Participant-Level Money Management Account Option

By Sheldon M. Geller

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NOVEMBER 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 plan accounts.

A service 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 advisors.


Although 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 Bulletin 96-1).

Although 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.

ERISA 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.

An 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.

Accordingly, 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 investment choices.

Money Management

Some 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.

The 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.

If 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.

The 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.

Fiduciary Responsibilities

ERISA 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)].

ERISA 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 investments.

Good 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.

ERISA 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)].

ERISA 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)].

Retained Fiduciary Responsibilities

Enabling 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.

By 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.

ERISA 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.

Plan Expenses

ERISA 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].

A plan 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).

Good Business Practices

Managed 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.

Sheldon M. Geller, Esq., is managing director of the Geller Group LLC, a member of Focus Financial Partners, New York, N.Y.





















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