Retirement Plan Asset
Management – A
Comprehensive Look
1 Hr. CE
Brought to you by the
Nationwide® Advanced Consulting Group
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Some Things You Need To Know
• This presentation is for educational purposes only and is not
intended to be a solicitation or sale of a specific product or
service. The presentation is designed to provide accurate
and authoritative information in regard to the subject matter
covered. The general information in this presentation is not
intended to be nor should it be treated as tax, legal,
accounting or other professional advice.
• Nationwide Investment Services Corporation, member
FINRA. In Michigan only -Nationwide Investment Svcs.
Corporation
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AGENDA
• ERISA overview of investment activities – nonfiduciary vs.
fiduciary
• ERISA background – retirement plan investments
• Sales of investment products to the retirement plan
• Investment education services to plan participants
• Investment advice to the trustee and/or participants
• Investment management services for the trustee
• Compare and contrast advisory vs. management activities
• Practice management tips for the retirement plan advisor
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ERISA Overview of Investment Activities
• Nonfiduciary
• Sales of investment products to the retirement plan
• Investment education services to plan participants
• Fiduciary
• Investment advice to the plan’s trustee, named fiduciary, and/or
participants – ERISA section 3(21)(A)(ii)
• Investment management – ERISA section 3(38)
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ERISA Section 404(a) Affirmative Fiduciary
Duties
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Exclusive purpose rule
“Prudent Man” standard of care
Diversification of investments
Must follow the plan documents
Upshot – if one is deemed to be a fiduciary by virtue of his
or her position or actions, then these affirmative duties
apply
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Investment-Related ERISA Section 406(a)(1)
Party in Interest Prohibited Transactions
• ERISA section 3(14) defines “party in interest” and
includes (among others) both a fiduciary and a person
providing services to the plan
• Retirement plan advisors are parties in interest
• ERISA section 406(a)(1) prohibits the following [relevant]
transactions between a plan and a party in interest • (A) Sale or exchange, or leasing, of property
• (B) Lending of money or other extension of credit
• (D) Transfer to or use by or for the benefit of, a party in interest of
any assets of the plan
• Effectively, this makes the sale of insurance, annuity, and
investment products to the plan’s trustee a prohibited
transaction, absent an exemption
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ERISA Background – Section 406(b)
Fiduciary Prohibited Transactions
• ERISA section 406(b): A fiduciary with respect to a plan
shall not—
(1) deal with the assets of the plan in his own interest or for his own
account
(2) in his individual or in any other capacity act in any transaction
involving the plan on behalf of a party (or represent a party) whose
interests are adverse to the interests of the plan or the interests of
its participants or beneficiaries, or
(3) receive any consideration for his own personal account from any
party dealing with such plan in connection with a transaction
involving the assets of the plan
• NOTE – there are no statutory exemptions for these
fiduciary prohibited transactions
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Investment-Related Statutory Exemptions to
Party in Interest Prohibited Transactions
• ERISA section 408(b) contains a statutory exemption for
the following investment-related prohibited transactions
described in ERISA section 406(a)(1) • (2) services necessary for establishment or operation of the plan,
provided that no more than reasonable compensation is paid (and
includes investment advice delivered to the plan’s trustee or named
fiduciary)
• (14) provision of investment advice to a participant or beneficiary,
provided the conditions of 408(g) [Eligible Investment Advice
Arrangement] are met
• (17) transactions described in 406(a)(1)(A), (B), and (D) between a
plan and a service provider (who is not a fiduciary), as long as plan
receives no less, nor pays no more than “adequate consideration”
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Selective Fiduciary Penalties for Prohibited
Transactions
ERISA section 409(a) - personal liability of a fiduciary
who breaches any of his or her fiduciary responsibilities,
obligations, or duties
• personally liable to make good to the plan any losses resulting
from such breach
• restore to the plan any profits of the fiduciary which have been
made through use of plan assets by the fiduciary
• other equitable or remedial relief as a court may deem appropriate
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Selective Fiduciary Penalties (cont’d)
• ERISA section 501 - criminal penalties for willful violation
of Title I of ERISA include a fine of up to $100,000 and/or
imprisonment of up to 10 years
• ERISA section 502(a)(3) - civil suit by participants and
beneficiaries to enjoin proscribed conduct and for
equitable relief
• ERISA section 502(a)(5) - civil suit by DOL to enjoin
proscribed conduct and for equitable relief
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Selective Fiduciary Penalties (cont’d)
• ERISA section 502(g) - a judge may award attorney's
fees to the prevailing party in any litigation proceeding
• IRC section 4975 – potential excise tax equal to 15% of
the prohibited transaction amount, increasing to 100% if
not corrected within the “taxable period”
• ERISA section 502(l) - DOL may assess a civil penalty
against a fiduciary for any breach of fiduciary
responsibility equal to 20% of the "applicable recovery
amount"
• this 20% penalty is in addition to whatever DOL recovers
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Sale of Insurance and Investment Products
to a Retirement Plan
• Considered to be a prohibited transaction in the absence
of an exemption
• Nonfiduciary activity if the FINRA registered
representative and/or an insurance-licensed producer is
not otherwise a fiduciary
• See prohibited transaction exemption (“PTE”) 84-24 for a
list of disclosure requirements in connection with sale of
insurance, annuity, and mutual fund products
• DOL Regs. Sec. 2550.408b-2(c) applies: disclosure
requirements for determining a “reasonable contract or
service”
• ERISA section 408(b)(17) “adequate compensation” rule
applies; statutory prohibited transaction exemption
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Investment Education Services to
Participants
• Nonfiduciary activity according to Interpretive Bulletin 96-1
[29 CFR sec. 2509.96-1] on Participant Investment
Education
• Furnishing the following categories of investment-related
information/materials constitutes investment education
•
•
•
•
plan information
general financial and investment information
asset allocation models
interactive investment materials
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Investment Advice Fiduciary
• ERISA sec. 3(21)(A): a person is a fiduciary to the extent
that he/she ...
