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White Paper Founds No ERISA Fiduciary Conflict Regarding Affiliated Funds

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It is not a fiduciary conflict of interest nor a prohibited transaction under the Employee Retirement Income Security Act (ERISA) to make a retirement plan provider’s affiliated funds part of an investment strategy, according to a new whitepaper.

The Prudence Standard : Affiliated Products and Services, a paper commissioned by Great-West Retirement Services and authored by Fred Reisch, Bruce Ashton and Summer Conley of Drinker Biddle & Reath LLP, found that rejecting funds from consideration solely on the basis that a fund is an affiliate of the record-keeper could potentially be a breach of one’s fiduciary responsibility.

When fees received by the record-keeper and affiliated fund are reasonable compensation and the fiduciaries selecting the affiliated funds do not receive additional compensation or benefit from selecting the fund, “there is no prohibited transaction under ERISA,” the white paper concludes.

The paper adds that, in respect to a conflict the record-keeper may have regarding the relationship with the affiliated fund, “this conflict can be managed through disclosures to the plan fiduciaries and participants.”

Retirement plan providers usually offer record-keeping as well as other administrative services. In many instances the provider will also offer investment funds managed through an affiliate of the provider, these are known as affiliated funds.

If a plan that uses a provider’s record-keeping service also offers investment alternatives through an affiliate, the provider will receive compensation from two sources. This however, could be beneficial to participants in the plan if the combination of fees is substantial enough for the provider to offset record keeping fees, thereby allowing the plan to experience significant cost savings that could be passed on to plan participants.

Charlie Nelson, president in of Great-West Retirement Services said in a statement, “We have seen some plan sponsors who prohibit affiliated funds from a record keeper by rule or policy, and thus our paper points out the concerns with that approach from a fiduciary perspective.”


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