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  • Writer's pictureNicholas Zaiko, CIMA

Part 3 - DOL Fiduciary Guidance on Managed Accounts in 401(k) Plans

Updated: Jan 3, 2023

Field Assistance Bulletin (FAB) 2007‐1

FAB 2007‐1 provides a detailed summary of the duties involved in selecting and monitoring a managed account provider for the plan. The FAB states that the fiduciary should engage in an objective process that is designed to obtain information necessary to assess the provider’s professional qualifications and registrations, the quality of services offered, and reasonableness of fees charged for the service. The fiduciary must also determine the extent to which advice to be furnished to participants and beneficiaries will be based upon generally accepted investment theories.

FAB 2007‐1 also describes the hiring fiduciary’s ongoing responsibilities, including monitoring changes in the information considered, the adviser’s compliance with its contractual obligations, and participant comments and complaints about the quality of the furnished advice. To the extent that participant complaints raise questions concerning the quality of the managed account advice, a fiduciary may have to review the specific advice at issue with the managed account provider.

The managed account provider should be an ERISA 3(38) fiduciary and investment manager:

  • Is a registered investment adviser under the Investment Advisers Act of 1940

  • Has discretionary authority or exclusive authority for the investment of the managed account

  • Accepts full fiduciary responsibility for the discretionary management of the account

  • Per ERISA and SEC, the account management should be based solely on the best interests of the plan participant

The DOL (EBSA) Final Rule on Investment Advice to Participants, effective 12/27/2011 enables managed account providers to offer their own advice and managed accounts through affiliates and groups with common ownership as long as certain conditions are met and monitored. They previously needed to be separate, independent firms, non‐affiliates that offered conflict‐free advice in order to avoid a potential "prohibited transaction".

The PPA of 2006 amended the ERISA of 1974 and IRS to create a statutory exemption from the "prohibited transaction" rules to provide fiduciary investment advice to participants. ERISA and the IRS previously prohibited fiduciary investment advisers from receiving compensation from the investment providers that they recommended to the plan participants due to the conflict of interest.

The DOL (EBSA) Final Rule on Investment Advice to Participants exempts investment advice from the ERISA "prohibited transaction" if the advice is based on:

  • Unbiased computer model used for asset allocation recommendations

  • Managed account adviser's compensation is not enhanced by the advice (favors proprietary or higher revenue share funds)

The guidance permits managed account advisers to receive compensation from investments they recommend if either:

  • The investment advice they provide is based on a computer model certified as unbiased and as applying generally accepted investment theories, or

  • The adviser is compensated on a "level‐fee" basis (i.e., fees do not vary based on investments selected by the participant).

There are specific conditions and safeguards outlined by the DOL guidance:

  • A plan fiduciary (independent of the investment adviser or its affiliates) must authorize the advice arrangement, adviser compensation, and participant charges through a formal contract.

  • The managed account adviser must meet specific recordkeeping requirements for investment advisers relying on the exemption.

  • Computer models must be certified in advance as unbiased and meeting the requirements by an independent expert.

  • The fiduciary has established qualifications and a selection process that considers multiple managed account providers.

  • Managed account advisers are not permitted to receive compensation from any party (including affiliates) that vary on the basis of the investments participants select. Affiliated advice providers have a level‐fee requirement.

  • The fiduciary should establish an annual audit of both computer model and level‐fee advice arrangements. This includes the requirement that the auditor be independent from the managed account provider.

  • The managed account provider is required to make written disclosures to plan participants.

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