DoL Sets Out Fiduciary Adviser Selection/Monitoring Guidelines

February 2, 2007 (PLANSPONSOR.com) - While plan sponsors and other fiduciaries must exercise prudence in choosing a fiduciary investment adviser and periodically monitor the adviser's abilities and qualifications, they do not have to oversee the providing of specific advice.

That was a key holding in a regulatory guidance document released Friday by the U.S. Department of Labor (DoL) Employee Benefits Security Administration (EBSA) in response to questions from the retirement services industry about the Pension Protection Act's effects on the DoL's approach to the sensitive plan advice issue.

Declared EBSA in  Field Assistance Bulletin (FAB) 2007-01 : "[I]t is the view of the Department that a plan sponsor or other fiduciary that prudently selects and monitors an investment advice provider will not be liable for the advice furnished by such provider to the plan's participants and beneficiaries, whether or not that advice is provided pursuant to the (prohibited transaction) statutory exemption under (Employee Retirement Income Security Act) section 408(b)(14)."

The same expectation of fiduciary responsibility also holds true in situations where the advice provider was not required to get a prohibited transaction exemption, the agency said.

Friday's guidance document also included guidelines on how the required "prudent" selection and periodic monitoring should be carried out. During an advice provider search, the department said, "[A] fiduciary should engage in an objective process that is designed to elicit information necessary to assess the provider's qualifications, quality of services offered and reasonableness of fees charged for the service. The process also must avoid self dealing, conflicts of interest or other improper influence."

Regulators said the process should take into account:

• the experience and qualifications of the investment adviser, including the adviser's registration in accordance with applicable federal and/or state securities law;
• the willingness of the adviser to assume fiduciary status and responsibility under ERISA with respect to the advice provided to participants; and
• the extent to which advice to be furnished to participants and beneficiaries will be based upon generally accepted investment theories.

In articulating its expectations on how plan sponsors and other fiduciaries are to carry out the required monitoring of investment advisers, DoL said, "[W]e anticipate that fiduciaries will periodically review, among other things, the extent to which there have been any changes in the information that served as the basis for the initial selection of the investment adviser, including whether the adviser continues to meet applicable federal and state securities law requirements, and whether the advice being furnished to participants and beneficiaries was based upon generally accepted investment theories."

Regulators said fiduciaries should take into account whether the investment advice provider is complying with the contractual provisions of the engagement; utilization of the investment advice services by the participants in relation to the cost of the services to the plan; and participant comments and complaints about the quality of the furnished advice. "With regard to comments and complaints, we note that to the extent that a complaint or complaints raise questions concerning the quality of advice being provided to participants, a fiduciary may have to review the specific advice at issue with the investment adviser," the agency said.

In addition, the DoL said it expected that advice providers "will maintain, and be able to demonstrate compliance with, policies and procedures designed to ensure that fees and compensation paid to fiduciary advisers, at both the entity and individual level, do not vary on the basis of any investment option selected. Moreover, it is anticipated that compliance with such policies and procedures will be reviewed as part of the annual audit required by section 408(g)(5)(A) and addressed in the report referred to in section 408(g)(5)(B)."