Investment Advice And Fiduciary Liability (Updated)
What Is Your Risk?
Providing Advice: "The risk involved when giving advice to plan participants is probably no greater than for any other fiduciary action or decision that a company makes concerning the plan" says David Wray, President of the Profit Sharing/401k Council of America. "Knowing this, the employer can provide advice to participants while acting responsibly to keep fiduciary risk to the company manageable. Remember that ERISA requires prudent decision-making, not [a] successful outcome" noted Wray.
Not Providing Advice: Since ERISA doesn't require a plan to provide investment advice, many assume that by not providing advice they can avoid any liability. This may not be the case. Fred Reish of the law firm Reish Luftman & Reicher has noted that "DOL regulations under section 404(c) specifically state that fiduciaries have no duty to provide investment advice to participants under a 404(c) plan. However, there may be an additional duty under the 'circumstances then prevailing.' For example, if the plan sponsor knows the workforce is unsophisticated about investing, what would a knowledgeable and prudent person do in a similar situation? While we are not aware of any case law or regulatory pronouncement that would impose a requirement for providing investment advice to participants, under the general prudence rule an argument could be made that the plan fiduciaries cannot fulfill their duty to act prudently if they do not make investment advice available."3
Department of Labor Speaks Out
"We understand that some employers may be reluctant to provide advice out of concern that such activities give rise to fiduciary liability," noted U.S. Labor Department's Leslie Kramerich in a major address before the American Society of Pension Actuaries Conference in Los Angeles. She outlined several salient points answering specific concerns voiced by the plan community about investment advice including the following:
Many employees need investment advice. Many employees are not schooled in complexities of investment management, risk/return strategies, asset allocation and diversification principles yet often have the responsibility for making investment decisions in their 401k plans.
Investment education is an important tool. When the Department of Labor issued Interpretive Bulletin 96-1, it distinguished a variety of investment-related investment education activities from the fiduciary act of providing investment advice, and made clear that designating a person to provide investment advice to participants would not, in and of itself, give rise to liability for losses resulting from the individual participant's investment decisions.
Investment education may not be enough for some employees. Many employees may not wish to assume responsibility for making such decisions and may need professional advice. A plan may pay reasonable expenses in providing such investment advice to the plan's participants.
Employers are not liable for acts of investment advisors. IB 96-1 indicated that in ERISA Section 404(c) plans, the person designated to provide investment advice would not be liable for loss that is directly the result of the participant's exercise of control. As with any selection of a service provider, however, the plan fiduciary is still responsible for the prudent selection and periodic monitoring of the designated advisor.
Prudent selection of an investment advisor limits the employer's liability. The rules applying to the prudent selection of one or more investment advisors for plan participants are similar to those applying to selecting any plan service provider. Responsible plan fiduciaries must engage in an objective process to elicit information necessary to assess the provider's qualifications, quality of services offered and reasonableness of fees charged for the service. The process also should be designed to avoid self dealing, conflicts of interest or other improper influence.
Liability in the Selection and Monitoring an Advice Provider
As with any decision to hire a service provider for a plan, the designation of a person or firm to provide investment advice to plan participants and beneficiaries is an exercise of discretionary authority or control. This requires that the fiduciaries making the designation must act prudently and solely in the interest of the plan participants and beneficiaries, both in selecting the person or firm and in continuing the relationship.
"Thus, where a plan sponsor decides to provide investment advice to its 401k participants, the plan sponsor must make the selection in a prudent manner and must periodically monitor the performance of the investment advisor.
"The plan sponsor, through its designated officers, must make that decision in accordance with ERISA's fiduciary standards, that is, 'with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like arms.'"4
The Department of Labor took another step toward expanding and clarifying participant advice options in Advisory Opinion 2001-09. This advisory opinion removes some of the economic barriers that have prevented some investment managers from offering the service.
"Investment Education or Investment Advice: Which Are You Providing?" provides an overview of Department of Labor guidance on determining the difference between investment education and investment advice.
Have concerns? As with any complex ERISA issue, always consult with a qualified attorney who deals with these issues. Remember, this article is for informational purposes only and doesn't constitute legal, tax or investment advise.
1. Profit Sharing/401k Council of America's "46th Annual Survey of Profit Sharing and 401k Plans," September 2003.