DoL: Independent Fiduciary Must Make Fund Investment Decision
>That was the bottom line of the recently issued Advisory Opinion 2003-09A from the US Department of Labor’s Employee Benefits Security Administration (EBSA), according to a report by Washington-based legal publisher BNA.
The opinion is available at http://www.dol.gov/ebsa/regs/aos/ao2003-09a.html .
“It is the view of the Department that [ABN AMRO Trust Services Company’s] (AASTC) receipt of 12b-1 or subtransfer fees from mutual funds, including those proprietary funds the investment advisers of which are affiliates of AATSC, for services in connection with investment by employee benefit plans in the mutual funds . . . would not violate Section 406(b)(1) or 406(b)(3) of ERISA when the decision to invest in such funds is made by a fiduciary who is independent of AATSC and its affiliates, or by participants of such employee benefit plans,” the opinion said.
“Under Section 404(a)(1) of ERISA, the responsible plan fiduciaries must act prudently and solely in the interest of the plan participants and beneficiaries both in deciding whether to enter into, or continue, arrangements with AATSC and in determining the investment options in which to invest or make available to plan participants and beneficiaries in self-directed plans,” the advisory opinion said.
AATSC Corporate Arrangements
>According to the opinion, AATSC is a subsidiary of Alleghany Asset Management Company, which, in turn, is a subsidiary of ABN-AMRO North America Holding Company, a bank holding company. Alleghany is also the parent company of several institutional investment advisers, including some that have entered into investment advisory contracts with registered mutual funds. Those mutual funds with which such advisers have investment advisory contracts are proprietary funds while others are considered non-proprietary funds.
AATSC provides directed trustee and non-fiduciary services to participant-directed and other DC plans through bundled service arrangements for such services as recordkeeping, plan documentation, and educational materials and programs.
In connection with the client plan-related business, AATSC has shareholder service arrangements with distributors of, or investment advisers to, mutual fund families as part of which AATSC offers fund investment options to client plans. Among the investment advisers with which AATSC enters into such arrangements are those advisers with investment advisory contracts with proprietary funds.
All bundled service arrangements between AATSC and a client plan are predicated on a client plan’s offering of one or more proprietary funds as an investment option. Disclosure of the proprietary funds will enable the fiduciaries of potential client plans to make an informed decision regarding whether to engage AATSC in a bundled service arrangement.
According to the opinion, potential client plan fiduciaries are free to accept, reject, or further negotiate a bundled service arrangement from AATSC. As a directed trustee, AATSC takes direction from client plans about selecting investment options. Either party can terminate a bundled service arrangement without cause.
>In the opinion, the EBSA also made several observations about fiduciary responsibility:
- as a directed trustee of client plans, AATSC will be a party in interest and a fiduciary
- no contract or arrangement is reasonable if it does not permit termination by the plan without penalty to the plan on reasonably short notice to prevent the plan from becoming locked into an arrangement that has become disadvantageous
- ERISA prohibits a plan fiduciary from receiving any consideration for its own personal account from any party dealing with the plan in connection with a transaction involving the assets of a plan.
The advisory opinion did note however, that if AATSC provides investment advice to a client plan, AATSC would violate Section 406(b)(1) of ERISA in causing the client plan to invest in a proprietary fund or any mutual fund that pays a fee to AATSC or its affiliates.