ERISA expert to plan advisers: Don't shy from offering affiliated funds from service providers

Financial advisers might want to consider retirement plan providers with affiliated investment funds when selecting the appropriate lineup to recommend to plans. Upcoming Labor Department regulations on plan fee disclosure and the hotly debated proposed “definition of fiduciary” rule have placed a spotlight on bundled service providers, such as Fidelity Investments and The Vanguard Group Inc. Such firms provide record keeping services to plans, as well as funds managed by their affiliates, and are paid through record keeping and asset management fees. Some plan fiduciaries have been quick to dismiss investing in such affiliated funds because the plan's investment policy may bar using the funds or because the adviser or fiduciary doesn't want to consider the options, according to a white paper recently co-authored by C. Frederick Reish, a partner with Drinker Biddle & Reath LLP's employee benefits and executive compensation practice group. They might also fear that offering an affiliated fund is a prohibited transaction, he observed. It isn't, Mr. Reish says, as long as the service provider and fund affiliate get reasonable compensation, per the Employee Retirement Income Security Act of 1974. Fiduciaries who ignore the funds do so at their peril, as they may be cheaper or have better performance than other options. “The fact that offering one or more affiliated funds as plan investment options may lead the plan's record keeper to discount its fees or offer additional services is a ‘relevant' fact that must be considered by fiduciaries,” Mr. Reish wrote. For financial advisers, the issue has been a lack of disclosure by the providers, particularly when it comes to revenue sharing from the affiliated fund. “When you start to peel back the layers of the onion, it's not a good deal. People are being overcharged and things aren't being disclosed,” said Gerald Wernette, director of retirement plan services and a principal with Rehmann Financial. Bundled service providers haven't always come up with the best cost for plans, even the large ones, he added. But greater disclosure, mandated by Labor Department, ought to help plan sponsors make a fair judgment when the time comes to compare one investment to another. “Plan sponsors need to have a prudent process in how they evaluate the vendors they work with,” Mr. Wernette said. “At the center of this, you shouldn't discount a provider because they have a proprietary product, nor should you make the blanket assumption that everyone's fair game.”