IA Insight is a blog for investment advisers and those who advise investment advisers, such as attorneys and compliance personnel. The goal is to provide practical and meaningful information to help investment advisers and their advisers develop and maintain acceptable “best practice” standards to better serve their clients and protect their advisory practices.
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The Prudent Investment Adviser Rules
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Thanks for the post on “Reverse BICE”. I recommend you ask all of those questions 10 years from now, after the plaintiff’s bar has compiled a post-fiduciary regulations track record.
You asked: ” Is it possible that financial advisers should also consider the possibility of a reverse BICE action against them as a result of advising a customer to stay in their 401(k) plan?” As you know, people can bring suit for good reason, bad reason or no reason whatsoever.
§ 2510.3–21 defines fiduciary to include those who provide Investment Advice with regard to assets in “a plan or IRA” … “If —
(1) Such person provides to a … plan participant … the following types of advice for a fee or other compensation, direct or indirect:
(i) A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property …”
The term “other investment property” would generally include “cash or cash equivalents” – which would seem to apply to any potential cash distribution of 401k assets. So, why wouldn’t a recommendation to remain in the 401k qualify as “… advisability of … holding … “?
You ask: “… (D)oes a financial adviser have a fiduciary duty to point out a poorly structured 401(k) plan and the resulting potential for losses due to funds with excessive fees and/or a history of poor performance?” Let me ask: “…(P)oorly structured … potential for losses … history of poor performance” as compared to what? I assume you don’t mean comparing it to better 401k’s offered by other employers where the individual doesn’t work, right?
As long as the comparison is accurate, why wouldn’t advisers always provide a comparison – regardless of what the BICE agreement provides and regardless of whether a court would require fiduciaries to provide a comparison? No one has to grade the current 401k – just show a side-by-side comparison to whatever is recommended. That is, if you are a fiduciary, a comparison of your recommendation against the alternatives (whether continuing the 401k is your recommendation or not), would always seem to be appropriate.
So, the comparison must be complete. For example, in my 401k which has the bulk of my lifetime savings, whether you recommended leaving the assets in that plan or you recommend moving the assets from that plan to another investment, I would hope that you would note specifics about my current situation. For example, you should probably point out that my 401k plan’s GIC currently pays a guaranteed 3.2% and that my plan’s S&P 500 index fund has no tracking error and only a 2 basis point investment management fee. I would also hope that you would compare my plan’s $3/month recordkeeping fee. You may want to confirm that so long as I leave even a modest amount of assets in my plan, I can rollover assets back to the plan at a future date. You may also want to note that my plan provides for in-plan Roth conversions, but doesn’t provide an income solution, and that it does provide 21st Century loan functionality. The other challenge of “compared to what” is that I might have other options not available to the next client – including my existing IRAs, my other 401(k) or the 403(b) offered by my current employer.
An investment decision to move money out of the 401k may also come with payout option and tax consequences … so dissatisfaction may arise for reasons other than the investment recommendations.
Bottom line, whether or not a comparison is provided, whether or not a change is recommended, litigation may follow.
These comments are provided for informational purposes only and nothing offered here should be taken as a legal or tax opinion or advice. Any opinions expressed are those of the author and do not necessarily represent those of any employer or trade association – past, present or future.