Advisor Solutions - Volume 2 Issue 2 Supplement - S9

it is clearly prudent not to do so; and •	 	 Discharge their duties in accordance with the plan’s governing documents. The Department of Labor goes on to define what it means by “prudent management.” A key factor is whether the advisor gives “appropriate consideration” to those facts and circumstances that, given the scope of the fiduciary’s investment duties, the fiduciary knows or should know are relevant to the investment or investment course of action. That includes understanding the role that any recommended investment or investment course of action plays within the broader context of the plan’s overall investment portfolio. For example, an appellate decision in 1989 found that a fiduciary retained by a plan sponsor to pursue a specific investment strategy was responsible for determining whether that strategy was appropriate for the plan as a whole. Another guideline often misunderstood by advisors is that ERISA fiduciary standards determine whether a fiduciary acted “prudently” based on the procedures that were followed in making a particular decision, rather than the results of that decision. So even if a client benefited from specific advice, advisors can find themselves on the wrong side of the fiduciary statutes if they didn’t follow specific procedures in making an investment recommendation. In addition to the basic fiduciary duties that advisors must perform, ERISA has a long list of prohibited activities, most of which forbid various transactions between a plan and a “party in interest.” A “party in interest” of a plan includes: •	 	 fiduciary of the plan any •	 	 person providing services to the plan any •	 	 employer whose employees are plan participants any •	 	 any employee organization (e.g., a union) whose members are plan participants •	 	 certain persons and entities related to or affiliated with anyone in the first four categories
be wAry of the blurry guidelines

“level-fee” standard, which says that you must receive the same level of payment regardless of which investments you recommend. Another common area of confusion is under the statutes that require that these types of accounts be managed solely for the benefit of the plan participants. You have to look beyond the fees themselves to determine whether or not you are benefiting from your own advice. For example, if your custodian offers different products or services based, in part, on the total amount of assets that you place with them, you should keep in mind that your IRA and ERISA assets probably cannot be counted toward that total, depending on the nature of the program.
meeting the disclosure responsibility to your clients

In order to ensure that each participant fully understands the consequences and costs of their investment choices, the Department of Labor spells out exactly how fiduciaries should meet their disclosure responsibilities. Usually it is the fiduciary’s job to provide all plan disclosures to the participants, but it is up to the advisor to ensure that the fiduciary has all of the necessary information needed to make that disclosure. For example, if you are receiving a standard RIA fee for your services, but are also receiving some other type of revenue as a result of your advisory position with the plan, that needs to be disclosed so that the fiduciary is aware of the total cost. Under these regulations, the fiduciary must also provide plan participants information about their rights under the plan itself, including information about the participants’ rights to receive investment direction and a detailed explanation of the investment options available under the plan. The fiduciary also needs to explain all of the fees and expenses charged to the plan, and those fees and expenses that the employee will be paying. Those disclosures should be repeated at least annually.
drAft A client contrAct

Because the regulations are so complex, many advisors can cross a line that they don’t even know is there. This issue often comes up around fees. For example, being a fee-only advisor is not enough to keep you in compliance with the statutes surrounding compensation. Whether you are a fiduciary by ERISA standards or simply a service provider, you are limited to “reasonable” compensation. Unfortunately, there are no precise definitions for what may or may not be reasonable. Consider a situation in which you are being paid as an advisor and an affiliate is being paid to provide custody of those assets. The Department of Labor, which oversees ERISA, could add up the total compensation being paid to both you and your affiliate and decide that it is not reasonable. Then you have to make sure that you are meeting the

ERISA and most employee benefit attorneys recommend that advisors draft a contract that fully explains the client’s rights and the advisor’s responsibilities to that client. It should also include a comprehensive explanation of fees and any relevant information about the advisor’s business practices that could in any way impact or influence the advisory relationship. Although this disclosure does not completely relieve you of your fiduciary duties, it does help you meet your responsibilities. If you have any questions or concerns about your practice, consider attending continuing education seminars that focus on ERISA guidelines or talk to an ERISA attorney. For industry events and other information, you can consult sources such as the American Society for Pension Professional and Actuaries at www.asppa.org, and the 401k Help Center at www.401khelpcenter.com.

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Advisor Solutions - Volume 2 Issue 2 Supplement

Table of Contents for the Digital Edition of Advisor Solutions - Volume 2 Issue 2 Supplement
