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Can My Plan Adviser Give My Employees Advice Too?

In short the answer is yes.

But of course, I wouldn’t be writing this article if the answer was that straightforward, now would I?  The more realistic answer for plan sponsors is “it depends.”

Some plan-level advisers offer employee investment advice as an additional service. If you’re a plan sponsor looking to provide employees with resources to make informed decisions, you certainly should consider this service. However, when reviewing such models there are a few important points for a sponsor (plan fiduciary) to consider.

Legally, how is the advice being offered? There are rules governing the way a retirement plan advice program can be established and operate.  If your adviser is an independent third party who accepts fiduciary responsibility, you may be ok.  By independent third party, I mean the adviser doesn’t offer proprietary investment products and doesn’t accept revenue sharing from the funds offered within your plan (such as 12b-1 fees).  If either situation exists, your adviser is not truly independent because their compensation, or their firm’s compensation, will likely be affected by the advice recommendations.  Not all funds pay equally, you know.  If your adviser tells you to move into funds that pay more to his/her firm, how do you know it’s in the sole best interest of your participants in the eyes of the law?

So what if your adviser is not an independent third party? The Department of Labor has issued private letter rulings (SunAmerica and Frost Bank) that allows parties with conflicting interests to provide advice if they’ve mitigated all conflicts.  Or you could wait to see how final language is issued as part of PPA.  Pension Protection Act language has been proposed to establish guidelines to mitigate potential conflicts of interest by following either the Computer Model or Fee Leveling exemptions.

Who is monitoring the advice service?  Plan fiduciaries have a legal obligation to assure that decisions are made in the sole best interest of their employees and that reasonable fees are paid for the services.  It is common for a plan sponsor to hire an adviser to assist the plan sponsor in meeting fiduciary obligations by overseeing the plan’s service providers.

If your adviser is helping with your fiduciary obligation by monitoring to assure your plan is paying fair fees, who is monitoring the investment advice?  Will they monitor themselves?  If they determine that services offered, or the utilization of advice, do not justify the fees you are paying, will they reduce their fees or replace themselves in that role?   As a fiduciary, you should understand how the program will be monitored and the process for corrective actions.

What about prohibited transactions?  As a plan fiduciary, it is extremely important to be aware of any potential prohibited transactions.  If your adviser also acts as an investment adviser on non-retirement plan assets, how do you assure they will not cross-sell other products (like IRA Rollovers or Annuity products) to your participants?  The government has been very clear that fiduciaries must act in the sole interest of plan participants.  If your adviser promotes rollover services to terminated or retired participants, how will you ensure that no prohibited transaction occurs?  Will they guarantee fees for IRA Rollovers so they don’t exceed plan fees?  Will they offer retirement education and discuss other rollover destinations for which they do not receive monetary compensation?

So back to the original question – can my plan adviser give my employees advice too? Your plan adviser can offer investment advice to your participants, but, as a plan fiduciary, it’s your responsibility to make sure it’s done properly. You have to ensure that all potential conflicts-of-interest are mitigated and the program is solely offered for the benefit of your participants.

Scott Swezy
Vice President, Smart401k

About Smart401k
Smart401k is a Web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans. Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at Smart401k.com.