: Exactly. And the ones that I've worked on that are being put together now, all have a 3(38) because they want to be able to go to market and to say to plan sponsors "We'll be the fiduciary. We'll have the target on our back, you won't have it on yours." So it's possible, legally to have one without a 3(38). And one or more may roll out, particularly if they roll out for very large plans and they want to use their own 3(38). But for smaller plans, it's going to be a package deal, because they do want to be able to pitch "We're going to take all fiduciary responsibility off you." By the way-
Josh Itzoe: As it relates to selecting and monitoring the investments.
Fred Reish: And administration, the 3(16) fiduciaries responsibility also.
Josh Itzoe: So speak about that for a minute, this idea of taking all... What will with these PEPs... I guess, a couple of questions. One, do you think these things will go up market or do you think a lot of the target and kind of the argument is that small plans can achieve some of this scale and protection on their own, which I would argue is not necessarily the case. But that's kind of seems the way these solutions are being marketed for kind of more on the smaller end of the market to leverage economies of scale, if you will.
So number one, what do you think in terms of that? Do you think they'll be successful in moving up market with these pooled employer solutions? And then I guess the second question would be, what is for these adopting employers, let's say my company, Greenspring Advisors. Let’s say we don't want to have our own 401k plan, just for us anymore for a variety of reasons. We're going to join a PEP, and we're going to kind of turn the keys over. How much can we turn the keys over? What is our responsibility as an employer who chooses that for our company and for our people?
Fred Reish: Well, first off, going up scale, I'm actually working with one CPA to do an upscale PEP, pooled employer plan, and it's going to look very different than the small plan scenario. These will be negotiated individually with each employer, for example, for one employer might be $20 a participant for another employer might be $50 a participant, depending on the number of participants and total assets. They may be able to accommodate company stock on and on and on, they'll look very flexible vis-a-vis each individual employer. That's for the bigger plans.
For the smaller plans where I think the need or not the need, but where I think the sales opportunities are the greatest right now. They'll be more vanilla in the sense that they'll have more of a set lineup. They'll have a set way of doing things. There'll be some design flexibility, but not total design flexibility. So what the plan sponsor wants to do on a practical level... Or the employer wants to on a practical level, and see if it's adequate. I think for a lot of small plan employers, they may say "I just want to write a real straightforward plan to get to my employees, so they have a 401k plan, but I don't have the internal staffing to really manage it myself, I don't want to be that involved. I make widgets, not plans. So I just want to plug and play."
This is the ultimate plug and play plan the PEP is. That's practical. Now legally, from a fiduciary responsibility, they need to look at the package and make a determination that it would be prudent for their company to hire that package, to do it. So for example, if let's say you were a PEP, Josh, your firm were, you know plans how they run, you know what the investments are like what the fees are like, I mean, I could look at you as a PPP and say, "Wow, it's pretty safe to hire Josh’s PEP for my plan, because he's competent, he's capable. He's really good. He knows what he's doing. He's got a lot of experience."
So that's the kind of analysis, is it a competent organization, does it know what it's doing. Are these people with experience in 401k plans? That's the responsibility of the employer. So it's a fiduciary process to evaluate the provider, the more experienced the more capable, the better brand name, the easier it is to engage them positively on that fiduciary process. Even if you don't know exactly everything you're supposed to do, because a small employer wasn’t born knowing everything there is to know about 401k plans. No. So yeah, I think it's going to be pretty easy because I think the people that are going to bring them out, the firms that'll be PPPs are going to be true, capable, competent, 401k players. So initially, at least I don't think there's going to be... I don't think it'd be very tough for a plan sponsor to prudently select one of the providers.
Josh Itzoe: And then once they've selected, let's say, and they've made a prudent decision, there, just operationally what is the employer, the plan's sponsor. Is it really remitting payroll contributions and distributing communications and making sure that their internal processes, just like any other employer or kind of aligning with whatever the provisions within the plan document are? Is that just administratively? They don't have to sit in committee meetings anymore. they don't have to evaluate fees outside of the overall is it prudent to select this PEP, if you will? What's the plan sponsor do moving forward day to day?
