Part 1 of this article (see “Broadening Your Business,” PLANADVISER, January-February 2010) describes the Department of Labor’s (DoL’s) position in Advisory Opinion 2005-23A that a financial adviser with a connection to an ERISA plan is subject to fiduciary obligations when advising or responding to questions of participants concerning rollovers and the investment of rollover proceeds.
The legal underpinning of the DoL’s position may be shaky, but that does not diminish the agency’s ability to make life difficult for financial advisers who engage in conduct that the Department deems to be abusive.
So, how can an adviser protect himself? This question is most pressing in situations where a financial adviser has been providing participant-level advice to a plan participant who then asks whether he should take a distribution and how he should invest it. Note that in Question 2 of Advisory Opinion 2005-23A, which articulates its position, the DoL set up the question so that the adviser would be responding to an inquiry about the “advisability” of taking a distribution. The advisory opinion assumes that the response would be in the form of a “recommendation.”
In other guidance, specifically, the DoL’s interpretive bulletin relating to participant education, the Department has indicated that certain information and materials are not “advice” or “recommendations.” This includes information regarding the terms of the plan, for example, the circumstances under which the plan allows distributions. It also includes information relating to the benefits of plan participation and the impact of preretirement withdrawals of retirement income. Finally, the adviser may provide information about the investment alternatives available under the plan, including past and current investment performance, the objectives and risk and return characteristics of the investment, and asset allocation models geared to hypothetical individuals with different time horizons. If limited in this manner, there are no restraints on an adviser’s helping and educating the participant. The key is to avoid any reference to a proper or desirable course of action, including the appropriateness of any particular investment option. If an adviser is committed to a hard sell in capturing rollover business, this approach may not work. However, a neutral presentation of investment information will be appreciated and rewarded by many participants.
It should be noted that current DoL guidance does not state specifically whether an adviser can present asset allocation models that are available outside the plan. Obviously, this would assist the participant in assessing whether he or she should take a distribution in order to access such investment alternatives. This would be particularly true for a participant nearing retirement if the model portfolios are for hypothetical individuals with a short time horizon. In my opinion, this should not be treated as a recommendation or the giving of advice, provided that the model is accompanied by a statement that other investment alternatives with similar risk and return characteristics may be available and the adviser identifies where the participant may find information on such other investment alternatives. Once again, staying out of trouble requires an adviser to avoid making a recommendation, and the best way to do this is to make a balanced and neutral presentation.
Accordingly, a financial adviser who is already providing participant-level advice to an individual who is approaching retirement should not be prevented from assisting participants who are looking for guidance on whether to take a rollover and how to invest it. The issues become more difficult, although not insurmountable, if the adviser provides plan-level advice, because of the perception of added authority and reliability that this position may entail. However, under any circumstance, the fiduciary adviser is not prevented from servicing a plan participant, as long as the adviser limits the information that he presents so that he avoids making specific recommendations while giving the participant the tools to make his own decision.
Marcia S. Wagner is an expert in a variety of employee benefits issues and executive compensation matters, including qualified and nonqualified retirement plans, and welfare benefit arrangements. A summa cum laude graduate of Cornell University and Harvard Law School, she has practiced for 23 years. Wagner is a frequent lecturer and has authored several books and numerous articles.