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Managing Accountability

Is your plan's investment advisor an ERISA fiduciary?

W. Scott Simon, 12/04/2008

Investment advisors to sponsors of qualified retirement plans such as 401(k) plans might wish to adapt some of the material in this month's column for use when marketing to other plan sponsors.

Two Problems Faced by Sponsors of 401(k) Plans
Are you the sponsor of a 401(k) plan? If you are, does the investment advisor to your plan acknowledge in writing its status as a section 3(38) "investment manager" operating as a section 405(d)(1) "independent fiduciary" under the Employee Retirement Income Security Act (ERISA)? If not, you face two problems. First, you subject yourself to the risk of legal liability for your investment advisor's own imprudent conduct. Second, you have missed the chance to transfer significant risk and responsibility, and hence potential liability, to your investment advisor. Both of these problems are unnecessary and both of them can be solved.

Recommendations without Accountability or Advice with Accountability
The 401(k) plan industry includes investment advisors such as brokerage firms, insurance companies, banks, trust companies, mutual fund families and other entities offering their investment services to sponsors of 401(k) plans. The persons who represent investment advisors bear such titles as advisor, consultant, financial consultant, stockbroker, insurance agent, registered representative, or vice president. Many of these are salespeople who adhere to what I term the "salesperson" standard.

There are three ways how investment advisors can become ERISA fiduciaries. The first two ways are intentional: the advisor is identified in plan documents or other formal fiduciary documents (e.g., formal delegations, assignments, agreements, etc.) as a "named fiduciary" or the advisor enters into a written agreement accepting responsibility as an "appointed fiduciary." The third way is unintentional: the advisor inadvertently becomes a "functional fiduciary" through its actions such as exercising discretionary authority or control over the management of a qualified retirement plan.

Many sales-oriented investment advisors don't want to become ERISA fiduciaries because they don't want to be personally liable for their actions. This refusal comes in two forms: (1) failing to acknowledge in writing their status as an appointed fiduciary and (2) making sure that their actions don't make them a functional fiduciary.

ERISA requires a section 3(38) investment manager to be a bank, an insurance company or a registered investment adviser. Nearly every major brokerage firm, insurance company, bank, trust company, mutual fund family and other entities offering investment services to sponsors of 401(k) plans has a registered investment adviser subsidiary so they have the ability to accept status as a fiduciary under ERISA sections 3(38) and 405(d)(1).

Yet these entities have made the business decision not to accept such fiduciary status. In doing so, they have decided to provide their clients with only legally meaningless recommendations and have therefore settled for adherence to the salesperson standard. That decision is viewed by prudent fiduciaries to be fundamentally disloyal to plan participants. (The opposite of disloyalty, of course, is loyalty, which is the oldest fiduciary duty from which all other fiduciary duties emanate.)

Sales-oriented investment advisors to 401(k) plans (whatever the title of their representatives) have no legal obligation to plan sponsors to ensure that they get the very best products at the best price. This salesperson standard -- recommendations with meaningless legal accountability -- stands in sharp contrast to the "fiduciary" standard -- advice with meaningful legal accountability. The fiduciary standard is the one that all plan sponsors such as you should demand from their investment advisors; there's no need to settle for the clearly inferior salesperson standard.

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