Investment Advice v Education

[rlb64]

DOL Advisory Opinion 2001-09A discusses computer generated asset allocation models as investment advice and the provision of such advice would constitute a PT if Sunamerica provided such computer models.

Does anyone know why the provision of computer generated asset allocation models constitutes advice and not education? As far as I could tell, participants didn't have to accept the results of the computer program.

[E as in ERISA]

Rule of thumb: If recommendations are specific to the individual and their facts, then they tend to be advice. If they are just general rules that may or may not to the specific facts, then they are not.

[rlb64]

Isn't it general practice to give risk profile questionnaires that show a result asset allocation and still fall within education?

[E as in ERISA]

I think that in SunAmerica, the asset allocation would be specific to the actual fund choices in the plan (ABC fund, DEF fund, etc.) as opposed to types of funds (High cap growth vs med cap value).

The more specific it is, the more likely to be advice.

[Jon Chambers]

Here's some relevant info from IB 96-1 on what is not advice--basic premise--with appropriate disclosure, and relying on "generally accepted investment theories", you can do a lot before "education" becomes "advice". Note that the IB permits the identification of specific investment options in the models, without making the models "advice", however, if you name funds, you need to include "a statement indicating that other investment alternatives having similar risk and return characteristics may be available under the plan and identifying where information on those investment alternatives may be obtained":

"Asset Allocation Models. Information and materials (e.g., pie charts, graphs, or case studies) that provide a participant or beneficiary with models, available to all plan participants and beneficiaries, of asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles, where: (i) Such models are based on generally accepted investments theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over define periods of time; (ii) all material facts and assumptions on which such models are based (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) accompany the models; (iii) to the extent that an asset allocation model identifies any specific investment alternative available under the plan, the model is accompanied by a statement indicating that other investment alternatives having similar risk and return characteristics may be available under the plan and identifying where information on those investment alternatives may be obtained; and (iv) the asset allocation models are accompanied by a statement indicating that, in applying particular asset allocation models to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and non-qualified plans) in addition to their interests in the plan.

Interactive Investment Materials. Questionnaires, worksheets, software, and similar materials which provide a participant or beneficiary the means to estimate future retirement income needs and assess the impact of different asset allocations on retirement income, where: (i) Such materials are based on generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over defined periods of time; (ii) there is an objective correlation between the asset allocations generated by the materials and the information and data supplied by the participant or beneficiary; (iii) all material facts and assumptions (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) which may affect a participant's or beneficiary's assessment of the different asset allocations accompany the materials or are specified by the participant or beneficiary; (iv) to the extent that an asset allocation generated by the materials identifies any specific investment alternative available under the plan, the asset allocation is accompanied by a statement indicating that other investment alternatives having similar risk and return characteristics may be available under the plan and identifying where information on those investment alternatives may be obtained; and (v) the materials either take into account or are accompanied by a statement indicating that, in applying particular asset allocations to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and non-qualified plans) in addition to their interests in the plan. "

[rlb64]

Jon, to me it seems Sunamerica could have produced computer generated asset allocations with the disclosure statement and brought it into education. Why wouldn't that work?

[Jon Chambers]

Many of these issues turn on the degree to which the education/advice is "individualized" for the participant. For example, for many years, Fidelity has been providing an "education" tool that gives specific investment recommendations, including recommendations for investing in Fidelity funds. While this looks on its face like a prohibited transaction, Fidelity notes that tool will only generate one of four possible portfolios. Thus, they conclude that the tool is not truly "individualized" for the participant, and is therefore not "advice".

Remember that it's not necessarily problematic to deliver advice. The real issue is the possibility for triggering a prohibited transaction if the result of the advice influences fees earned by the advisor elsewhere. Thus, the old TCW approach, where all funds charged the same expense ratio. TCW could deliver advice, without impacting its investment management revenue--whatever the advice, the fee would be the same. Similarly, the SunAmerica opinion relies on the fact that the "advice" is really coming from Ibbotson--developers of the underlying software model. Ibbotson is not a party-in-interest to the plan, so the advice doesn't trigger a prohibited transaction, even though the advice is delivered by SunAmerica representatives, who are parties-in-interest.

My guess is that SunAmerica wanted to customize results, and wanted their portfolio models to be "advice", not "education". But you are correct in noting that they could have obtained a very similar result if they had decided to stick with education.

[rlb64]

Ok, but hasn't the provision of advice removed 404c protection for the employer?

And, on what basis is Ibottson relieved of being labeled a fiduciary if they are the ones providing advice for a fee?

[E as in ERISA]

Some would argue that advice provides more protection than compliance with 404© (if there is such a thing)....If investment performance is good, then one's risk of a lawsuit is minimized.

[mbozek]

ERISA does not require that the investment advice produce good results, only that it is prudent. Years ago a noted investment advisor who specialized in contrarian investment strategy was sued by the fids of plans in which he acted as investment adivisor because the investments had under performed the overall stock market for a period of serveral years. The Courts dismissed the cases on the grounds that contrarian investing was a recognized investment strategy and therefore was prudent even though it produced below average results.

[rlb64]

Say a 64 year old employee planning on retiring in a year chooses not to accept his computer generated portfolio and instead chooses a high risk fund... I think the employer would prefer to have 404c protection against this stupidity.

If an employer wants computer generated portfolios, it seems it would be better to remove participant elections.

[Jon Chambers]

rlb, remember that 404© protection is transactional in nature. While you are probably right that when an employee selectis advice through an advisor that was selected by the plan sponsor, the sponsor no longer receives 404© protection, if the employee doesn't select the advice, the plan sponsor is still eligible for 404© protection, assuming the plan is otherwise compliant. And as mbozek and katherine note, assuming the advice is prudent, there is little potential liability, even if investment results are not good. This is why "advice" is so popular in many circles--if the advice generates a prudent result, liability is probably minimized. Exceptions might occur if the advice is conflicted, inordinately costly, or demonstrably imprudent.

[mbozek]

I thought that in a 404© plan where the fiduciary selects investment mgrs who can chosen by the employee there is no fid liability which results from the part. exercise of control (selecting the investment mgr) and the fid only has a duty to to determine the mgr's suitability to continue to advise part. under the plan. reg. 2550.404c-1f(8).