Advisor-managed Investments May Violate ERISA

In an effort to gain more revenue and control over a plan, some advisors have taken to creating their own investments and recommending themselves or charging more as a 3(38) fiduciary. But according to a letter by EBSA’s Phyllis Borzi (subscription required) obtained by The Wall Street Journal, that practice may violate fiduciary rules under ERISA, especially in light of pending regulations on the matter.

Rep. George Miller (D-Calif.) raised the issue earlier this year, urging the DOL to look into the issue of potential conflicts with investment consultants to pension plans who recommend themselves as money managers. Borzi wrote back, indicating that her agency is “committed to addressing the issues and conflicts of interest you describe.” 

Meanwhile, many high-profile plan advisors have created CITs that they manage and put into their clients’ plans. One advisor at a recent conference said he does not make any more from his investment than any other. But others are concerned that, even with no additional compensation, they are put in the awkward position of reviewing and potentially firing themselves if they underperform or do not fit within the plan’s IPS.

Record keepers routinely put proprietary investments into their lineups, incenting plan sponsors with cheaper fees and getting greater revenue from their own investments. But there’s one big difference from advisors: They are not considered fiduciaries — for now, that is.