Fred Reish: I think there's two things they have to do. One is that evaluation. And clearly even if somebody hired like you, Josh, or your firm or a comparable firm, on a consulting basis to help them select a PEP and maybe on an ongoing consulting basis to help them review the PEP annually. From a fiduciary perspective, that would be helpful because I do have a concern as I sort of implied a minute ago that plan sponsors may not know enough to really do it properly. And my concern is particularly on the cost side is that expense structure appropriate for that plan.
But that aside, that's legal, on a practical level. The big difference here is, when it's a single employer plan, the employer is in charge of a lot of that. Now, they may give it to a third party, the data to a third party administrator, or to the recordkeeper. But here, they have a limited set of responsibilities. One is just data, payroll data, getting the right data to the provider, the PPP so that the plan can be administered, so that the discrimination tests can be done, so that the money can be allocated to the right accounts and so on.
The second thing, as you mentioned, is payroll. You got to get that money there pretty shortly after you take it out of the employee's paycheck. It's not employers money, it's the employees money that needs to be deposited into the account. But that's already there. That's just an existing responsibility. Then the third one is that there are a whole series of disclosures that are required under the law. For example, there's an annual... It's called a 404(a)(5) disclosure, as you know Josh, but some of the people listening may not know. But that's an annual thing that has to be given to participants about investments in the plan and the cost in the plan and so on.
But now, a lot of this is going to go electronic with the new electronic rules permitting a lot of this to be delivered electronically. So I think they'll need to be some coordination between the pooled employer plan and the employer to get email addresses for all the employees so that they can communicate right electronically. But I think some of that paperwork stuff was going to go away. Not because of PEPs but for this whole new electronic disclosure.
Josh Itzoe: eDelivery, which was another positive, I would say overall very, very much a positive thing for plan sponsors. Okay, so I think really, really helpful. We'll see, with a lot of these things. So I would consider we're in the first inning of a nine inning baseball game, if you will, just because there's a lot of product development and a lot of things that need to be created and implemented and see what the uptake starts to look like. Let's shift gears and talk about just litigation trends for a couple of minutes, we continue to see, I think fee litigation. In fact, it feels like recently I saw today even a couple of articles about fee litigation, which has really been, as much as the industry I think, in some cases likes to fear monger around like selecting bad investments.
I think if you look at the past 10 or 15 years, most of the ERISA litigation has been fee focused. Excessive fees and share classes and revenue sharing and conflicts. But there are two areas which I actually think could be the next frontier, kind of the evolving frontier of litigation. And they're just starting, I think, to come online. I'd love to get your perspective. So the first is just as it relates to cybersecurity. And then the second is as it relates to data privacy.
So, April, I believe there was a complaint that was filed in Illinois against Abbott Laboratories, and it alleged fiduciary breaches of duty for cyber fraud. Basically, a retired participant claims that she had $245,000 stolen from her account by a hacker due to ineffective security measures with the benefits department and the recordkeeper. And so I'd just love to get kind of your perspective on that and what do you think the future holds as it relates to cases like this and how should plan sponsors specifically be addressing these types of issues and risks as they're trying to make prudent decisions and kind of fulfill their fiduciary responsibilities?
Fred Reish: The issue of cybersecurity really falls into two categories. One is the one you mentioned. I tend to call that cyber theft, because it's somebody who's trying to access the participants account and get their money transferred to some bank. And then often it's immediately transferred from that bank to overseas, to Russia, to Europe, to Africa. And they're gangs doing this. I mean, there are international groups doing this. They're constantly trying to get into people's 401k accounts, from a lawyer perspective, really ought to look and see what the agreement is for the recordkeeper. What's the allocation of responsibility between the recordkeeper and the plan sponsor, and the recordkeeping agreement, if any?
I am reviewing those agreements now for people and we're tightening them up some because of this. And what I'm hearing is that with the CARES Act, changes the extra loans and distributions under the CARES Act, that the a recordkeepers, the providers are being... There are more and more calls for people trying to somehow persuade the people in the recordkeeper call center to transfer the money out. And they're working very hard to fight that off.
