Many broker-dealers, RIAs and recordkeepers have been struggling
with whether the participant disclosure rules apply to asset
allocation models (AAMs). The Department of Labor has now issued
guidance on this issue in Field Assistance Bulletin 2012-02.
In that guidance, the DOL addressed whether an AAM that is
presented to plan participants as an asset allocation strategy
among investment alternatives is a designated investment
alternative or "DIA." The significance of that question
is that detailed information about DIAs must be provided to
participants under the participant disclosure rules (404a-5),
including the DIA's expense ratios and performance history and
a website describing the DIA's principal strategies, risks and
portfolio turnover rates. Even though this obligation is imposed on
the ERISA plan administrator (typically, the plan sponsor or the
plan committee), in many instances the plan administrator will look
to its service providers for this information. To complicate
matters, most service providers (e.g., recordkeepers) do not have
systems that can capture and report the information about AAMs for
those disclosures – and will not be able to do so for
many months or perhaps even years – which could cause
plan fiduciaries to be out of compliance.
Unlike investment education models (under DOL Interpretive
Bulletin 96-1) that educate participants on ways of managing their
own accounts, an AAM is presented to plan participants as an
investment tool that allows them to allocate their accounts among
the plan's investment line-up by simply electing to use the
AAM's allocations. On occasion, AAMs may also include
investment alternatives not available for participant selection
under the plan. Most AAMs also have a rebalancing feature so that,
after market fluctuations cause the allocations to change, the
accounts are periodically restored to the original allocations. The
question addressed by the DOL is whether an AAM is considered an
investment subject to the disclosure rules governing DIAs, rather
than merely an allocation service.
The DOL guidance on AAMs is addressed in a question which uses,
as its example, a plan that offers 10 investment choices and three
risk-based model portfolios comprised of different combinations of
the plan's investment options. The DOL states that an AAM
"ordinarily" is not required to be treated as a DIA if it
is clearly presented to participants as a way of allocating among
the plan's investment options and a description of how it
functions and how it differs from the plan's investment options
is provided to participants. This is good news for advisors that
offer an AAM using only the core line-up. We refer to an AAM of
this type as a "qualifying asset allocation service"
because it is not viewed as an investment. It is important to note,
though, that several conditions must be satisfied for the asset
allocation service to "qualify," that is, to avoid DIA
But what about AAMs that allocate among investments that are not
otherwise available to participants? The DOL response is not as
clear as we would like; for example, at one point it says: "if
a plan offers only model portfolios made up of investments not
separately designated under the plan, each model would have to be
treated as a designated investment alternative." While this
statement could be read to mean that, if the AAMs have some
investments from the core line-up and some "outside"
investments, the AAMs are not DIAs, we believe there is risk in
that interpretation. For example, the first sentence in the answer
says: "A model portfolio ordinarily is not required to be
treated as a designated investment alternative under the regulation
if it is clearly presented to the participants and beneficiaries as
merely a means of allocating account assets among specific
designated investment alternatives." Because of that
statement, we believe the safest interpretation of the DOL's
intent is to require DIA status if any outside investments are used
in the AAMs.
In conclusion, service providers, such as broker-dealers, RIAs,
and recordkeepers who offer AAMs should restructure them as
qualifying asset allocation services in order to avoid DIA status.
For those advisers who want to use outside investments in
participant accounts, one option is to offer such services as a
3(38) investment manager. If structured properly, the asset
allocations of a 3(38) investment manager will avoid DIA status.
The restructuring process should include reviewing all written and
website material descriptions of the managed account services to
make sure they are consistent with the DOL guidance.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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