25 April 2019

A Fiduciary Adviser and Manager?

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May an adviser be a fiduciary investment adviser to the plan and also a fiduciary investment manager for participant accounts? 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.

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.

• 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.

• 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.

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.

Click here to access the full article on PLANADVISER.com

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