Fiduciary Responsibilities in Selecting Investment Advisors (Part II)

By Fred Reish and Bruce Ashton

In our last column, we pointed out that, while plans are not required to offer investment advisory services to 401(k) participants, those services may be offered to help the participants invest for their retirement. However, the decision to offer investment advice is a fiduciary act, as is the selection and retention of a specific investment advisor. Thus, even though an investment provider (for example, an insurance company or a mutual fund family) may offer access to one or more investment advisory firms as a part of its investment package, the decision to use the investment advisor must be made by the responsible plan fiduciaries—that is, by the corporate officers who serve on the plan committee and who oversee the operation of the plan. And, in making that decision, they are responsible under ERISA to act “prudently.” That raises the obvious question: What must the officers do to be prudent?

In analyzing the duties of ERISA fiduciaries, courts have found that ERISA requires that the fiduciaries make a reasonable investigation before reaching a decision. However, ERISA also allows the plan fiduciaries to take into account the investigation done by the investment provider—assuming the plan fiduciaries have obtained information about that investigation and have reviewed it. The plan fiduciaries cannot blindly rely on that information, but must make their own independent determination. The failure to do so is a fiduciary breach and may result in liability for the plan sponsor and the officers who made the decision.

Once the initial selection is made, the plan fiduciaries have an ongoing duty to regularly monitor the performance of the investment advisor. To fulfill that duty, they must obtain and review information about the advisor’s methodology and performance. As a result, when initially selecting the investment advisor, it is critical to determine whether the advisor will periodically provide the plan fiduciaries with the information needed to monitor its performance. Our experience is that at least one of the well-known advisory services is unwilling to provide adequate information for plan fiduciaries to review the advisor’s performance.

The selection of a capable investment advisor can provide a valuable service to participants by assisting them in selecting the investment options most appropriate for their goals—taking into account personal factors like retirement needs and risk tolerance. Further, if the investment advisor is prudently selected and monitored, the plan sponsor is relieved from liability for the specific investment recommendations made to the participants by the investment advisor.

Properly done, there is little legal risk to the plan sponsor for arranging for outside investment advice for the 401(k) participants. However, the law requires that the investment advisor be selected and retained according to ERISA’s standards, including the duty to investigate. So, in selecting investment advisors, plan sponsors must prudently investigate and understand the services being offered and their suitability for their plan participants.