• (ii) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of
such plan, or has any authority or responsibility to do so ...
• DOL Regs. sec. 29 CFR 2510.3-21(c) – current rule
• Five-part test for fiduciary advisor status: (1) advisor makes
recommendations on investing in, purchasing or selling securities
or other property, or give advice as to their value; (2) on a regular
basis; (3) pursuant to a mutual understanding that the advice; (4)
will serve as a primary basis for investment decisions; and (5) will
be individualized to the particular needs of the plan
• An investment advisor is not treated as a fiduciary unless each of
the five elements of this test is satisfied for each instance of advice
• Proposed change to current regulations – elimination of
the five-part test; status update
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Implications of Status as an Investment
Advice Fiduciary
• Client Relationship
• Plan’s trustee or named fiduciary
• Plan participant(s)
• Perhaps both
• Compensation Arrangements – Trustee as the Client
• Advisor cannot set own compensation; must be approved by
independent fiduciary
• Compensation Arrangements – Participant as the Client
• Compensation may not vary based on a participant’s selection of a
particular investment; ERISA sections 408(b)(14) & 408(g)
• Adv. Op. 2005-10A; fees may reflect size of account
• Rollover Opportunities – Advisory Opinion 2005-23
• If advisor is a fiduciary to the plan or participants, then rollover
solicitation has fiduciary and compensation implications
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Investment Management Fiduciary
• ERISA section 3(21)(A): a person is a fiduciary to the
extent that he/she ...
• (i) exercises any discretionary authority or discretionary control
respecting management of such plan or exercises any authority or
control respecting management or disposition of its assets
• ERISA section 3(38): "investment manager" means any
fiduciary (other than a trustee or named fiduciary, as
defined in section 402(a)(2))—
• (A) who has the power to manage, acquire, or dispose of any asset
of a plan;
• (B) who is either a registered investment advisor under the
Investment Advisers Act of 1940 or is a bank or an insurance
company qualified to perform asset management services
• (C) has acknowledged in writing its fiduciary status to the plan
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Investment Advisor vs. Investment Manager
Services Provided
• Investment Advisor [3(21)(A)(ii)] Services
• investment advice concerning plan assets to the plan’s trustee,
named fiduciary, and/or plan participants
• Investment Manager [3(38)] Services
• investment selection for the plan
• sales and purchases of plan assets
• asset management
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Investment Advisor vs. Investment Manager
Qualifications Required
• Investment Advisor [3(21)(A)(ii)] Qualifications
• no specific requirements under ERISA
• FINRA and state law requirements apply
• can become an "accidental fiduciary" by advisor's actions
• Investment Manager [3(38)] Qualifications
• RIA under the Investment Advisers Act of 1940
• RIA under applicable state law
• bank or insurance company
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Investment Advisor vs. Investment Manager
Effect On Other Fiduciaries
• Fiduciary Advisor [3(21)(A)(ii)]
• serves as co-fiduciary with plan trustee(s) on investment decisions
• does not implement investment advice; other plan fiduciaries must
do so
• does not relieve other plan fiduciaries of liability for investment
decisions
• Investment Manager [3(38)]
• relieves other plan fiduciaries from liability for investment decisions
• other plan fiduciaries liable for selection and monitoring of manager
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Investment Advisor vs. Investment Manager
Effect On Plan Participants in a ParticipantDirected Plan
• Investment Advisor [3(21)(A)(ii)]
• can provide investment advice directly to participants
• participants who elect to work with an investment advisor are still
ultimately responsible for selecting and managing their investment
choices
• trustee, named fiduciary, and/or investment manager sets the core fund
lineup
• Investment Manager [3(38)]
• sets the core fund lineup in a participant-directed investment plan
• retains complete control over the selection and retention of plan assets
under an assignment of authority from the plan’s trustee or named
fiduciary
• can separately contract with participants for investment management
services
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Practice Management Tips for the
Retirement Plan Advisor
• Decide what role to play – fiduciary vs. nonfiduciary
• Consult with your broker-dealer to determine any
limitations on your practice activities
• Review fiduciary duties and prohibited transactions rules
• Comply with PTE 84-24 and ERISA sections 408(b)(17)
and 408(b)(2) on the sale of products to the plan
• Study Interpretive Bulletin 96-1 to determine what
activities are nonfiduciary education activities
• If providing investment advice, consider using levelized
compensation arrangements
• Consider using a 3(38) investment manager on the plan to
remain a nonfiduciary and free to do rollover business
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