DOL said to be investigating JPMorgan stable-value fund; 'Who is looking under the hood?'
A reported inquiry by the Labor Department into a JPMorgan Chase & Co. stable-value fund could put financial advisers in the cross hairs.
The federal agency is questioning whether the firm committed a fiduciary breach under the Employee Retirement Income Security Act of 1974 in relation to one of its stable-value funds, according to a Reuters report Friday.
The DOL could be examining whether the fund holds investments that are inappropriate and whether such risks were disclosed, according to Reuters, which noted that JPMorgan's Stable Asset Income Fund once held as much as 13% of its assets in private-mortgage debt that's rated and underwritten by the firm. That number has been reduced to 4%.
Kristen Chambers, a spokeswoman for JPMorgan, declined to comment. Michael Trupo, a spokesman for the DOL, said he could neither confirm nor deny the existence of any investigation.
If the Labor Department finds that the firm violated ERISA with respect to the investments within the fund, plan sponsors and financial advisers who recommended it to 401(k) plans could be on the hook for failure to perform the appropriate due diligence.
“The question is: How did this stable-value fund get here, and who is looking under the hood?” asked Jason C. Roberts, chief executive of the Pension Resource Institute.
“We are constantly telling clients that it's not just enough to look at performance,” said Michael J. Francis, president of Francis Investment Counsel LLC. “Prudent fiduciaries look under the hood to understand what the investment manager is invested in to better protect participants from expected blowups from highly volatile, risky or illiquid securities.”
ERISA experts noted that the amount of responsibility that falls on the financial adviser and plan sponsor typically depends on the amount of information available to these plan fiduciaries.
Stable-value funds, which are wrapped with insurance, generally are positioned along the same lines as money market funds — that is, as safe and liquid 401(k) investments.
That perception, however, may lead advisers and registered representatives to pass on doing an analysis of the funds' holdings. The funds are perceived merely as bonds wrapped with insurance, but reps and advisers often fail to dig beyond those details.
Investment policy statements for 401(k)s generally don't cover a lot of the metrics for stable value, Mr. Roberts said. “Rather, a lot of these statements might have a box that you check off for cash equivalents: money market funds, stable value or guaranteed investment contracts,” he added.
Few policy statements go into much more detail, and reps tend to see stable-value funds as a feature that's incidental to the 401(k) plan, he added.
ERISA experts also noted that advisers working with plans might want to revisit their agreements with their retirement plans. The extent to which advisers are responsible for having a poor stable-value-fund option depends on the services they agreed to provide to plan sponsors.
“For advisers, the take-away is twofold," said Marcia Wagner, managing director at The Wagner Law Group. "Know who you're in business with, and have good adviser agreements so that it's clear what you're responsible for.”
Failure to carve out stable value in the agreement could leave financial advisers responsible for an investment that they aren't fully equipped to service or for events that are beyond their control.
“The adviser needs an agreement that says he or she isn't responsible for the prohibited transactions of the provider,” Ms. Wagner said. “There is a whole lot of liability to go around.”
