Education or Advice

[PLAN MAN]

An investment advisor created nine asset allocation models based on age and risk using the existing funds in the plan. The advisor worked with the Record Keeper to put the models on the enrollment form as an investment choice by participants. You just check one box and your investment allocation is divided among the funds based on the model.

Is this still just education? Has the advisor crossed the line over to advice? Are they making a recommendation of which funds and what percentages to invest in? Does anyone have a similar situation? Should the advisor accept fiduciary responsibility for the investment choices made based on the models? Thanks.

[Peter Gulia]

What (if anything) did the adviser say about what its service is? If the adviser says that setting the asset-allocation pre-fills is merely "education" and not advice, did it produce any lawyer's opinion letter to support that view? If so, what warnings are in the opinion letter?

[QDROphile]

It is neither eduction of participants nor advice to participants. The particpants have investment choices and no one is telling them anything more, or at least not that you have revealed. However, the choice of investment options and portfolio structuring makes the adviser a fiduciary -- which is at the heart of what is going on here. The adviser is either ignorant or a bit of a scoundrel if the adviser is claiming no fiduciary role. So get the "F" word on the table and have the adviser declare rather than pussyfoot around the issue with indirect labels. However, the fiduciary duty stops at the choice of reasonable investment options unless more is going on, assuming compliance with 404©. The description of the funds could open a new can of worms.

[PLAN MAN]

Thanks for the comments. The adviser does not choose which investment options to include in the plan. After that choice is made by the plan committee, the adviser creates the asset allocation models.

The adviser states that the model portfolios are illustrations only and are not intended as investment advice or recommendations for any individual. The models have been developed as general examples for investors with various age and risk profiles. On the enrollment form the participant signs a declaration that their investment choices are their own, and they were not recommended by the adviser or any other organization affiliated with the adviser.

I understand using asset allocation models as education tools and being able to use the actual investment options of the plan instead of asset classes or categories. What I'm concerned about is the participant making an investment election for a particular model by checking a box. I'm much more comfortable if the participant fills out the investment options and percentages and uses the model as a guide, but the participant is still making the investment elections.

QDROphile, are you saying that placing the asset allocation model on the enrollment form as an investment option makes the adviser who created the model a fiduciary for that investment option? What responsibilities would they have?

[QDROphile]

If one can choose a "model" allocation by checking a box, it is an investment option and the adviser has constructed it, unless the investment form was done without the adviser knowledge or consent. The adviser has the responsibility of a fiduciary who has chosen an investment option for the menu, the same as if the plan administrator has chosen some "lifestyle" fund for the menu. Depending on the adviser's engagement, the adviser may or may not have the same duty to monitor as the plan administrator has for the chosen lifestlye fund. Anthing else that is disclosed on the for or otherwise might cause the adviser to have more fiduciary responsibility. It does not sound like the disclosure is adhering to the guidance about education. Among other things, the guidance does not anticipate that education will focus on the particular investment options of the plan.

[Peter Gulia]

Even if one wants to use the Labor department’s Interpretive Bulletin to argue that displaying illustrative asset-allocation models isn’t advice, it seems unclear whether the enrollment form described above meets the Bulletin’s conditions.

Among those conditions, “all material facts and assumptions on which such models are based ([for example], retirement ages, life expectancies, income levels, financial resources, replacement[-]income ratios, inflation rates, and rates of return) [must] ACCOMPANY the models[.]”

Further, one might consider that the Interpretive Bulletin wasn’t the subject of a rule-making that followed the Administrative Procedure Act, and so a court need not defer it. A court might not be persuaded by the Labor department’s reasoning that displaying an asset-allocation model isn’t a recommendation because the information and materials described in the Bulletin (without more) would “enable” a participant to evaluate the suggestion or information.