So what can the plan sponsor do other than looking at the agreement, see what our responsibility is? I think the best thing they can do is to work with a recordkeeper to educate your employees on not giving away data, not giving away their password, not giving away their login information, not having it out anywhere, not sharing it via email. Just a huge education campaign. Most recordkeepers will work with plan sponsors to do that. And I'm not talking about a one time education program. I'm talking continuous like reminders every month. And I think employers have the same issue with their data.
So yes, that's a big deal. Cyber theft is here. It's worse than ever. It takes a partnership between employers and the recordkeepers to do the most effective job of combating. And the participants have to help because if a participant gives away their information to a family member, or to somebody who just asked for it that seems credible on the phone, don't give it to anybody, period. If you have to contact the recordkeeper then get the number from HR and call the recordkeeper. But don't talk to somebody who says that they're from the recordkeeper. And they're just trying to... And they ask you for personal information.
There's always a backdoor, a legitimate backdoor where you don't have to talk to the person who's on the phone or respond to that email. But that has to be communicated and people have to be educated. So that's cyber theft. The other is what I call cyber security or you could call it the privacy of data, but it sort of falls in between those two. There are three sources of important data on the employer's computer, on the recordkeepers computers, and the transmission from the employer to the recordkeeper, all of those have to be secure. If an employer is confident that... First off, they ought to know that the recordkeeper is secure. And I can tell you the recordkeepers I work with are putting a huge amount of effort into being secure.
Josh Itzoe: So what you're talking more about is so in the first case, with more what I would call kind of call it a user error, if you will, that's somebody that did not protect their own kind of personally identifiable information, if you will, themselves. The second one you're talking about is more around security measures to lock data down itself so that it's not accessible by hackers. That Abbott Laboratories case was interesting in that the woman who brought suit or filed the complaint claimed that somebody had called the benefits department of the recordkeeper on her behalf, basically claiming to be her.
And then actually the benefits representative, the way that the complaint read, provided some personally identifiable information, something along the lines of "Do you still live at this address?" So they actually gave out this information, which was validated, and then a third party as I understand it, a bank account was then changed. And then a few days later, money was transferred. That's different than a computer being hacked, if you will. And it seems like that's what you're talking about is in where data lives and then to the transmission. It being accessible via some type of hacking attempts. Is that fair?
Fred Reish: Yeah, the cyber theft was the one you were talking about with the Abbott example. And this one would be the holding on transmission. We're working on both of those right now. When I say we, I mean, my law firm. We're working on helping clients with both of those right now. But they're both active areas in which lawyers that work in the retirement plan area are working. So there's that.
And then the other source of litigation is the privacy. There's two sets of privacy issues, one are new laws like California's which have new, very strong privacy laws where there can be enormous penalties if it's violated if you gather information from your customers or consumers. The other, the one I'm seeing more of in the litigation right now, is where an employer gives information about their participants to their providers, which obviously they need in order to administer the plan. But then the providers take that information and use it to sell other stuff to participants. Now that has been the source of a number of allegations and a number of complaints by the Schlichter law firm, which is the best known class action 401k law firm and 403b law firm out there.
Josh Itzoe: I know in the Vanderbilt University settlement, which was 14 and a half million dollars. With all these lawsuits, right, there's monetary damages, but then there's non-monetary terms as well. And I know that within that case, specifically, the plan fiduciaries agreed to prohibit current and future recordkeepers from using participant data in that way to really cross sell unless it was requested by the participants. So that seems like kind of an emerging angle that you're starting to see plaintiff's attorneys take.
Fred Reish: Yes, that's very definitely emerging. I mean, John Hopkins was another... There are four or five of those now that have been settled where part of the settlement agreement creates a condition that participants have to opt in to receiving those additional services or recommendations of products. Rather, what I think employers can do, though and again a certain amount of writing on this where if they engage in process to have the representative of the recordkeeper come in and say, "What are you using the data for other than to add nothing to our plan." So again, it all laid out for the plan committee, so they understand exactly how that data is being used.
