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NAGDCA Note: A Look at Providing Investment Advice Services to Participants

A plan sponsor's fiduciary duty is to make sure participants are provided sufficient information and tools to make educated and appropriate investment decisions. Education and guidance are important, but is it really enough? Some participants may need more assistance than others when it comes to planning for retirement and this is why plan sponsors should evaluate whether or not to provide investment advice to employees as part of their defined contribution plan. Whatever course of action a plan sponsor takes, they must meet the investment advice and fiduciary duty criteria that's spelled out by their respective state statutes and plan documents.

There are two options available for providing investment advice if a plan decides to do so. The first being available after the 2001 DOL Advisory Opinion 2001-09A was released. Although the DOL guidance applies only to plans covered by the Employee Retirement Income Security Act (ERISA) and doesn't technically apply to governmental plans, it does provide good guidance on how to structure an advice offering. The Advisory Opinion allows defined contribution plan investment product providers to offer advice services to participants that may result in additional fees paid to the provider as a result of the advice, but only if the advice is based on methodologies developed, maintained and controlled by an independent third party hired by the product provider.  Plan sponsors or other fiduciaries that prudently select and monitor an investment advice provider will not be liable for the advice furnished by such provider to the plan's participants and beneficiaries.

The other option allows for investment product providers to develop their own service or computer model. Providers must comply with the disclosure and audit provisions of the Pension Protection Act (PPA) of 2006. The investment advice must be provided under an 'eligible investment advice arrangement' and must satisfy other requirements, including appropriate disclosure of the investment advice. An eligible investment advice arrangement either offers that fees for the investment advice that (1) do not vary depending on the basis of any investment option selected or (2) are not level and requires a computer model for determining the advice. The fiduciary advisor (product provider) must disclose the amount and sources of its compensation and that it is acting as a fiduciary. An annual audit is also required for compliance with the Act and each plan sponsor that is offering the advice service must be provided with an annual compliance report. Plan sponsors need to prudently select or monitor the advice service providers in the same manner as is required when they select investment options for their plans and plan sponsors have no duty to monitor the specific investment advice given by the investment advice provider. 
As previously mentioned, governmental plan sponsors examining whether or not to provide investment advice services to participants need to first look to their state laws before making a final decision to offer advice to participants. If a plan decides to move forward with providing advice services, the plan sponsor can select the investment advisory service which is best for their plan participants whether it fulfills the PPA or the DOL Advisory Opinion and the plan sponsor will receive the same exemption from advice under a service provider using either approach. Again, these provisions are specific to plans covered under ERISA, but government sector employers can use the guidance as a best practice if they decide to provide advice services. 

Increasing services beyond guidance to include investment advice causes some plan sponsors to worry about fiduciary liability. The concerns that are most commonly raised when considering advice are the potential liability for losses that could result from the advice provided, responsibility for selecting the advice provider, and the role in the on-going monitoring of the service. The liability for the advice on the part of plan sponsors looks to have been settled in a way that should put plan sponsors fears to rest. Plan sponsors will not be liable for the advice to participants from properly selected and monitored service providers. The prudent selection of an investment advisor should be completed in essentially the same manner that is used to select any other service or product provider. It should be based on an objective process (such as a request for proposal) that allows the plan sponsor to evaluate the provider's qualifications, quality of services, reasonableness of fees, etc. Once the service provider has been selected, this firm must be willing to accept a fiduciary role in the plan for the advice they provide to participants. Plan sponsors will need to monitor the service to ensure it continues to be appropriate to offer to participants. Guidelines should be established and followed to evaluate this service on an on-going basis.

Plan sponsors have a duty to focus on the needs of their employees when deciding if guidance is sufficient or if advice should be added to their defined contribution plan. Looking at current plan statistics (such as participation rates, diversification of account balances) or conducting an employee survey can help plan sponsors decide if the current education and guidance efforts are effective. 
Neither NAGDCA, nor its employees or agents, nor members of its Executive Board, provide tax, financial, accounting or legal advice. This memorandum should not be construed as tax, financial, accounting or legal advice; it is provided solely for informational purposes. NAGDCA members, both government and industry, are urged to consult with their own attorneys and/or tax advisors about the issues addressed herein.
Reference Materials:
Investment Advice to Defined Contribution Plan Participants – Update on Impact of Department of Labor Advisory Opinion 2001-09A and the Pension Protection Act of 2006:
Department of Labor Field Assistance Bulletin No. 2007-01


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