Magazine article The CPA Journal

Participant-Level Money Management Account Option

Magazine article The CPA Journal

Participant-Level Money Management Account Option

Article excerpt

Defined contribution and 401(k) plan participants have long requested guidance, planning, and investment advice for their participant-directed retirement plan accounts. Although some 401(k) service providers offer assetallocation guidance and education, many plan participants desire money-management investment advice and monitoring services for their retirement plan accounts.

A service provider offering independent portfolio management at the participant level, including discretionary money management and advice, must be an investment advisor registered under the Investment Advisors Act of 1940. Registered investment advisors become cofiduciaries under the Employee Retirement Income security Act (ERISA) and are the only service providers that may afford ERISA fiduciaries exculpatory relief for the selection and maintenance of plan asset investments. That is, ERISA fiduciaries and plan sponsors who retain registered investment advisors are no longer responsible for the selection and continued retention of plan asset investment choices, but rather are responsible for monitoring the delegation to the investment advisor. ERISA fiduciaries generally monitor the delegation for investment management responsibilities at least once a year by executing an investment policy statement prepared and effectuated by their investment advisors.


Although many defined contribution and 401(k) plans enable participants to direct the investment of their accounts, many participants have doubts that they are sufficiently trained to assume this investment responsibility. Although the U.S. Department of Labor (DOL) has recognized this concern and issued guidelines encouraging employers and service providers to offer investment education, participants have expressed a preference for investment advice rather than education (DOL Interpretative Bulletin 96-1).

Although ERISA section 404(c) provides relief to ERISA fiduciaries for the liability associated with carrying out participant investment directions, section 404(c) relief does not extend to the selection and continued retention of a plan's investment options. Further, section 404(c) relief does not extend to the account of a participant who does not affirmatively elect to direct the investment of the account.

ERISA fiduciaries also have a duty to act prudently in connection with the investment of plan assets. ERISA fiduciaries may lack investment expertise themselves, however, and thus have a duty to seek expert advice in connection with the investment of plan assets.

An investment advisor appointed under a 401(k) plan assumes a fiduciary role with respect to that plan and the investment of its plan assets over which the investment advisor exercises investment discretion. According to ERISA section 405(d), federal pension law provides that when the investment advisor is appointed, no ERISA fiduciary shall be liable for the acts or omissions of the investment manager. An investment advisor who has discretionary power over the participant's account would relieve ERISA fiduciaries of the responsibility for making plan asset investment decisions for that plan participant. An investment advisor can legally provide advice and discretionary money-management services to plan sponsors and plan participants, provided the advisor meets a prohibited-transaction exemption conditioned upon not engaging in self-dealing.

Accordingly, registered investment advisors provide services intended to assist ERISA fiduciaries in reducing their fiduciary responsibilities by implementing a disciplined process and a prudent investment policy. This policy would address the investment needs of participants and relieve fiduciaries of the responsibility to select and maintain plan asset investment choices.

Money Management

Some 401(k) service providers offer registered investment advisory services to help plan participants manage their accounts based upon their risk tolerance and investment goals. …

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