And then go through the different uses and say, "Well, we think this one helps our participants. We're glad to have you use it that way, because it seems like a positive." But we still want to know that you're making recommendations that are in their best interest, and we still want to understand that the conflicts are being clearly explained to our participants. Tell me what you do about that. In other words, I think if properly done by the plan fiduciaries that Jerry Schlichter's concerns are dealt with through a fiduciary process rather than through a lawsuit. But I think if you're a recordkeeper using that data, you do want to have a... Which most are, not all, but most. You do want to have a process in place for the committee who reviews it, understands it and approves of it or disapproves of it.
Josh Itzoe: And clearly document that entire process just like in any other decision that you make.
Fred Reish: Right. Always document it. At least, the process, I mean, part of the documentation you'll get, because hopefully, the recordkeeper will provide you with some sort of memo or written explanation of what they do. That can be part of your documentation. The minutes of that meeting can be part of your documentation. It doesn't have to be like you have to sit down and create a separate document. But make sure there's evidence and you keep it in your file that you engaged, reviewed, had your advisor with you in the meeting so that advisor can explain some of the stuff to the committee members. And then you keep that in your files for at least six years. Absolutely.
Josh Itzoe: Just like any other decision you would make.
Fred Reish: Yes.
Josh Itzoe: Okay. Two things I want to touch on as we, as we wrap up is guidance that was recently provided by the DOL. So the first was around ESG investing. This is something fairly recent - ESG generally stands for environmental, social and governance factors. So incorporating those into traditional investment solutions. It's also often described as socially responsible investing or maybe sustainable investing. But there was guidance provided recently by the DOL, it wasn't very favorable, and it drew a lot of criticism from the industry. In fact, I heard the other day that during the comment period, which I think ended last week, there were over 1,500 comments around that guidance. And so can you talk a little bit about this? What did the DOL say as it related to ESG investing? And what plan sponsors need to be aware of either those who are currently taking that approach and incorporating these types of investments in their plans or are considering it.
Fred Reish: Sure, I mean, in the interest of full disclosure, we represent some of the mutual fund families that use ESG factors. So, whatever I say, have that in mind, but, the DOL came out and said, "If the plan committee selects investments that use ESG factors in picking the investments, then the plan committee... They can only do it properly. If the factors are pecuniary." I'll explain pecuniary in a moment. And even then they have to document in writing why they selected that particular investment with the ESG factors. Which you don't have to document inwriting for any other kind of investment. I mean, in theory investments can be made with a Ouija board, you wouldn't have to document it. But here because it's-
Josh Itzoe: I think that's actually how a lot of advisors actually pick investments!
Fred Reish: The flip of a coin. What I've learned through this process is that there's the old ESG, that you think of many years ago, where investments were made primarily by union pension plans to try to affect certain environmental or political outcomes. And the DOL is still thinking the old way, but the new way is that many investment, perhaps most investment managers now consider ESG factors. So let me give you some examples. How could you invest in Tesla, without considering environmental factors? I mean, you'd have to at least think about it.
If you think that a company is a polluter, and that that kind of pollution is going to become more highly regulated, imposing significant expenses on that company and reducing its profits? How could you not consider that in selecting investments. I could go on and on and in other examples. But the point being that we're a pretty complex world now. And in my view, at least, it's inappropriate for the government to tell the private sector, what the private sector should be looking at in terms of which things can affect the performance or the risk of investments going forward. They don't have the expertise, they're not investment experts. The private sector has investment experts.
The government can just say look, you have to focus on participant outcomes, you have to look at the potential returns and you have to look at the potential risk and determine that a prudent investment favors either better return or less risk or a combination of the two. Now you the private sector go decide what it is, you're going to look at. What are the factors that should be considered for that? Because one, we're the government, we don't have the expertise. But two, we're the government, we shouldn't tell the private sector what to do unless we absolutely have to. And number three, we don't have the internal... Or number three, this involves factors that were important 20, 30 years ago, are less important now. And new factors are more important.
So bottom line. Josh, I just think they're totally off base. I think it's a political agenda. This particular administration favors old line companies, ESG factors favor new line companies. Solar power, for example, might be a good investment, but you would consider what's going to happen in the future and that has nothing to do with the environment in thinking it. So I just think they're totally off base. They're trying to use regulations to achieve a political objective and the thing should be withdrawn. But that's me. There you go, Josh. Thanks for allowing me to have my little rant.
