What's the best way to provide or receive participant advice?

We continue to receive questions from financial service professionals who are considering providing investment advice to retirement plan participants.  We have previously stated in this blog that most are waiting for the participant advice rule to be finalized before making a decision in that regard.  Others have been providing advice to participants well before the Pension Protection Act of 2006 (PPA) was passed and continue to do so.  Many of them are relying on prior DOL guidance provided in the SunAmerica Opinion Letter (2001-09A).

One of the most recent questions we received essentially asked: when do advisors providing participant advice need to enter into an "eligible investment advice arrangement" (arrangement) with the plan sponsor, as defined in the PPA and the proposed participant advice rule? The short answer: they need to enter into an arrangement with the plan sponsor when a prohibited transaction would result from providing advice and an exemption from that prohibited transaction is required.

Those providing advice who are controlled by or affiliated with other financial service companies, such as mutual fund companies, broker dealers, and insurance companies must engage the plan sponsor through an arrangement because of the inherent conflicts of interest that exist.  The arrangement as specified in the proposed participant advice rule requires that the compensation received for advice is level, or that a computer model is used. The level fee limitation applies to both the person and entity rendering advice, including any person working for that entity as an employee, agent, or registered representative, and there is speculation that this limitation may be extended to all affiliations of the entity as well. If a computer model is used, it must be independently certified.  All arrangements must be audited annually.

On the other hand, independent investment advisors who have no affiliations with other financial service providers that would create inherent conflicts based on how those providers and the advisors are compensated, can continue to provide advice without entering into an arrangement with the plan sponsor. These advisors do not need an exemption because they do not benefit from the advice they provide to participants (other than the fee they charge for those services) and therefore are not committing a prohibited transaction. ERISA attorney Fred Reish refers to this as the "pure" level-fee model. 

We still recommend that advisors working under a pure level-fee model inform their plan sponsors of the new (fiduciary adviser) "safe harbor" that results from entering into an eligible investment advice arrangement so the plan sponsor can make an informed decision on whether it should not bring the advisor relationship into conformance with the new law and the associated regulation (e.g., required disclosures, annual audit requirement, etc.).  The last thing you want is for the plan sponsor to become aware of this "safe harbor" during the discovery process tied to potential litigation resulting from a participant's complaint of a fiduciary breach.  At that point, the plan sponsor won't be happy to learn that revising the structure of the relationship with their advisor may have afforded them additional protection from liability.

It should be noted that requirements related to entering an arrangement with a plan sponsor and complying with the proposed participant advice rule likely will increase the cost for providing participant advice.  Some believe the additional cost is or will be worth it because the arrangement will help ensure that plan participants are getting objective advice.  Others believe it makes more sense to engage an advisor that utilizes a "pure" level fee model.  We always recommend the avoidance of conflicts if at all possible, but ultimately, it's up to the plan sponsor.

Comments

[Carosa]

Nicely done - and very sound advice.

[401k_Fiduciary]

Well done indeed, it is a concise overview of some critical points to consider. However, do not forget that a fiduciary relationship is an ongoing one, not a one time "do A, B, C and D" approach. Such a "one time" approach does not fit at the plan level, so advisors should be mindful that the delivery of ongoing participant advice is critical to the success and compliance of such a program, even if they are operating under the SunAmerica Opinion.

Chad Griffeth
BeManaged
http://bemanagednow.com

[Rich Lynch]

We certainly agree that the relationship between advisor and participant needs to be ongoing in order to be successful.