PLANADVISER - Winter 2023 - 37

and opt-out services, with one being for participants to
actively choose and the other being the default.
QDIA Status
To qualify as a QDIA, the managed account program must:
* Be managed consistently with generally accepted
investment theories-e.g., model portfolio theory;
* Use the plan's designated investment alternatives,
meaning that, if investments outside the plan line-up are
used, the managed accounts will fail to qualify as the QDIA,
though it may qualify under another QDIA category-e.g.,
a target-date or balanced-model portfolio managed by a
3(38) investment manager;
* Allocate among equity and fixed-income investments;
* Be based upon the participant's age, target retirement
date or life expectancy; and
* Be diversified to minimize the risk of large losses, with
the objective of becoming more conservative with the holder's
increasing age.
In addition, the plan must provide participants with
notices about the QDIA.
Conclusion
There are more considerations-e.g., disclosures and the
prohibited transaction rules, which are discussed in the
briefs below. Managed account solutions provide advisers
with an opportunity to help participants improve investment
outcomes and promote retirement readiness.
More on Adviser Managed Accounts
Prohibited Transactions
ADVISERS who intend to offer
managed account services for plan
sponsors to provide as an available
investment service for participants
should be aware of the self-dealing
prohibited transaction rule under the
Employee Retirement Income Security
Act and the Internal Revenue Code.
This rule says a fiduciary may not use
her fiduciary authority to cause herself
to receive additional compensation
from a client's plan. This means a fiduciary
adviser may not use her authority
to recommend herself to the plan as a
participant-level
investment manager
and receive an additional fee.
This prohibited transaction issue
can be managed in a few ways:
Rely on Prohibited Transaction
Exemption 2020-02. PTE 2020-02
is an exemption from the prohibited
transaction rules for conflicts of
interest arising from nondiscretionary
fiduciary recommendations. Here, the
fiduciary
adviser's
recommendation
to hire herself as a participant-level
investment manager is nondiscretionary
because the plan sponsor will
make the final decision as to whether
to engage her. In order to secure the
protection provided by the PTE, a
number of conditions must be satisfied,
including adherence to: a best
interest standard, disclosure obligations,
policies and procedures to
ensure compliance, and an annual
retrospective review of compliance.
Have no fiduciary status at the time
of the recommendation. If the adviser
is not an ERISA fiduciary to the plan
or the participant and simply engages
in a " hire me " discussion touting her
services, this is not self-dealing. In
fact, the sponsor may hire the adviser
to provide an array of services.
Do not charge a managed account
fee. If the adviser is a fiduciary to the
plan receiving a plan-level advisory
fee, she may recommend her managed
account service as long as she charges
no additional fee for that service. In that
case, there would be no self-dealing.
Disclosure Considerations
AN ADVISER designated by a plan
sponsor to provide a managed account
service must provide a 408(b)(2) disclosure
to the sponsor describing the
service,
compensation and adviser's
status in advance of the engagement.
While there is no Department of
Labor-specific guidance that the adviser
provide a similar disclosure to the
participants, doing so is a best practice
so they understand how their account
will be managed and the risks involved.
Further, it is a best practice to provide
participants with the adviser's Form
ADV, Part 2, or similar brochure.
Where similar portfolio management
services such as model portfolios
are provided to participants, Rule
3a-4 of the Investment Company Act of
1940 provides a safe harbor from the
definition of an investment company
such as a mutual fund.
In effect, the rule requires that
each participant receive individualized
investment treatment. For instance,
the adviser must contact the individual
at least annually to determine
whether there have been changes
to his investment objectives. Where
participant accounts are managed
based on a number of participantspecific
factors, they will not closely
resemble one another, which is helpful
in avoiding the need for Rule 3a-4.
Advisers who offer managed
account services should develop
disclosures with these considerations
in mind.
Joan Neri is counsel
for Faegre Drinker's
financial services
ERISA practice in
Florham Park, New
Jersey.
Fred Reish is
chairman of the
financial services
ERISA practice at
Faegre Drinker in
Los Angeles.
Plan Management | Winter 2023 | planadviser.com 37
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