Josh Itzoe: There you go. We'll see if your crystal ball is accurate and what happens.
Fred Reish: It's not my crystal ball, I think they're going to do it. Put that aside.
Josh Itzoe: It definitely is interesting when you look at I think the different... Even over the past two administrations you do see a different approach, for instance, the DOL, a different approach that they take. It seems very much that the current administration is, there's been in some ways, like a deregulation if you will approach. And I don't think that's surprising given some of the... I think early on, I think it was kind of mandated that for every one new rule that was I think created, there had to be two that went away or something along those lines. So it definitely is something where you've had a lot of companies who have invested I think in ESG. And a lot of investment managers and getting 1,500 comments during the comment period is pretty significant if that number is in fact the case.
Fred Reish: That's an amazing number of comments from the private sector.
Josh Itzoe: Right. Okay, so last topic as we wrap up, and then I will let you go. But the other thing is private equity and the DOL recently provided an information letter, which was requested by two private equity firms, Pantheon and Partners Group, but they inquired about the use of private equity investments in defined contribution plans like 401k plans. And the letter I think was viewed as favorable in the sense that the DOL didn't exclude private equity as an investment alternative. As long as the selection and monitoring of these types of investments followed the prescribed kind of fiduciary standards and practices outlined in ERISA.
There's obviously some really major hurdles, I think, that need to be solved like high fees and lack of transparency and liquidity evaluation and due diligence. But it certainly opens the door, I'm sure for more investment providers to come up with solutions. What are some of the most important things do you think for fiduciaries to be mindful of? I mean, I've been getting some questions, right, when that was announced, around like, "Hey, what should we do around this? Should we include this?" And kind of my perspective was, "Hey, let's wade slowly into the pool, if you will." There's going to be a lot of time now, between how these hurdles get addressed how these problems get kind of solved. Hopefully, it's going to take time for product to be built, if you will, but what do you think as it relates to private equity and how should plan sponsors be thinking about considering these types of investments within their plans?
Fred Reish: Again, Josh, my firm represents-
Josh Itzoe: You represent everybody, Fred!
Fred Reish: Private equity investment, so consider what I say in that light. But when it came out, I wasn't particularly surprised. I was wondering, why were they issuing guidance because ERISA's investment principles are based on generally accepted investment theories. The most generally accepted investment theory is modern portfolio theory, which suggests you have a wide range of asset classes that have different risk and return profiles such that the old umbrellas and sunglasses. You've got some investments that are good when it's raining and some are good when the sun is shining. So a lot of non-highly correlated investments.
The guidance was similar to that. I mean, the guidance was consistent with that. So as a lawyer who's practiced in this area for decades, to me it just seemed like "Well, that's pretty obvious." Now, that's the legal analysis. What about process, what about the practical considerations? The guidance said that it applied to a portfolio arrangement where the was managed by a professional manager.
Josh Itzoe: So within like an asset allocation approach, as opposed to like an individual fund in a lineup. It would be more of a call it a sleeve within maybe a target date fund or a managed account.
Fred Reish: Exactly. A managed account, a target-date fund, a balanced fund, a multiple asset class collective trust. But a portfolio arrangement managed by a professional. So that's what it talks about. So now I think it's up to the professional managers to decide whether to include it in their portfolios, but it clearly did not apply to a standalone, private equity investment. The DOL dealt with some of the major issues in the guidance like, okay, 401k plans are generally daily traded. How are you going to maintain liquidity? Will you be able to do daily trading? How are you going to value it so you can trade daily?
Those are two big issues related uniquely, to 401k plans and their daily trading feature. Now in talking with some private equity managers they seem to have that in control. But that would be an obvious question for a plan sponsor, or a committee to ask because they're considering having a portfolio that includes private equity. And then always, every investment of any kind and any 401k plan anywhere, is the issue of cost, is this reasonably priced relative to what you're getting? And I think the major target date fund providers, for example, will take that into account because they want to keep their expense ratios as low as possible in order to compete.
