Plan sponsor’s fail-safe: Using RIA as a co-fiduciary

Many Employee Retirement Income Security Act fiduciaries, including plan sponsors, trustees and members of investment committees, are unaware of their significant responsibilities relating to the prudent selection and monitoring of plan asset investments, and the proper operation of their qualified plans.
Plan sponsors have long requested guidance and investment advice for their participant-directed 401(k) plans and employer-directed pension plans. Although many 401(k) service providers offer asset allocation guidance and education, plan sponsors need unbiased investment advice and monitoring services to safeguard their plans and plan participants properly.
Registered investment advisers may provide plan sponsors with fiduciary relief relating to the selection and monitoring of plan asset investment choices in a participant-directed plan and select asset investments generally in an employer- directed plan. Further, plan sponsors working with investment advisers as co-fiduciaries receive extensive disclosure and a description of any conflicts of interest.
Investment advisers serving as ERISA fiduciaries acknowledging this status under ERISA in a written document provide exculpatory relief to plan sponsors, provided the plan sponsors were prudent in their selection of the mutual fund manager and establish prudent guidelines for monitoring the investment managers on a regular basis.
Investment advisers acting as ERISA fiduciaries are required to file a registration statement, known as Form ADV, annually with the Securities and Exchange Commission and must offer their clients a copy of their updated Form ADV each year. The registration statement is the primary compliance document where investment advisers disclose, among other details, fee schedules and potential conflicts of interest. The process of keeping Form ADV updated establishes a culture of compliance in which investment advisers acting as ERISA fiduciaries are cognizant of a need to disclose material information about their business practices and to alert clients of any conflicts of interest.
Lawsuits have recently been filed accusing plan sponsors of violating ERISA by allowing their employees to be overcharged by their 401(k) vendors for investment management and administrative services. These lawsuits claim that employees were charged excessive management fees that were hidden in obscure service agreements and not disclosed to employees. These lawsuits also claim that the fee structures are excessive, undisclosed and violate the fiduciary-responsibility requirements of ERISA.
RIAs, however, provide full disclosure of fees and any other remuneration received for services as a co-fiduciary. The Department of Labor cautions plan sponsors to monitor plan expenses, because the largest component of 401(k) fees and expenses is associated with managing plan asset investments. Full written disclosure by RIAs effectively safeguards against the possibility of non-disclosure, and the maintenance of excessive fee arrangements.
Plan sponsors rarely monitor fees and rarely understand the fees chargeable to plan assets. It is not uncommon for plan sponsors to offer retail investment funds rather than institutional funds and to experience undisclosed fees netted against performance. Further, many custodial platforms do not provide participant-level disclosure of fees deducted directly from participant accounts.
The plan sponsors, officers, directors and members of investment committees responsible for monitoring plan expenses can protect themselves by engaging in a prudent process of selecting investment options and investigating the fees associated with those options. An RIA may provide a benchmarking review to analyze fees and expenses currently being charged to plan participants, and to compare these fees with an RIA adviser platform with institutional fund choices.
Benchmarking reviews need to be conducted by independent parties, such as an RIA acting as an ERISA fiduciary. Such fiduciaries receive the same level of compensation regardless of the funds offered under the 401(k) plan or investments made under the pension plan and thus can provide an unbiased review.
Recent ERISA litigation involves in-house fiduciaries who may be deemed to have minimally participated in an ERISA breach of fiduciary responsibility. Investment advisers use a fiduciary model for their clients and thus have a legal obligation to put their client’s interests first — which is in stark contrast to the traditional commission- based-brokerage model. Providing an investment consulting service to plan sponsors acting as fiduciaries is dramatically different from services provided by sales personnel following a lower standard of care.
Plan sponsors retaining investment advisers take advantage of a fiduciary approach to service, with high independence from product manufacturers and captive or proprietary fund offerings. Professional money management at the participant level, as well as at the plan sponsor level, also strengthens the ability of plan sponsors to meet their fiduciary responsibilities.
Investment adviser fiduciaries may help plan sponsor fiduciaries act as successful guardians of plan asset investments to avoid inadvertent and unintended infractions of the rules under ERISA and the Internal Revenue Code.
Sheldon M. Geller is managing director of New York-based Geller Group LLC, which is a member of Focus Financial Partners.