Jump to content

What do you disclose to participants about an investment adviser?


Recommended Posts

For an individual-account retirement plan, an SEC-registered investment adviser is provided to all participants, without any incremental charge.

(The employer/administrator approves an arrangement in which the recordkeeper pays the investment adviser. The recordkeeper gets its money as indirect compensation paid by investment funds' distributors, transfer agents, and managers. Assume everyone involved has done thorough 408b-2 disclosures.)

The investment adviser's fee thus is not a charge against a participant's account that is not reflected in the total annual operating expenses of an investment fund.

What, if anything, should a participant-level 404a-5 disclosure say about the arrangement for the investment adviser's services?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

What, if anything, should a participant-level 404a-5 disclosure say about the arrangement for the investment adviser's services?

Nothing. 404a-5 is about telling participants what they are paying (covered in the fund expenses). 408b-2 is about telling fiduciaries what others are earning.

Ed Snyder

Link to comment
Share on other sites

There should be some discussion of the fiduciary issues -- the plan administrator (fiduciary) has engaged (a fiduciary act) an investment adviser (a fiduciary) available to the participants. Who has what responsibility/liability; what are the consequences of participant use of the investment adviser; what are the options of the participants with respect to investing. Without appropriate discussion and cautions, the plan administrator has effectively, as a fiduciary, recommended the investment adviser to the participants -- a pretty serious responsibility.

Link to comment
Share on other sites

It really is an open inquiry, to help me learn about the experiences and perspectives of other practitioners.

If one limits the inquiry to whether the text of the 404a-5 rule calls for a particular disclosure, that answer is No.

And that answer is logically sensible if one assumes that the purpose of a 404a-5 is to enable a participant to evaluate the consequences of directing her account's investment to one or another investment alternative within the plan's menu of investment alternatives.

But some practitioners consider that some participants might not perceive a 404a-5 disclosure as limited to that use.

And some employers worry that a follow-the-rule-only 404a-5 disclosure could make the investments look more expensive than is necessary or appropriate, if the text does not include a description of the services provided by using indirect compensation.

These and other concerns are among the consequences of a regime that assumes a participant won't read one comprehensive disclosure, and so supplements it with several provisions and rules for limited-focus disclosures.

Some practitioners have started editing the "cookbook" 404a-5 disclosure to meet these concerns.

I'd be glad to learn more about what other practitioners are doing.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...