Investment Advice for Individual Participants ... from Plan Investment Advisor

[Lois Baker]

A few days ago, a question was asked on this board about issues that might be raised when the plan's investment advisor is approached by a participant for individual investment advice for the participant's personal (non-plan) portfolio.

Looks like this could become a hot issue for plan sponsors as advisors seek to "turn participants into lasting clients".  See this upcoming NAPA webcast:  Grow Beyond the Plan: How to Convert Participants into Lifelong Clients

What sorts of fiduciary issues does this raise for the plan sponsor -- and the investment advisor? What about contractual provisions that the plan sponsor should ensure are included in the advisor's service agreement?

 @Paul I@Peter Gulia

[Peter Gulia]

Whether it’s good or bad for an individual to seek advice from a bank, trust company, insurance company, or registered investment adviser (let’s neutrally call any of these a “firm”) that has served as an investment manager or investment adviser regarding an employment-based retirement plan in which the individual is or was a participant turns on the facts.

From an individual’s perspective, here’s only a few of many points that might matter:

• Is the employment-based plan a governmental plan, a church plan, a plan for which all participants are not an employee, or an ERISA-governed plan? (This might relate to how the plan selected the firm.)
• Whichever kind of plan, does the responsible plan fiduciary of the employment-based plan prudently or ineptly manage the plan’s relationship with the firm? Or does the individual not know?
• Were the firm’s communications to the individual within, or a breach of, the firm’s agreement with the employment-based plan?
• Might the individual perceive the firm having been engaged for the employment-based plan as some suggestion that the firm would be a capable provider of advice for an individual? If so, is the perception a sensible or unwise inference?
• Would the individual’s engagement of the firm breach the individual’s agreement with her employer or former employer?
• Would the firm’s acceptance of the individual as its client breach the firm’s agreement with the employment-based retirement plan?
• Are there circumstances in which giving candid advice to the individual could harm the employment-based plan?
• Are there circumstances in which giving candid advice to the employment-based plan could harm the individual?
• Does the firm have a compensation conflict about whether the individual should invest under the employment-based plan or an individual arrangement? Does the firm meet all conditions of the prohibited-transaction exemption? What evidence will the individual get?
• Beyond that conflict, has the firm delivered disclosures that enable the individual to evaluate all others of the firm’s conflicts? Does the individual need independent advice to understand potential consequences of the conflicts?
• Did the individual observe the firm’s work for the employment-based plan?
• Is or was the firm loyal or disloyal in its services for the employment-based plan? How does or would the individual know?
• Is or was the firm prudent or imprudent in its services?
• How else will the individual evaluate the firm’s capabilities and services?
• If the individual has a spouse, what are the spouse’s observations about the firm?

This is not advice to anyone.

[Lois Baker]

12 minutes ago, Peter Gulia said:

Were the firm’s communications to the individual within, or a breach of, the firm’s agreement with the employment-based plan?

Might the individual perceive the firm having been engaged for the employment-based plan as some suggestion that the firm would be a capable provider of advice for an individual? ...

Would the firm’s acceptance of the individual as its client breach the firm’s agreement with the employment-based retirement plan?

Are there circumstances in which giving candid advice to the individual could harm the employment-based plan?

Now flip that around:  what issues/concerns does that raise for the plan sponsor?  How can/should the plan sponsor be proactive in protecting itself?

[Peter Gulia]

A responsible plan fiduciary, before engaging an investment manager or investment adviser, might negotiate:

• whether the firm may or must not use information that is or was available to the firm because of its engagement with the plan;
• whether the firm may or must not solicit an individual who has or had some relation regarding the plan;
• how the firm must act when, unsolicited, a participant, beneficiary, alternate payee, or fiduciary approaches the firm;
• what warnings and disclosures the firm must give, in its service for the plan, and in communicating with an individual who might be a prospective client;
• restrictions against advice that could interfere with the plan’s purpose or interests;
• anything more the responsible plan fiduciary, with the plan’s lawyer’s advice, finds could help protect the plan;
• anything more the responsible plan fiduciary, with the fiduciary’s lawyer’s advice, finds could help protect the fiduciary personally (to the extent the fiduciary can do this without breaching its responsibility to the plan); and
• appropriate indemnities, backed by the firm’s strong financial position, to protect the plan.

Whatever the engagement and its terms, a responsible plan fiduciary might use prudent oversight to see that the firm obeys the terms, including expressed or implied promises that the firm follows applicable law and relevant law.

Also, a plan’s fiduciary might manage the plan’s communications and the firm’s communications to warn, conspicuously and clearly, a reader, viewer, or listener that no plan fiduciary and no employer evaluated the firm’s suitability for services beyond those the plan contracted, which do not include advising individuals (or don't include anything beyond information about how a participant exercises her rights and obligations under the plan).

Both sets of communications might refer to disclosures public law requires, and admonish an individual to read the firm’s and other advisers’ disclosures carefully before the individual decides anything about any adviser.

A plan’s sponsor might use time-bar, governing-law, exclusive-forum, and other dispute-resolution provisions.

This is not advice to anyone.