But that is an issue and I think they're going to need the help of their advisors. Your clients, Josh, I think will need your help. Because unless you're just taking a humongous company, you don't have internal private equity or hedge fund expertise. So you need to get an outside advisor to help you evaluate it. And then how long the managers have been doing this, what their track record is, just all the regular stuff. But it's a little more complicated because it's really just on all the reports and all the information you get on mutual funds. So it's a little harder. But I'm not competent to qualify whether it's a good investment, or not, that would be in the province of folks like you Josh. But legally, it can be done. And I think we all know the factors to be considered in the selection of any investment for a 401k plan, include cost and quality. So there you go.
Josh Itzoe: You know what'll be interesting. And I think part of this came up, and I want to move on and kind of wrap up but I seem to remember that the Intel lawsuit really centered around kind of these custom portfolios that Intel had built. And whether those were prudent and fiduciary breaches, I seem to remember they might have had private equity in them as well. And that was part of the arguments by plaintiffs, am I remembering that correctly?
Fred Reish: Yeah, my memory on that one's a little foggy too. I know they had hedge funds, but I can't remember if private equity or not. But in any event, you have similar issues, which are, they're not publicly traded.
Josh Itzoe: They're not liquid.
Fred Reish: They're not liquid. They tend to be higher cost based on the promise of either less volatility, greater return or both. And that's the kind of stuff that that plan committees would have to evaluate. And if they didn't have the internal skill sets, they had better hire an advisor to help them. I mean, the process is just the same for everything. It's just that these are more complicated.
Josh Itzoe: Right. Yeah, it'll be interesting to see... And, again, this is I would say, I'm not even sure we're in the first inning. I think we've probably still in spring training as it relates to private equity. So it'll be interesting to see how things develop. And that actually, as we close, kind of leads me into my last couple of questions. I like to ask these at the end of each one of these episodes. So first, how do you think the retirement industry is going to change and evolve over the next five to 10 years? And then what would be, Fred, your single best piece of advice to make ERISA fiduciaries smarter?
Fred Reish: In terms of how we're going to evolve. I think, up until now, Josh, most of us have thought in terms of retirement plans. But I think the perspective has to expand - it has to be retirement. Including working, accumulating, and retiring, distributing. So there's a continuum that starts in the 20s, perhaps, and that goes all the way to a person's death. And we have to start thinking, how do we make that continuum work. One example would be we talked about projection of retirement income. We talked about guaranteed benefits. But also we're seeing more and more employers, plenty of participants leaving money in the plan and making monthly payments to retirees.
So just a different perspective on it. And I think in terms of future developments, I don't know why we can't have something like super IRAs that are retirement plans for retirees, where instead of providing financial wellness and advice on accumulating and investing, to get ready for retirement, they provide advice on everything about retirement, how to have sustainable lifetime income, but they also provide the pooled plan benefits, of lower cost shares, and they're set up flexibly to distribute. And so I can see a whole new set of inventions of services like these super IRAs, as I call them. And products that are specifically designed for retirees.
So if people would just implement everything available like automatic enrollment, automatic deferral increases, QDIAs. I think we've got the accumulation thing pretty well understood and we have the tools to make it work. The place we're really missing is coverage. There's just so many people that aren't covered by a retirement plan yet. We'll have to go to work on that and perhaps IRAs are part of the answer there. State run IRA plans are part of the answer. But in terms of accumulation, that's when the focus I think, will primarily be in terms of de-cumulation or distribution.
Golly, the picture is still warming up. And we're still in spring training as you said a minute ago. But that hasn't even really started in earnest yet in terms of thinking creatively and developing really nifty products and services. So that's what I think the future holds for all of us in the retirement industry. And I think each of us can be a player for the full spectrum that we can help people get enough money and we can help people live on the money in retirement. I would urge everybody, even plan sponsors to have a broader look at how to make this work out. Okay. The other question was, what can I do to help plan sponsors understand their fiduciary responsibilities?
Josh Itzoe: Well I would say your single best piece of advice since this podcast is all about making ERISA fiduciaries smarter. What would be your single best piece of advice for fiduciaries?
