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The Way Has Been Cleared For 401(k) Investment Advice


With the recent stock market decline, companies and institutions that provide 401(k) benefit plans are looking for ways to help employees with their investment decisions, but concerns over managing "fiduciary" responsibility and the seemingly overwhelming task of selecting an advice provider have left many employers reluctant to make investment advice available.

However, the landscape for providing investment advice to employees has dramatically changed in the past year. That's due in large measure to a recent Department of Labor (DOL) ruling that paves the way for providers of benefits services, using third-party financial experts, to offer independent financial advice. This important ruling could further be enhanced by proposed legislation, currently in Congress, allowing investment advice for retirement plan participants [see MFMN 10/28/02].

An understanding of the historic underpinnings of the current law, along with the recent DOL ruling, will show that corporations and institutions can safely accept the fiduciary responsibility associated with offering investment advice.

The roots of the fiduciary responsibilities associated with 401(k) plans and investment advice are found in the Employee Retirement Income Security Act of 1974 (ERISA). Enacted to protect the interests of participants in employee benefit plans, the law is administered and enforced by the DOL and basically requires full disclosure and the defining of responsibilities of the "fiduciaries" who manage the plans.

Under ERISA, a fiduciary is broadly defined to include anyone who has control over management of the plan's assets, has responsibility for the administration of the plan, or renders investment advice for a fee. A plan sponsor - that is, the corporation or institution providing the benefit plan - would be a fiduciary since it controls the plan's assets and is responsible for the administration of the plan.

Likewise, an advice provider would be a fiduciary since the advice is provided for a fee. Under the rules, a fiduciary must discharge his duties.

Accordingly, a plan sponsor has a fiduciary obligation in selecting an advice provider to act prudently and solely in the interest of plan participants. To do this, the plan sponsor should perform a due-diligence investigation of third-party advice providers prior to selection and evaluate a number of factors, including the computer model by which advice will be generated, ease of use and ability to obtain customer service support, and the financial stability of the person or entity responsible for the advice.

Plan sponsors will want to consider the benefit of having the advice provided by the company that already provides "bundled services" for the 401(k) plan, such as investment management, trustee or recordkeeping services. Such a bundled service provider will be familiar with the plan's investments and may be able to easily connect the advice service to participant data.

In a bundled service arrangement, the service provider most likely will be already acting in a fiduciary capacity under ERISA, such as acting as an investment manager.

Consequently, there might be a conflict of interest issue under ERISA where the plan's investment lineup includes mutual funds sponsored by an affiliate organization of the advice provider. In this case, the advice provider would potentially be making investment recommendations over funds from which its affiliate would be paid compensation for managing that fund. This is a statutorily prohibited transaction under ERISA, but one that can be overcome using Department of Labor guidance.

That can be done in one of two ways: (1) by leveling fees or (2) by engaging an independent party to generate the advice provided. The latter is based on a recent DOL advisory opinion contingent upon several conditions, including that the investment recommendations are developed by a financial expert who is independent of the advice provider.

Any plan sponsor evaluating an advice provider's product using this model should ensure that the foregoing conditions and several others spelled out by the DOL have been fulfilled.

Legislation is pending that may provide further clarification, notably the Retirement Security Advice Act (H.R. 2269), introduced by Rep. John Boehner (R-OH) and now incorporated into pension reform legislation approved by the full House of Representatives. This would create an exemption under ERISA allowing employers and investment intermediaries to give individualized advice to workers participating in retirement savings plans. The bill would allow employers to provide workers with investment advice as long as the advisers fully disclose their fees and any potential conflicts, and would give investors greater access to the information they need to make informed decisions about their retirement savings accounts.

While legislation is pending that may provide further clarification, plan sponsors can comfortably accept the fiduciary responsibility associated with offering investment advice. To do so, they must simply establish and follow processes with regard to the selection and monitoring of an advice provider.

As the DOL has indicated, the selection of an advice provider is a fiduciary act. But that act in and of itself carries no additional risk greater than selecting any service provider to the plan. While it is not a fiduciary requirement that investment advice be offered to plan participants, it certainly makes common sense.

A compelling case for investment advice can be made in light of the variety of investment options offered in today's 401(k) plans, the use of brokerage accounts, company stock funds and the short-term swings that the stock market has experienced recently. By properly managing the fiduciary risks under ERISA, plan sponsors can reap the rewards associated with better-satisfied participants and the knowledge that they have helped their employees obtain the best chance possible to realize their retirement goals.

Gary Jenkins is general counsel for CitiStreet, the global benefits provider that is a joint venture of State Street Corp. and Citigroup.