ERISA Fiduciary Responsibilities and Registered Investment Advisors

By Geller, Sheldon M. | The CPA Journal, January 2007 | Go to article overview

ERISA Fiduciary Responsibilities and Registered Investment Advisors


Geller, Sheldon M., The CPA Journal


Many plan sponsors are unaware of their responsibilities as Employee Retirement Income Security Act (ERISA) fiduciaries as they relate to the prudent selection and monitoring of plan asset investments. The continually volatile stock market, large corporate failures, and recent mutual fund scandals have caused plan sponsors to focus on fiduciary issues.

The growing recognition by corporate executives of their responsibilities and liabilities as plan sponsors has prompted them to seek help from experts on navigating the shifting regulatory landscape. Plan sponsors and ERISA fiduciaries understand the need for full disclosure of compensation paid to investment advisors, remuneration paid by third parties, and conflicts of interest in providing services for retirement plans.

ERISA's legislative history suggests a broad construction of the term "fiduciary" that would include any person who is an investment advisor to a plan, including registered investment advisors. Brokers or other registered representatives are not considered fiduciaries unless they provide advisory functions that are relied upon by plan sponsors. ERISA fiduciaries must discharge their duties for the exclusive benefit of plan participants. ERISA fiduciaries are held to a standard of prudent experts.

Registered Investment Advisors

Plan sponsors retaining registered investment advisors (RIA) may be relieved of certain fiduciary investment responsibilities that plan sponsors would retain when working with advisors that are not registered with the sec. Furthermore, plan sponsors working with RIAs as co-fiduciaries receive extensive disclosure and a description of any conflicts of interest.

The one area of responsibility that may be delegated by plan sponsors regarding plan asset investment is the retention of an RIA that acknowledges this status under ERISA in a written document. When an RIA is retained, plan sponsors may be relieved of their fiduciary responsibility with regard to asset allocations made by investment managers, including mutual fund managers, as long as the plan sponsors were prudent in their selection of the mutual fund manager, established prudent guidelines for the investment of plan assets, and monitor the manager on a regular basis to ensure compliance with the plan's investment policy statement.

Investment Advisor Disclosure

RIAs are required to file a registration statement, known as Form ADV, annually with the sec and must offer their clients a copy of their updated Form ADV each year.

The registration statement is the primary compliance document in the plan asset investment business, wherein an RIA discloses to clients its business organization, services, basic fee schedule, and, most important, potential conflicts of interest. Any inaccurate or incomplete registration statement would become the subject of a regulatory enforcement action and a source of regulatory examination deficiencies.

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