Financial Advice - who can be billed for this service?

[Guest jhilliard]

I am researching a financial advice service offered through Principal Financial. My question relates to who can be billed for this service generically.

I was under the impression that- The fee can be passed on to the participant if it is for advice relating to the plan, but when they offer full range advice regarding all of the ee's financials (i.e. estate planning other retirement vehicles) - the fee has to be paid by the employer.

Has anyone else come across this? Is this an accurate statement?

Help if you can.

Thanks

[k man]

i dont see why you would make the distinction. i believe participant investment advice could always be billed to the participant. it is never a settlor function in my opinion.

[Kirk Maldonado]

k man:

I don't quite agree with your application of fiduciary/settlor dichotomy in this scenario.

The test isn't whether the employer should bear the expense; it is whether the plan should bear the expense.

I think that if would be helpful if I expand the facts in the hypothetical. Assume that some of the investment advice is completely unrelated to any type of investments that could ever be utilized in the retirement plan. In that case, it is my belief that the costs of providing that advice cannot be borne by the plan.

In the original submission, it was stated that the employer would bear that cost. While I agree that the cost would be more appropriately borne by the employee in his or her individual capacity, if the choice is between the plan and the employer, then I believe the employer is the better party.

[mbozek]

I think we need to know what type of advice is being provided. An employer can provide retirement planning advice to employees as a tax free fringe benefit under IRC 132(m). However employer provided financial planning for non retirement purposes would be a taxable benefit. An employee can retain his own investment advisor for his retirement benefits to act as his fiduciary under ERISA 404© and pay the advisor from his account.

[Guest jhilliard]

Thanks for your input.... The type of advice being offered would not only look at the participants 401(k) but would also take into account spousal retirement package, ira, saving account, .....

The advice would only pertain or be provided on the investments with in the associated plan.

Could it be possible that the criteria pertaining to who can pay for the service be associated with the accounts they would make recommendations in? In other words they will take all accounts of the participant and family into consideration but only supply investment advise on the funds available in the plan versus they will give advise on ALL accounts reported to them owned by the participant?

This could be the twist.....

[mbozek]

I dont think that the advice would be a tax free fringe benefit for retirement planning under IRC 132(m) if it extends to non retirement assets. The employer needs to retain counsel to determine if investment advice could be provided by an investment advisor and paid by assets of the participant's accounts. However, I dont think advice could be provided on investments that are not in the 404© plan.

[Guest Remysis]

I think jhilliard gets the twist just right. The advice is limited to the qualified plan, in that it only extends to making recommendations about plan investments, but, in coming to those recommendations, takes into account other assets of the participant.

I think that has to qualify as excludible under sec. 132(m) if paid for by the employer. Participant level recommendations about plan investments that ignored savings outside the plan would border on negligent (and, if it were ERISA investment advice, probably a fiduciary breach). Can't imagine that these plan-specific services would become ineligible for section 132(m) because they are actually MORE informed.

[mbozek]

I would be interested in any citations you hve to your statements on fid liability- by the way who would be liable for advice? The legislative history of IRC 132(m) indicates that investment advice could encompass all retirement plans not just employer sponsored plans. But there is no reference to including non retirement assets in permissible retirement plan advice.

[Guest Remysis]

Long post, somewhat OT, responding to MBozek. . .

On the fiduciary point, I think DOL Interpretive Bulletin 96-1, distinguishing participant-level investment advice vs. education, is pretty instructive. The IB describes generalized, but increasingly participant-specific, categories of information that constitute investment education but fall short of being advice. Both categories of model-driven allocation recommendations (models and interactive materials) contemplate, among other things, that the model take into account -- or advise the participant to take into account -- other non-plan assets. These include not just retirement plan assets and income, but also include others, "(e.g., equity in a home, . . ., savings accounts . . .)".

With the DOL seeming to view this as a central component of a recommendation falling short of advice, it doesn't seem a stretch to think the DOL might think it essential in recommendations that rise to the level of ERISA investment advice (subject to a fiduciary standard). As the IB notes, after all, ERISA investment advice is to be individualized "based on the particular needs of the participant." Say, for example, the participant had a significant portfolio outside of the plan invested solely in US government bonds and participant expects to draw on these in retirement. Wouldn't you think the participant's particular needs are addressed more prudently if his plan account were skewed to the more aggressive, all other things being equal?

Is not to consider non-plan assets necessarily a breach of duty? I would say it depends upon the circumstances and materiality. Also, the advisor might be able to be relieved from considering other assets simply by a disclaimer to that effect. This is because another element of investment advice is a mutual understanding of its intent -- a disclaimer might be sufficient, basically, to limit the scope of the advisor's engagement. Otherwise, I would say liability, if any, would be the advisor's. (An enterprising attorney might, however, try to make a case choosing an advisor for participants who didn't take other assets into account was a breach.)

On the specific sec. 132(m) point, again, I understand the provider is advising on how to invest solely within the plan, though taking into account other assets, including non-retirement accounts. The EGTRRA Bluebook does state that qualified advice includes information about "how the employer's plan fits into the individual's overall retirement income plan." To me, the most straightforward way to read this is assume it speaks of all income being received in retirement, from whatever source (including, e.g., Soc. Security), rather than just income received from retirement plans. That seems like an unnecessary distinction, particularly in light of the description of the DOL IB.