A Fiduciary Adviser and Manager?
ADVISER QUESTION:May an adviser be a fiduciary investment adviser to the plan and also a fiduciary investment manager for participant accounts?
ANSWER: Yes, but there are rules that need to be followed. The failure to adhere to those requirements will result in prohibited transactions—regardless of good intentions.
As a fiduciary, an adviser needs to be aware of the prohibited transaction rules under both the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). One of these rules is that a fiduciary may not use his authority to deal with plan assets in his own interest. Stated another way, a fiduciary adviser may not receive any compensation above and beyond his advisory fee for fulfilling his fiduciary responsibilities.
This rule affects fiduciary advisers in relation to the following actions:
• Recommending an investment. If a fiduciary adviser recommends an investment, he may not receive additional payments from or for that investment. Note: What we mean by “recommending” is that the fiduciary adviser makes an individualized recommendation based upon the particular needs of the plan or the participants.
• Recommending an investment manager. The Department of Labor (DOL) views the recommending of investment managers as being the same as recommending investments. As a result, a fiduciary adviser may not receive an additional fee for endorsing an investment manager. If an adviser recommends itself, or an affiliate, as a participant investment manager, the advisory fees for those management services would be a prohibited transaction.
• Monitoring the participant investment manager. Similarly, the fiduciary adviser may not monitor itself as the participant investment manager. The adviser may, however, provide ongoing information about the performance of the service to the plan sponsor but not advise on monitoring itself.
• Advising participants to invest in the management service. The fiduciary adviser also may not advise participants to invest in the management service if that would increase his fees or the fees of an affiliate—e.g., the investment management fee.
What may the fiduciary adviser do if he wants to manage participant accounts?
• Charge no additional fee. A fiduciary adviser to the plan may recommend himself as an investment manager to participants as long as he charges no additional fee for the management service.
• Educate the plan sponsor about the investment management service. The fiduciary adviser may provide information to the plan sponsor about the management service. Then, if the plan sponsor decides to offer the service to participants, the fiduciary adviser may charge the management fee in addition to the plan-level fee. Note: To make it clear the fiduciary adviser did not advise about or recommend the management service, the plan advisory agreement should clearly state that the adviser has no responsibility or authority to recommend or assist in selecting investment managers for participants.
• Educate the plan participants about the investment management service. The plan may provide participants with information about the availability of the management service. Then, if the participant decides to hire the adviser as the investment manager, the adviser may charge a management fee to the plan or the participant’s account, in addition to the plan-level fee.
In addition to prohibited transaction issues, the adviser should consider the participant disclosure rules. If the plan sponsor allows the adviser to offer investment management services to participants, the adviser may be considered a “designated investment manager,” or DIM. The good news is that services provided by a DIM are not considered designated investment alternatives subject to detailed participant disclosure about expense ratios, performance history, portfolio turnover rates, etc.
Under the participant disclosure rules, the ERISA 3(16) plan administrator—usually, the plan sponsor—must identify the adviser as a DIM and describe the DIM’s services and fees. This disclosure must be provided initially to newly eligible employees. Also, it must be provided annually to all participants, including eligible employees who have not enrolled in the plan and beneficiaries who have the right to direct investments. In addition, the plan sponsor must provide participants with a quarterly statement of the DIM fee charged against their individual accounts.
Fred Reish is chair of the Financial Services ERISA practice at the law firm Dirnker, Biddle & Reath. A nationally recognized expert in employee benefits law, Reish has written four books and many articles on the Employee Retirement Income Security Act (ERISA), Internal Revenue Service (IRS) and Department of Labor (DOL) audits, as well as pension plan disputes. Joan Neri, who has been associated with the firm since 1988, is counsel on the Employee Benefits and Executive Compensation Practice Group. Her practice focuses on all aspects of employee benefits counseling