Did you know that your clients could be held liable for their employees' missed investment opportunities? Through a number of recent class-action lawsuits over the mismanagement of pension plans, corporate fiduciary responsibility has been brought to center stage.The fallout from these cases has put employers across the nation at risk by exposing their fiduciary responsibility.

Under the Employee Retirement Income Security Act, a fiduciary can be held personally responsible for a shortage in the benefit plan's assets, or even an "opportunity lost" resulting from a breach of fiduciary duty, such as offering imprudent investment choices.

ERISA's "Prudent Man" Rule stipulates that a fiduciary must act with skill, care, prudence and diligence. However, given the complexities in the current investment market, not many plan sponsors possess the skills to make "prudent" recommendations. As a result, many plan sponsors seek advice from an outside source. In today's environment, it is vitally important that the "outside source" offer what regulators deem prudent, unbiased advice.

There are two types of outside sources that plan sponsors typically seek advice from: brokers and investment advisors. A recent article in The Wall Street Journal titled "Congress Is Split on 401(k) Advisors" indicated that even Congress cannot agree on who should offer plan sponsors and participants the most prudent advice.

By passing the Pension Protection Act, which permits fund companies to give investment advice to plan sponsors and participants, the House of Representatives is, in essence, endorsing advice that is subject to financial conflict. Conversely, the Senate opposed this act and continues the ban on direct advice from fund firms, while encouraging companies to hire neutral, third-party advisors to make investment recommendations to employees with regards to their retirement plans.

Congress' conflict over who exactly the appropriate party is to advise plan sponsors and participants emphasizes the importance of advising your client on who to rely on for unbiased investment advice.

Start by looking at the difference between brokers and investment advisors.


An investment advisor is an outside consultant who is paid a flat fee or a fee based upon a percentage of plan assets to offer advice on plan design and investments. The investment advisor is not compensated for transactions and is paid the same fee no matter which investments she recommends.

A broker, on the other hand, is paid a commission based on investments sold. Sometimes the broker's commissions vary by investment. A broker may recommend investments that pay more commissions, which have higher expenses and may not be in the best interest of the plan participants.

Fund selection

An investment advisor approaches fund analysis with an unbiased perspective. Since his compensation is not tied to products sold or to transaction volume, the advisor uses a list of criteria to analyze and recommend funds based on the needs of the participants.

A broker is compensated through commissions paid on product sales; therefore, a potential conflict of interest exists in the broker's fund selection.

Fee disclosure

An investment advisor is typically paid to evaluate and disclose all plan fees and expenses. Licensed investment advisor representatives are not able to receive fees or commissions without disclosing them.

Brokers are not required to disclose commissions in the same degree of detail as an investment advisor, which can significantly reduce the return on investment.

Revenue sharing

A prudent investment advisor will disclose any revenue-sharing agreements that may exist between the fund companies and the investment provider. Revenue sharing must be used to offset plan costs within certain types of platforms.

A broker often does not disclose revenue sharing, and uses it to pay extra commissions to himself or the provider.

Services provided

An investment advisor typically offers clients an independent report on at least an annual basis comparing funds to their peer group. Investment advisors will also offer plan participants investment education and advice on appropriate asset allocation.

Brokers typically offer clients pre-packaged annual reviews comparing funds to a benchmark. The investment provider representatives typically handle the investment education for the plan participants, not the broker.


Investment advisors work on behalf of plan participants. They offer due care, due diligence and client advocacy, and must place their client's needs ahead of their own concerns. An investment advisor is a plan sponsor's "Prudent Man."

A broker is not typically held to fiduciary standards.

Prudent action is the key to reducing fiduciary liability. ERISA mandates that plan sponsors "must avoid conflicts of interest" and adhere to the "Prudent Man" Rule. That is why it is so important to choose a third-party, unbiased investment advisor who truly is an advocate for the plan sponsor and the participants.

How can you find an "unbiased" investment advisor? Here is a checklist to help select a truly impartial third party.

Do they:

* Have an investment advisor representative license?

* Charge a pre-negotiated flat fee or a fee based on assets of the plan for services provided?

* Disclose the fee arrangement and services provided?

* Work with multiple investment providers?

* Have stated criteria for selecting and monitoring funds?

* Provide the client with a fiduciary checklist to help reduce fiduciary liability?

* Provide a document that names them as co-fiduciary?

* Offer at least an annual performance review, including a comparison of funds to a peer group?

* Offer funds that have revenue sharing? If so, is the revenue sharing being channeled back to the plan trust to offset plan costs?

If the investment advisor meets the above criteria, it is also a good idea to ask for, and check out, client references.

Once you have identified a handful of unbiased investment advisors, encourage your clients to meet with them. Many investment advisors will prepare a comprehensive review of an existing plan, which should identify whether or not the plan offers appropriate investments and may also disclose hidden fees. This review might not only result in some beneficial recommendations for investment changes, but most important, it might reduce your client's fiduciary liability.

J. Daniel Vogelzang is the president of Torrance, Calif.-based M Advisory Group, and an insurance consultant. Reach him at dvogelzang@madvisory.com. Kathy Branconier is managing director of retirement plans at M Advisory. Reach her at kbranconier@madvisory.com.

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