PLANADVISER - September/October 2021 - 39

compliance consult
David Kaleda
Provider Recommendations
Does relying on certain 'go-to' providers have implications under ERISA?
ADVISERS ARE OFTEN ASKED by the named fiduciaries of
qualified plans to recommend plan service providers. Not
surprisingly, many advisers may be inclined to recommend
the same recordkeepers, third-party administrators (TPAs),
outsourced chief investment officer (OCIO) managers, etc.,
to all or most of their clients. In so doing, they raise a question
as to whether this has implications under the Employee
Retirement Income Security Act (ERISA).
The answer to that question depends on
whether the adviser acts as a fiduciary in
making such recommendations.
ERISA provides that an adviser acts
as a fiduciary if he, among other things,
supplies investment advice for a fee. The
Department of Labor (DOL), by regulation,
created a five-part test that determines
whether an adviser is giving what ERISA
would call investment advice. The first
recommendation does not directly involve a security. Of
course, to provide investment advice for purposes of ERISA,
the remaining parts of the five-part test must also be met.
It's important for advisers to understand whether they
... even if the
adviser does
not make
a fiduciary
part of the test requires that the person
renders advice to a plan as to the value
of securities or other property, or makes
recommendations regarding the advisability
of investing in, purchasing or selling
securities or other property. Additionally,
the test continues, the adviser provides 2) such advice on
a regular basis; 3) pursuant to a mutual understanding; 4)
that such advice will be a primary basis for investment decisions;
and 5) the advice will be individualized to the plan.
When an adviser recommends a service provider, that
entity may or may not be acting as a fiduciary. The threshold
question often is whether, in the instance under discussion,
the adviser makes recommendations regarding investing
in, purchasing or selling securities. In general, this should
not be the case when the adviser suggests a provider whose
services do not involve investments. Thus, the adviser would
not meet the first part of the test by merely recommending
a recordkeeper or a TPA.
On the other hand, if the adviser makes a recommendation
and there is a connection to plan investments, there's
a greater likelihood that the first part of the test will be
met. Notably, the DOL and some courts have a broad view
of what it means to make recommendations with respect
to investing in, purchasing or selling securities. Therefore,
that agency and, possibly, a court will take the position that
recommending one or more investment managers, including
an OCIO manager, is investment advice even though such
recommendation,
his plan
sponsor client is
a fiduciary.
act as ERISA fiduciaries when they make service provider
recommendations. A fiduciary is subject to the fiduciary
provisions of ERISA Section 404 and the enforcement provisions
in Section 502. For example, such
advisers would have to ensure that the
recommendation was
prudent,
fiduciary
duty
exclusively
in the best interest of the plan and
its participants and otherwise meets
ERISA's
requirements.
Under such circumstances, suggesting
the same investment managers or OCIO
managers may be completely defensible.
However, the adviser should be prepared
to explain why such managers were applicable
to each and every plan even though
the plans may vary in asset size, benefits
provided and participant count and demographics.
Additionally,
if a fiduciary, the adviser
may not be able to receive referral fees or
other types of compensation, due to the fiduciary prohibited
transaction provisions in Section 406(b), unless he can
point to an exemption.
Furthermore, even if the adviser does not make a fiduciary
recommendation, his plan sponsor client is a fiduciary.
That fiduciary may rely upon the adviser's recommendation
to select a service provider. If it does so imprudently
or otherwise contrary to the requirements of ERISA, the
client may be held liable for losses to the plan and other
remedies under ERISA. Therefore, when advisers recommend
a service provider, they should consider the fiduciary
implications to their client, particularly if it looks to them as
a trusted adviser. Under these circumstances, a preferred
recordkeeper or other service provider may not be the best
choice for a particular plan even though a good choice for
many plans. Additionally, if the adviser receives a referral
fee or other compensation from the provider, he may have
to disclose the compensation in accordance with ERISA
Section 408(b)(2) even when not acting as a fiduciary.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C.
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PLANADVISER - September/October 2021

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