When Does Limiting Investment Choices Become a Problem?

It was no surprise to many that the Department of Labor just recently pulled the investment advice regulations that were issued under Section 408(g) of ERISA earlier this year.  The new administration was concerned that the regulation went beyond what the Pension Protection Act of 2006 envisioned with respect to advice provided to participants under the statutory exemption.  The DOL will probably wait for legislative action before revisiting the participant advice question next year.  Among the issues contested in this ongoing debate are whether conflicted participant advice of any variety should be allowed and is there a problem if the investment choices available to plan sponsors are limited.

I received a related question last week from an investment advisor who took issue with the wirehouse firms that only offer certain products to their clients.  He inferred that these were either proprietary products or products from firms having special arrangements with the broker dealer.  His argument was that when a limited menu is offered, you are not acting in the client's best interests.

A student in one of our classes a while back posed the question; "If you limit the universe of investment choices available to your clients, haven't you already committed a fiduciary breech?"

Ideally, the entire universe of investment products should be open to investors and one could argue that any fiduciary that limits or accepts a limited universe has committed a breech.  However, there are other fiduciary practices that argue for reducing the number of investment choices for various reasons such as; not overwhelming the unsophisticated participants (Practice 2.4), simplifying the investment process (Practice 2.5), and/or minimizing costs (Practices 4.4 & 4.5).  As long as there are sufficient choices that afford the participant, beneficiary, or client the ability to meet their investment objectives, then limiting the investment choices should not be a problem.  The tricky part is determining what is a sufficient number and that question is dependent on the specific facts and circumstances of each situation.  Of course, this assumes that limiting the number of choices is done through an objective due diligence process (Practice 3.1).  It is this due diligence process that should ferret out problematic conflicts, excessive fees, and other fiduciary issues and help to ensure that the participant, beneficiary, or client are best served.

Comments

[John Beck Teleseminar]

In the market where there are limited investment opportunity , competition is great and competitors find ways to hike prices .

[john jackson]

I do not see a conflict of interest or a breach of fiduciary duties, for a fee based advisor, if you preselect no-load funds based on strong economic principals and low cost. Oh yes, And you have no economic relationship with the funds.

[Rich Lynch]

With respect to the Jackson comment, assuming the universe from which the funds were pre-selected is sufficiently large, I would agree there should be no fiduciary concerns.