In recent months, we have seen an expansion of services by RIA firms that provide advisory and educational services to plans.

While those firms have traditionally provided non-discretionary investment advice to plan sponsors and non-fiduciary investment education to participants, we have been hired by a number of firms to provide our advice and documentation about additional services for:

    • Discretionary investment management for 401(k) plans; and

    • Non-discretionary investment advice for participants.

Jason Roberts has written an article for this newsletter that discusses the ERISA section 3(38) investment management services. This article focuses on the participant investment advice services.

First, let me explain one thing. These RIA firms are not interested in providing discretionary investment management services to participants. They have decided that their business model is not appropriate for managing a large number of small accounts at a low price. Instead, they are acknowledging, as a matter of fact, that they have been providing individualized investment advice—that is, ERISA fiduciary advice—to participants for many years . . . and they are formalizing that arrangement.

As a part of that, we are preparing (i) agreements for plan sponsors to hire the RIA firms specifically for that purpose, (ii) participant disclosure statements that document the advice arrangement, (iii) descriptions of the process for formulating and delivering the non-discretionary advice, and (iv) language modifying the provisions of the ADV Part II to accurately reflect the arrangement. In addition, we are consulting with the RIA firms about the delivery of the ADV Part II or a similar brochure to the participants who receive advice.

The point of this article is that investment advisers who provide individualized advice to participants—regardless of whether they use model portfolios or other techniques—should formalize the arrangement, properly document it, and provide appropriate disclosures to participants. Unfortunately, in our experience, many advisory firms are going beyond investment education in their services for participants without properly handling those issues. That creates risk management considerations for the advisory firms.

Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

Source: Adviser Report