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
• 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
• 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
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.
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