Fred Reish: There's a line I love Josh, no one ever called a lawyer to ask how to help their mother invest her money. My point there being a fiduciary responsibility, a fiduciary relationship is a very odd relationship. The closest we have to that is family relationships where you actually put somebody else's interests ahead of your own. So if you go to work everyday, saying what can I do to get the best possible outcome for participants, then you're really going to get the essence of what a fiduciary relationship is. It is literally putting somebody else's interests ahead of yours.
So that's my single best piece of advice. Think in terms of not the plan as being a corporate responsibility or not just being part of your overall job. But at every meeting, say, "How do we get a better outcome for the participants? Whether it's lower costs, whether it's better investments, whether it's helping them save more through deferrals." Whatever it is, how do we do what's best for the participants? And most of the litigation I see is where people weren't willing to ask that question about every issue, and then they weren't taking the steps necessary to implement it. And what's best for participants is not what makes them happiest. It's tough love. What's best for participants is what produces the best results in terms of accumulating money for retirement. So don't worry so much about making people happy. Just worry about making things right.
Josh Itzoe: They'll thank you later.
Fred Reish: Yeah, well, and being a fiduciary is a thankless job Josh.
Josh Itzoe: Right. We often say internally that we're working for the "thank you’s" we'll never hear in a lot of ways. And I think, I love that piece of advice, because and that's one of the things in The Fiduciary Formula that I try to impress upon readers is that this idea of being a fiduciary is an incredibly high calling, and it takes courage, and it takes leadership. At the end of the day as a parent of four kids a lot of times I have to do things, I have to make decisions for them that they may not like but I know in the long run, it's going to be what's best for them.
And I love what you're saying and kind of that idea that we really need more and more plan sponsors, more fiduciaries, more committee members, and quite frankly, the ecosystem, those of us who support them to really step their games up, and to take this responsibility more seriously. Because they have a huge impact on the outcome, I would argue probably the greatest impact on the financial outcome for the people who work for them and their families over time. So great advice, as always. Where can people go to connect with you or follow what you're up to? And we'll be sure to put those in the show notes. But how can people stay connected with you?
Fred Reish: I think the best way is my blog. It's FredReish. My name is one word first last name, one word, no periods or anything. Dot com. So fredreish.com. It's a blog for, I slowed down production during the pandemic a little bit, but usually I post an article every week or two, so it's regularly updated for the issues of the day.
Josh Itzoe: That's great. We'll make sure to put those in the show notes so people can connect with you. And I'm glad to hear things are going well, and you're dealing with this new kind of COVID-19 world that we live in. But thank you so much for your time and your insights. And as I mentioned at the outset, you've probably had maybe the biggest impact on my career over the years in terms of helping me develop technical knowledge. And I'm so excited about and happy to be able to get you some exposure to the audience of the Fiduciary U™ podcast. So thank you so much for your insights and for taking the time, Fred.
Fred Reish: Josh, it's a pleasure. Thank you so much.
Josh Itzoe: Thanks for listening to today's episode with Fred Reish from Faegre Drinker. I hope you enjoyed our discussion, you have a better understanding about many of the regulatory, legislative and litigation issues facing the industry today, and it helped make you a smarter ERISA fiduciary. If you'd like more information or you'd like to connect and learn more, please go to www.fiduciaryu.com. I've got some great resources there for you including each episode along with show notes, articles, free tools and online courses. And if you've got questions you'd like me to answer, topics you'd like me to discuss, guests you think would be a good fit for the show or any other feedback, I'd love to hear from you. Also head over to Amazon and check out my two books, The Fiduciary Formula and Fixing the 401k. And if you want an easy way to support the show, I'd really appreciate you leaving a review on iTunes. It's the best way to help other people find the show, and I read each one. Until next time, thanks again for listening to the Fiduciary U™ podcast.
Greenspring Advisors is a registered investment advisor. The opinions I express on the show are my own and do not reflect the opinions of my guests or the companies they work for. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. The information and content presented on the show is for educational purposes only, and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk, and unless otherwise stated, are not guaranteed. Information expressed does not take into account your specific situation, or objectives, and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment advisor to determine whether any information presented may be suitable for their specific situation. And past performance is not indicative of future performance.
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