By taxclubadmin 
Over the past four decades, the U.S. retirement system has steadily transitioned away from traditional pensions toward defined contribution plans. Along the way, Americans have been left with two clear messages about retirement: You are expected to bear much of the responsibility for funding it, and you should go get the advice and guidance you need to navigate the system and make it work for you. The first premise reflects the structure of the system many workers now face and is worth examining. But the second is the one that worries me most as a former U.S. Department of Labor Employee Benefits Security Administration regulator.
Today, there are more than 20,000 state- and federally-registered RIA firms in this country, with total financial advisor jobs approaching 326,000, according to Bureau of Labor Statistics data. Collectively, advisors manage more than $144.6 trillion in assets. But a nation so rich in financial guidance still faces a profound retirement gap.
This raises an important question: Where is the breakdown happening?
One answer may lie not in the availability of advice, but in whether savers can actually apply it to their 401(k)s. It’s one thing to have access to advice; it’s another thing entirely to implement it effectively, particularly when plan structures or service provider practices limit how advice is implemented.
Defined contribution plans, by design, give individuals responsibility over their accounts. When that responsibility exists without the ability to meaningfully exercise choice, it’s time to examine whether the system is functioning as intended.
Responsibility and Authority
Today’s retirement savers cannot choose their plan recordkeeper—that decision rests with their employer or other plan sponsor. They can, however, choose where to get financial advice. This has created a push-pull dynamic; a debate over who has fiduciary responsibility and who does not.
But there’s been very little in the way of debate to be had. For decades, retirement savers have been asking their investment advisors to advise and manage their retirement accounts. And for decades, the regulatory framework has existed to support this relationship.
The Securities and Exchange Commission published guidance regarding advisor-led management under its custody rule in 2010. And back in the late 1990s, the DOL issued guidance protecting plan sponsors from responsibility or liability should participants choose to exercise the right to third-party advice.
So, when plan structures or service provider practices restrict how participants can work with fiduciary advisors inside their 401(k) accounts, the system, as it was designed to function, buckles.
Examining the System
America’s retirement system depends on individual savers making sound investment decisions. As someone who has spent much of my career studying this system and as someone who had the privilege of overseeing it as a regulator, I see four facts as critical to understanding where frameworks are helping—or undermining—participant choice and control.
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The defined contribution system shifted much of the responsibility to individuals. Rules are designed to support their choices, and while autonomy can create opportunity, it also creates a need for education, advice, and professional management.
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The assets in an individual’s retirement account belong solely to the plan participant, even though plan sponsors are responsible for the plan and its service providers.
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Data flows both ways. The concept of connecting retirement data to a broader financial plan is not new, and retirement accounts are part of that picture.
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The regulatory framework accommodates the reality that participants may seek advice from independent financial professionals outside the plan. Participants have sought third-party advice for decades. It’s so prevalent that the DOL’s 96-1 guidance offers assurances to plan sponsors when participants choose to work with an outside advisor. Not only are sponsors not required to approve participants’ third-party advisors, but the DOL—for more than 30 years—has actually built protections for sponsors on the matter, making it clear that sponsors are not liable for participant-chosen advice.
Identifying the Breakdown
The problem isn’t coming from RIAs, whom participants are tapping for help. RIAs are under the purview of either the SEC or the states in which they operate. Today’s retirement system is not only heavily dependent on advisors to both give and act on advice and strategies, but it also heavily regulates them.
Retirement savers are also not the source of the problem. In defined contribution plans, fiduciary duty governs the structure and oversight of the plan itself, while participants or savers are generally responsible for directing the investment of their own accounts. And they are doing what they’ve been taught—enlisting the help of trusted experts.
Plan sponsors are also not the source of the breakdown. The above-mentioned DOL protections ensure sponsors are not incentivized to involve themselves at all in participant’s choice of advisor. This allocation of authority is happening, after all, within the context of the Employee Retirement Income Security Act (“ERISA”) Section 404, requiring plan fiduciaries to act prudently and solely in the interest of participants and beneficiaries.
That leaves an important part of the system still worth examining: the role of service providers. Recordkeepers also must operate within the above framework pursuant to plan documents and contractual agreements. But lately, we’ve seen certain providers blurring these lines.
Stepping back, the issue here is bigger than any individual firm or market participant. It goes to the architecture of the defined contribution system itself. ERISA deliberately separates responsibilities among plan fiduciaries, service providers and participants. That structure is meant to preserve both fiduciary oversight and participant autonomy.
Clarity
The regulatory lines are deliberate: fiduciaries oversee the plan; participants direct their assets; service providers support both, within defined roles. If a service provider steps in and effectively unilaterally shifts responsibility for participants’ independent third-party advice back to plan sponsors, the protection that the DOL regulatory framework provides can begin to erode. And the system, designed to protect retirement savers and encourage planning for the future, fails.
DOL guidance draws clear lines between plan oversight and independent advice. Preserving those lines does not require limiting a participant’s ability to work with a chosen fiduciary. And they certainly don’t require a service provider to take punitive action against participants, including restricting (or blocking) participants’ access to their accounts or the tools they use to manage them.
The defined contribution system depends on clarity of roles. Participants are responsible for directing their investments. Plan fiduciaries are responsible for prudently selecting and monitoring service providers. Independent financial advisors are responsible for the advice they give their clients. When those roles remain clear, the system works as intended. When they blur, the system can break down, and fiduciaries must return to regulatory frameworks and the principles embedded in ERISA for guidance.