Money Management Account Option
Sheldon M. Geller
2006 - Defined contribution and 401(k) plan participants
have long requested guidance, planning, and investment advice
for their participant-directed retirement plan accounts.
Although some 401(k) service providers offer asset-allocation
guidance and education, many plan participants desire money-management
investment advice and monitoring services for their retirement
provider offering independent portfolio management at the
participant level, including discretionary money management
and advice, must be an investment advisor registered under
the Investment Advisors Act of 1940. Registered investment
advisors become cofiduciaries under the Employee Retirement
Income Security Act (ERISA) and are the only service providers
that may afford ERISA fiduciaries exculpatory relief for
the selection and maintenance of plan asset investments.
That is, ERISA fiduciaries and plan sponsors who retain
registered investment advisors are no longer responsible
for the selection and continued retention of plan asset
investment choices, but rather are responsible for monitoring
the delegation to the investment advisor. ERISA fiduciaries
generally monitor the delegation for investment management
responsibilities at least once a year by executing an investment
policy statement prepared and effectuated by their investment
many defined contribution and 401(k) plans enable participants
to direct the investment of their accounts, many participants
have doubts that they are sufficiently trained to assume
this investment responsibility. Although the U.S. Department
of Labor (DOL) has recognized this concern and issued guidelines
encouraging employers and service providers to offer investment
education, participants have expressed a preference for
investment advice rather than education (DOL Interpretative
ERISA section 404(c) provides relief to ERISA fiduciaries
for the liability associated with carrying out participant
investment directions, section 404(c) relief does not extend
to the selection and continued retention of a plan’s
investment options. Further, section 404(c) relief does
not extend to the account of a participant who does not
affirmatively elect to direct the investment of the account.
fiduciaries also have a duty to act prudently in connection
with the investment of plan assets. ERISA fiduciaries may
lack investment expertise themselves, however, and thus
have a duty to seek expert advice in connection with the
investment of plan assets.
investment advisor appointed under a 401(k) plan assumes
a fiduciary role with respect to that plan and the investment
of its plan assets over which the investment advisor exercises
investment discretion. According to ERISA section 405(d),
federal pension law provides that when the investment advisor
is appointed, no ERISA fiduciary shall be liable for the
acts or omissions of the investment manager. An investment
advisor who has discretionary power over the participant’s
account would relieve ERISA fiduciaries of the responsibility
for making plan asset investment decisions for that plan
participant. An investment advisor can legally provide advice
and discretionary money-management services to plan sponsors
and plan participants, provided the advisor meets a prohibited-transaction
exemption conditioned upon not engaging in self-dealing.
registered investment advisors provide services intended
to assist ERISA fiduciaries in reducing their fiduciary
responsibilities by implementing a disciplined process and
a prudent investment policy. This policy would address the
investment needs of participants and relieve fiduciaries
of the responsibility to select and maintain plan asset
401(k) service providers offer registered investment advisory
services to help plan participants manage their accounts
based upon their risk tolerance and investment goals. Plan
participants complete a risk-profile questionnaire, which
helps determine their investment time-horizon tolerance
for risk and retirement plan goals. The plan participant’s
investor profile assists the investment advisor in determining
asset allocation and a risk/reward profile of the proposed
portfolio. Thereafter, the investment advisor actively manages
the retirement plan account by rebalancing the underlying
positions of the managed account or by training the plan
participant to rebalance accounts among a diversified portfolio
of investment options.
investment advisor or the plan participant must determine
the level of equity, fixed income, and cash or cash equivalents
among the investments held at any given time. Most programs
invest plan assets in registered mutual funds selected by
the investment advisor under the plan’s custodial
platform. Each plan participant’s account reflects
the fair market value and number of shares invested with
each mutual fund.
a 401(k) plan offers proprietary mutual funds from that
investment advisor, a prohibited-transaction exemption would
require reducing the investment advisory fee by the amount
of investment advisory fees paid by the proprietary mutual
fund to the investment advisor or its affiliates. In any
event, investment advisors charge a fee based upon the value
of plan assets they are managing, which may range from 50
basis points to 150 basis points of the participant’s
assets under management. In certain circumstances, ERISA
fiduciaries may be able to negotiate a reduced fee, based
upon either the inclusion of proprietary mutual funds or
the plan asset levels.
investment advisor does not receive 12b-1 commissions or
other subadvisory fees payable by some mutual funds, with
the exception of the subadvisory fees paid by certain proprietary
mutual funds. Any subadvisory fees received by an investment
advisor from the proprietary mutual funds must be used to
offset the investment advisory fee otherwise payable to
the investment manager by the plan.
fiduciaries must prudently invest and manage plan assets.
