Not just a word game – “information” and “advice” have very different fiduciary and legal implications. Learn more about one of the most fundamentally important decisions facing you.
Do you think, “I’m all set?” In speaking with plan sponsors, we encounter a lot of confusion on this point. Many plan sponsors fail to understand the difference between receiving information and receiving advice. This distinction has important fiduciary implications.
An important point on fiduciary status: Remember, if you are a plan-level decision maker, you are a fiduciary. Fiduciaries are accountable to their plans’ participants, morally and legally. A service provider can avoid fiduciary status if they are simply providing information, and you are making all the decisions. An advice provider, on the other hand, shares fiduciary responsibility and liability with you.)
In broad terms, “information” is just that, data that you are left to interpret and base decisions upon, on your own. Examples of information:
- If your provider is a mutual fund or insurance company, the quarterly or annual reports they present to you are probably information. Look on them for disclaimer language. Many clearly disclose that they are not providing advice.
- If you plan uses an agent or broker, they are probably sticking to the information side of the Department of Labor Interpretive Bulletin 96-1 guidelines. Most insurance companies and brokerage firms will not allow their sales people to offer advice as that brings fiduciary status and shared liability.
- Investment review materials without specific recommendations are probably information. Some of these reports may look like advice, but are not. They may even contain Watch List information, but that, most likely, is just a reporting function that refers back to an Investment Policy Statement that your plan may have adopted at some point in the past.
Thoughts about “information”:
- Information is valuable. Thoughtful decisions cannot be made without good information.
- Non-fiduciary service providers are not obligated to provide you with “all the facts”. The information they elect to provide must be accurate, but not necessarily complete. Examples of accurate, but incomplete information:
- Included: “Our 2025 Retirement Fund returned 6.50% last year.” Excluded: “The category average return was 7.5%, and our fund ranked in the 70th percentile.”
- Included: “Average fund expense of plan’s investment menu is 1.45%.” Excluded: “Average fund expense of comparable size plan is 0.99%”
- Included: “XYZ International Growth Fund is the best performing of the five international funds available to your plan.” Excluded: “Many better options exist, but are not available on our platform.”
- Fiduciaries are potentially liable if they act upon incomplete information. A plaintiff’s attorney can have a field day if your defense is that you relied upon the completeness and objectivity of your non-fiduciary service provider’s information.
Thoughts about “advice”:
- There is good advice and bad advice. Bad advice can be costly and dangerous. Good advice can be tremendously beneficial to plan fiduciaries and plan participants.
- The definition of advice, within the context of retirement plans, is currently being tweaked by the Department of Labor. An Internet search will provide you with the latest details.
- In a general sense, if someone is making investment recommendations to a plan’s decision makers, they are giving advice.
- Anyone giving investment advice to a plan and getting paid for it is acting as a fiduciary.
- Fiduciaries must act in the best interests of the plan and its participants, without conflict.
- If you are receiving investment advice, you should understand how the advice is being paid for. If your advisor is receiving 12b-1 fees, you need to know whether each investment on your plan’s menu is paying at the same rate. Why? It is a potential conflict of interest if the party recommending investments can earn more by favoring certain of the menu’s options, or by avoiding ones the pay them less. Such an arrangement may be considered a “prohibited transaction” by the regulators and thus be a fiduciary breach.
- You should review the written agreements you have with your service providers. If there are no written agreements with regard to investment advice, the odds are that you are not receiving investment advice.
After reading the above, you should have a good idea of whether your service providers are rendering investment advice and sharing your fiduciary responsibilities. If there is any doubt in your mind, come right out and ask:
- Are you providing investment advice to the plan, the Investment Committee and/or the plan participants?
- Do you acknowledge fiduciary status?
- If so, request and review copies of the agreements covering the advisory services.
- How are you compensated? Provide written details.
If you are receiving advice, the information in the second installment of this article will help you to benchmark them. If you are not, you may want to consider the costs and potential benefits of working with an independent plan adviser. Those topics are also covered in Part 2.
Let’s try to sum this up: Fiduciaries are held to a prudent expert standard under ERISA, and are accountable to participants for their actions. Yet, many are relying upon their plan vendor “to do the right thing” on their behalf. But generally they intentionally avoid fiduciary status.
An independent plan adviser can help you to bridge the gap this situation creates. They can serve as a co-fiduciary and help you to manage your plan to the prudent expert standard by which you will be judged if your plan is ever subject to examination or litigation. The right independent plan adviser can help manage plan costs, improve the plan’s investment menu, help employees achieve better asset allocations, improve the participation and savings rates of your employees, reduce your risk exposure, and improve overall satisfaction with your plan.
To be continued in Part 2, next month.
Jim Phillips, President, and Patrick McGinn CFA, Vice President, Retirement Resources
Patrick and Jim have over 50 years of combined investment and retirement plans experience. Retirement Resources in a Registered Investment Advisor that helps employees retire with greater security, while helping employers manage workload, costs and fiduciary liability.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.