PLANADVISER - March/April 2019 - 54

ERISA vista
Are Personal Advisers
ERISA Fiduciaries?
Maybe yes, if advising about a 401(k)
QUESTION: I'm an adviser who provides investment advice to
individuals. If a client has a 401(k) plan account where he works
and wants me to give advice about
the asset allocation and
investment selection in that account or wants advice about plan
rollovers, am I subject to ERISA [Employee Retirement Income
Security Act]? If I am, what are my responsibilities?
ANSWER: In providing ongoing investment advice about the
client's 401(k) plan account, you probably act as a fiduciary
under ERISA. If so, you have a duty to act prudently and solely
in the interest of the client. Also, you need to be mindful of
the prohibited transaction rules.
The determination of whether you are a fiduciary under
ERISA is based on the definition in the " old " Department of
Labor (DOL) rule that was reinstated when the " new " DOL
rule was thrown out. Under that definition, and as confirmed
by the DOL in Interpretive Bulletin (I.B.) 96-1, you are a fiduciary
if you provide investment advice to a participant about
his 401(k) account in a way that meets the DOL's five-part
test: 1) you provide advice to the plan participant about
investments for a fee, 2) on a regular basis, 3) under a mutual
understanding, 4) that the advice will form a primary basis
for investment decisions, and 5) that the advice is individualized
based on the participant's unique needs.
For part 1) to apply, you-i.e. the adviser-must receive
a fee for the participant advice. If the fee is paid by the plan,
you may need to provide the responsible plan fiduciary with
a disclosure under ERISA 408(b)(2). The 408(b)(2) disclosure
applies if you reasonably expect to receive $1,000 or more
in compensation from the participant's 401(k) account. The
disclosure consists of an acknowledgment of your status as a
registered investment adviser (RIA) and ERISA fiduciary and
a description of the participant advisory services and fee.
But if the fee isn't paid from the plan, a 408(b)(2) disclosure
isn't needed.
The fee does not need to be paid by the plan in order for
you to qualify as a fiduciary under the part 1) of the five-part
test. It may be paid by your client. What if it's not clear that
the fee covers the advice for the 401(k) account? In all likelihood,
the DOL-and a plaintiff's attorney-would assert that
the fees you receive pay for the 401(k) plan advice, as well-
even if not specifically mentioned in the service agreement-
on the grounds that no one works for free.
If the five-part test is met, you are an ERISA fiduciary with
respect to that client's 401(k) account. In other words, you are
not an ERISA fiduciary of the plan as a whole, but rather one
with respect to a portion of the plan-namely, the assets held
in your client's account.
As an ERISA
fiduciary, you
are subject
to a duty to
act prudently
and to a duty
of loyalty to
the client.
As an ERISA fiduciary, you
are subject to a duty to act
prudently and to a duty of
loyalty to the client. The prudence
standard for participant
advice is the same prudence
standard that applies to all
ERISA fiduciaries. This means
you need to consider the relevant
facts and circumstances,
including
the
client's
investment
objectives and financial
needs, and then arrive at an
investment
recommendation
that aligns with those factors.
Because the purpose of 401(k)
money is retirement, you should give investment advice
that is consistent with that purpose.
Also, as to prohibited transactions, a fiduciary may not
make recommendations that can generate more compensation
for the fiduciary or for a party in whom the adviser has
an interest, e.g., investments managed by an affiliate. There
are other prohibited transactions, as well. As a fiduciary, you
need to know those rules and either avoid such transactions
or rely on a prohibited transaction exemption (PTE).
If you are a fiduciary for a client's 401(k) account, recommending
a rollover to an individual retirement account
(IRA) that you will advise could be prohibited. If you will be
paid the same from the IRA as you were for the participant
advice, the transaction is permitted. However, if you will be
paid more-e.g., a higher percentage of the assets-from the
IRA as a result of the rollover recommendation, the DOL will
consider it a prohibited transaction.
The good news is that, right now, the DOL and the IRS
have agreed not to enforce the prohibited transaction rules
if you: satisfy a best interest standard, which mirrors the
prudent man standard; charge a reasonable fee; and make
no materially misleading statements. This DOL nonenforcement
policy is discussed further in our column " Prohibited
Transaction Relief, " PLANADVISER, July/August 2018.
Fred Reish is chairman 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.
54 | planadviser.com March-April 2019
Art by Tim Bower
http://www.planadviserdigital.com/planadviser/march_april_2019/TrackLink.action?pageName=54&exitLink=http%3A%2F%2Fplanadviser.com
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