I want to relay a couple of stories I came across last week. In the interest of protecting the innocent, I won’t link to the source. I will say they’re both related to the Fiduciary Duty of Good Faith, and you can read about this here.

Specifically, they both demonstrate the misunderstanding of the definition of participant investment advice on both the part of the client and (surprise!) the professional.

As you are no doubt aware, until late 2011, when the DOL released is Participant Investment Advice Rule, plan fiduciaries were not permitted to provide individual investment advice to participants. With 2011’s Final Rule, the last promise of the Pension Protection Act of 2006 was fulfilled.

Of course, we had fits and starts those five years between 2006 and 2011. In early 2009, the outgoing Bush administration hastily put together some rules for participant advice. But these did not adequately address conflicts of interest and were quickly withdrawn by the incoming administration.

Is it any wonder, then, that we continue to see confusion regarding who is and who isn’t providing participant investment advice? Furthermore, because of the fine line compliance officers continue to require investment professionals to walk, should we be shocked to learn that both clients and their service providers don’t understand what qualifies as investment advice and what doesn’t?

In the first instance I’d like to highlight, we have a case where the 401(k) plan sponsor and several key participants have been under the assumption they have been receiving individual investment advice from their plan fiduciary for years. In truth, they’ve just been given the usual generic investment education nearly every 401(k) service provider offers to plan participants.

Why don’t they realize this? I don’t know. What I do know, though, is a deft professional can easily not cross the line into providing investment advice, yet make it seem he is providing such advice.

Of course, a fiduciary, acting in good faith, will never knowingly mislead a plan sponsor or a plan participant into thinking he was providing individual investment advice. The trouble arises when, despite the fiduciary doing and saying all the right things, the plan sponsor and the participants still think they’re getting investment advice.

Aside from continually reaffirming the fiduciary is not providing individual advice, what can the fiduciary do to prevent this common misconception?

At this point, the best solution is to follow the new 2011 Participant Advice Rule and begin offering the service – at a fair fee – to the plan participants. Without such an agreement, the fiduciary needs to take action to not confuse individual participants by meeting with them only in a group setting.

For smaller companies, this may prove challenging, but it could still be accomplished by insuring there is always at least one company fiduciary present at all times for participant education meetings. In the end, this conundrum might best be solved by strictly following the direction of service firm’s compliance officer.

But this addresses only one side of the equation, which brings us to our second incident. This one involves the financial professional. In particular, this situation is most likely to occur when a financial planner who deals mainly with individual clients accepts a “one-off” 401(k) plan relationship, usually one related to an existing client.

These dutiful professionals, often dual registered and operating virtually as sole proprietors without the benefit of a full-time in-house compliance officer, might find themselves pushing the envelope when it comes to staying within the letter of the law. 

Here’s how a problem can arise. Dual registrants, by definition, are affiliated with a broker-dealer. Their 401(k) clients will normally have to stay within the platform of that broker-dealer. The planner, who is now a fiduciary to the plan, can only offer participant advice under a revenue neutral condition. A planner might not see this as an issue because, no matter what he advises, he gets paid the same.

However, the revenue neutral stipulation also applies to all affiliates of the planner, and that includes his broker-dealer. This gets problematic. Most 401(k) plans contain both equity funds and stable value funds. Traditionally, equity funds will generate more revenue to the broker-dealer compared to stable value funds. 

Here’s the problem: Planners will generally recommend equity funds for long-term retirement accounts, including 401(k) participants. That recommendation will of course lead to greater revenues for the affiliated broker-dealer; hence, potentially violating the revenue neutral requirement.


The solution? In this particular case, since the planner was not receiving a fee for “providing” investment advice, the best answer is to not offer individual participant advice. Alternatively, the planner, a dual registrant after all, could seek to provide 401(k) plan fiduciaries investments through an independent platform, not through his broker-dealer.

The broker-dealer might not like it, but, since when is this about the broker-dealer?