Model Portfolio Guidance Should Not Be Ignored

August 16, 2012 ( - All the controversy regarding the Department of Labor’s (DOL’s) guidance about fee disclosures for brokerage windows may have overshadowed its guidance for model portfolios. 

By Corie Russell | August 17, 2012
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In July, the DOL’s Employee Benefits Security Administration (EBSA) issued Field Assistance Bulletin (FAB) No. 2012-02R (see “DOL Issues Clarification to Participant Fee Disclosure Guidance”), which superseded Field Assistance Bulletin No. 2012-02 and eased some concerns about the DOL’s guidance for brokerage windows (see “DOL’s Answer in Fee Disclosure Guidance ‘Surprising’”). Question 28 about model portfolios, however, may have been overlooked by the adviser community, said Fred Reish, chairman of the financial services ERISA team at Drinker Biddle & Reath LLP, during “Inside the Beltway,” a broadcast series hosted by the firm.

“I just think people are missing a significant issue here, and it could blow up somewhere down the road,” Reish said, adding that question 28 of the FAB calls for additional information to be sent to participants explaining model portfolios.

Question 28 in FAB No. 2012-02R asks: "If a plan offers 10 designated investment alternatives (DIAs) and also offers three model portfolios (labeled conservative, moderate and growth) made up of different combinations of the plan’s DIAs, is each model portfolio a DIA under the participant fee disclosure regulation?"  The DOL responded by saying that a model portfolio ordinarily is not required to be treated as a DIA under the regulation if it is clearly presented to the participants and beneficiaries as merely a means of allocating account assets among specific designated investment alternatives.

On the other hand, the DOL said that if in choosing a model portfolio, the participant “acquires an equity security, unit participation, or similar interest in an entity that, itself, invests in some combination of the plan's designated investment alternatives, such model portfolio ordinarily would be a DIA.”  The guidance also advised that a model portfolio “made up of investments not separately designated under the plan … would have to be treated as a DIA.”