PLANADVISER - January/February 2020 - 47

ERISA vista
Fred Reish and Joan Neri
Asset Allocation Models
A model's structure determines the adviser's fiduciary status
ADVISER QUESTION: I'm an investment adviser to 401(k) plans.
I construct and utilize asset allocation models in carrying out
my services. Am I considered an ERISA [Employee Retirement
Income Security Act] fiduciary when I utilize these models?
ANSWER: You will be considered an ERISA fiduciary if you're
using the models to provide investment advice to the plan or
the participants based upon their particular needs or if you
are managing a unitized model. But if the models are structured-and
used-in a hypothetical format in accordance
with the Department of Labor (DOL) guidance on investment
education, you won't be considered an ERISA fiduciary.
Asset allocation models can be used by a plan adviser in a
number of ways, and each has different consequences under
ERISA and the DOL rules. Here are three fairly common
structures we see in our work with advisers to 401(k) plans.
1) Models Used to Provide Investment Education
An adviser may construct asset allocation models that are
intended to provide investment education to plan participants.
These models are based upon asset-allocation portfolios
of hypothetical individuals with different time horizons
and risk profiles. A participant can then assess the relevance
of a particular model to his individual situation and determine
whether to use it as a guide for investment allocation.
Under DOL guidance-Interpretive Bulletin 96-1-use
of models will not be considered fiduciary advice if the
following four requirements are met:
* The models are based upon generally accepted investment
theories that take into account the historic returns of
different asset classes over defined periods of time;
* All material facts and assumptions on which the
models are based-e.g.,
retirement ages,
income levels,
financial resources, etc.-accompany the models;
* The model, if it identifies a specific plan investment
option, includes a statement that other investment options
having similar risk and return characteristics may be available
under the plan and identifies where information on
such other investments may be obtained; and
* The model is accompanied by a statement that, in
applying particular asset allocation models to their individual
situations, participants should consider their other
assets, income and investments.
An adviser using models that meet these requirements
will not be considered to be providing fiduciary advice.
However, if he recommends a specific allocation or model to
a participant, that is advice and not education.
2) Models Used to Provide Participant-Level
Investment Advice
An adviser may use asset allocation models-whether developed
by himself or a third party-to provide participant-level
investment advice. With this service, the adviser recommends
that a participant invest his account in accordance
with the asset allocation model that aligns with his particular
investment needs-e.g., based on the individual's investment
profile. In providing this service, the adviser is acting
as a fiduciary under ERISA subject to the legislation's rules,
including the prudent man standard and duty of loyalty.
3) Models Made Available as Investment Options
Some plan advisers construct and manage asset allocation
models that are unitized-i.e., treated as a single investment
with a stated daily value-and made available as a
401(k) plan investment option. The adviser manages the
model and makes decisions about the asset allocation and
underlying investments. In that case, the adviser is an ERISA
fiduciary for the allocations and the choice of investments.
These models are treated as designated investment
alternatives (DIAs) under the DOL rules. This means they
are subject to detailed participant disclosures-i.e., the
404a-5 disclosure rules-about expense ratios, performance
history, portfolio turnover rates, benchmarks and
more. In our experience, while most advisers don't object
to presenting this detailed investment information, not all
recordkeepers have the system to capture and report it.
Plan advisers who use these models in 401(k) plans
should consider how they intend to do so. Each approach has
different consequences. If the adviser is managing the model
as a unitized investment option or is using the model to
make participant-level investment recommendations, he is
an ERISA fiduciary and should ensure that he uses a prudent
process for making investment and allocation decisions and
that he documents the process.
Fred Reish is chair of the financial services ERISA practice at law firm
Drinker Biddle & Reath LLP. A nationally recognized expert in employee
benefits law, Reish has written four books and many articles on ERISA,
pension plan disputes and audits by the IRS and Department of Labor.
Joan Neri is counsel in the firm's financial services ERISA practice,
where she focuses on all aspects of ERISA compliance affecting
registered investment advisers and other plan service providers.
planadviser.com January-February 2020 | 47
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PLANADVISER - January/February 2020

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