Accordingly, fiduciaries to whom investment responsibility
has been delegated may be subject to liability for the improper
investment of plan assets. Fiduciaries have an affirmative
duty to perform solely in the interest of plan participants
and their beneficiaries, for the exclusive purpose of providing
benefits. If ERISA fiduciaries lack technical expertise
to invest plan assets, they have a duty to seek the assistance
and advice of an outside professional [Donovan v. Bierworth,
680 F.2d 263 (2nd Cr 1982)].
fiduciaries also have an ongoing duty to monitor the performance
of the investment fund options made available to plan participants.
ERISA fiduciaries must review investment performance periodically
against standard market indicies and the performance of
peer groups. Although ERISA fiduciaries must conduct an
investment fund review only as often as necessary given
the circumstances and volatility of the market, good business
practice would dictate a fiduciary review at least annually.
ERISA fiduciaries lacking the expertise have a duty to seek
an expert when monitoring the performance of plan asset
business practice dictates the development of a written
investment policy statement outlining the allocation of
fiduciary duties among the named fiduciaries and providing
for investment objectives. The written statement should
set forth the process for the selection and monitoring,
as well as the replacement, of investment fund options.
fiduciaries are relieved of the responsibility and liability
for a participant’s investment decisions under ERISA
section 404(c) if the participants have exercised meaningful,
independent control over the investment of their own accounts.
The participants must be able to choose from a broad range
of investment alternatives to sufficiently diversify their
accounts and minimize risk of loss. Participants must be
able to give investment instructions with sufficient frequency
and be able to obtain sufficient information to make investment
decisions [see 29 CFR section 2550.404(a-1)].
fiduciaries retain the fiduciary duty to prudently select
and monitor available fund options unless they retain a
registered investment advisor. Investment advisors are cofiduciaries
under ERISA to the extent they have discretionary authority
or control in connection with the management or disposition
of plan assets, or if they provide advice for a fee [ERISA
sections 3(21)(A)(i), 3(38), and 405(d)].
plan participants to direct the investment of their accounts
does not completely relieve the named fiduciary of all fiduciary
responsibility. ERISA fiduciaries retain responsibility
for the investment of plan assets where individual participants
do not exercise control over the investment of their accounts.
Furthermore, where individual participants retain responsibility,
ERISA fiduciaries retain fiduciary responsibility to prudently
select and monitor the performance of the investment options
thereafter. According to ERISA section 403(a), an ERISA
fiduciary who has the authority to appoint another fiduciary
has an ongoing duty to monitor its performance.
appointing an investment advisor to either provide advice
in connection with the selection and retention of plan choices
or manage the investment of participant accounts, ERISA
fiduciaries must act prudently in the selection and continued
retention of the investment advisor and to monitor the performance
of the investment advisor.
fiduciaries must also follow a course of procedural prudence
in decision making regarding plan asset investments. That
is, ERISA fiduciaries must diligently engage in, and document,
the investigation and review resulting in the fiduciary
decisions regarding the investment of plan assets.
contains no provisions specifically addressing how plan
expenses may be allocated among the participants and beneficiaries.
Nevertheless, ERISA does address certain instances in which
a plan may impose charges on particular participants and
beneficiaries. For example, DOL regulations under ERISA
provide that reasonable expenses associated with a participant’s
exercise of an option to direct asset investments or to
take a participant loan may be separately charged to the
account of the individual participant [29 CFR section 2550.404c-1(b)(2)(ii)(A)
and the preamble to 29 CFR section 2550.408d-1]. On the
other hand, a plan may be limited in the extent to which
it may charge a particular participant or beneficiary for
information that would need to be furnished free of charge
[29 CFR sections 2520.104-46(d)(1)(r)(C), 2520.104b-1(c)(1)(ii)
and (iv), and 2520.104b-36].
may be charged with an investment advisory fee to help sponsors
manage the investment of plan assets as well as provide
investment advice to plan participants. In the alternative,
an ERISA fiduciary may be able to justify the allocation
of an investment advisory fee to the account of the particular
individual participant who utilizes the professional money
management services (DOL Field Assistance Bulletin 2003-3).
accounts at the participant level with a registered investment
advisor and a professional third-party money manager will
provide asset management on a participant’s retirement
plan accounts in all market environments. Professional money-management
at the participant level also strengthens the ability of
plan sponsors to meet their fiduciary responsibilities.
M. Geller, Esq., is managing director of the Geller
Group LLC, a member of Focus Financial Partners, New York,