From time to time, our plan sponsor clients hire advisers to either:
- Help provide general financial planning and investment advice to their employees; or
- To provide advice only about investing their 401(k) accounts.
In both cases, the advisers are likely to be fiduciaries because—even in the first situation—the advisers are making specific recommendations about the 401(k) investments in a participant’s account.
From a risk management perspective, plan sponsors need to do a good job of selecting and monitoring the advisers. From an ERISA fiduciary perspective, when the plan sponsor selects an adviser to provide services to a 401(k) plan, the law requires that the adviser be prudently selected and monitored. That is true regardless of whether or not the adviser is a fiduciary (that is, does the adviser provide investment education or does it provide investment advice?). In addition, in most situations, when financial planning is being done (as opposed to just giving advice on 401(k) accounts), the plan sponsor has made a decision to give the advisory firm, and its representatives, access to its employees. While the law is not clear about plan sponsor responsibilities in that situation, there is a risk that the employer will be seen as “recommending” the adviser, since it is the only advisory firm that is given access to the employees. Further, in our experience, the advisers often provide written materials to the employees that say that the plan sponsor has “approved” or “selected” the advisory firm for that purpose.
As a result, we recommend that plan sponsors do at least the following from a risk management perspective:
- Determine scope of services.
- Review the qualification and practices of the adviser to provide those services.
- Document the scope and delivery of the services (and other matters) in a written agreement.
- Review and understand conflicts of interest, including indirect compensation.
- Require advance disclosure to employees of commissions, fees, costs and revenues (to adviser and any affiliates); any limitations on advice (for example, the adviser will, in some or all cases, recommend only the investments of affiliates); and material conflicts of interest.
- Agree upon disclosure to employees of role of company and adviser (for example, can the adviser say it was “selected”—or otherwise state or imply approval—by the plan sponsor).
- Require written acknowledgment of fiduciary status where appropriate.
- Require annual reports adequate for monitoring.
- Require periodic renewal.
- Require adherence to generally accepted investment theories and prevailing investment industry standards.
- Determine and evaluate any protections for plan sponsors (for example, indemnification and/or insurance coverage).