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Think Your Portfolio Models Pass ERISA Muster? You May Be Wrong

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ERISA guru Fred Reish says he’s concerned that advisors have misinterpreted guidance the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) recently released in its updated field assistance bulletin regarding asset allocation models under rules 408(b)2 and 404a-5.

In reviewing EBSA’s recently revised Field Assistance Bulletin (FAB) 2012-02, Reish, partner and chairman of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, says that advisors have concluded that “asset allocation models (AAMs) can be offered to plans without the need to treat them as designated investment alternatives (DIAs) and, therefore, without the need to report the performance history, expense ratios, etc., of the AAMs.”

Unfortunately, Reish says, “that is an oversimplification and may inadvertently lead to problems under both the 408(b)(2) and 404a-5 regulations.”

Reish provided a list of what he called “safe” answers for providing asset allocation models that will not be treated as DIAs:

• The model portfolio must be clearly presented to participants and beneficiaries as merely a means of allocating account assets among the plan’s designated investment alternatives. In other words, it needs to be presented as an asset allocation service using the plan’s core investment lineup.

• The model portfolio cannot use investment alternatives that are not in the core lineup of DIAs.

• A unitized portfolio is not a qualifying asset allocation service; instead, it is a DIA.

• The plan must provide—initially and annually—participants (which includes all eligible employees and beneficiaries) with a written explanation of how the model portfolio works.

• The plan also must explain in writing how the model portfolio differs from the plan’s designated investment alternatives. The explanation must also be provided to participants initially and annually.

Reish goes on to say that it appears that “the failure to satisfy any of the DOL’s requirements will cause the model portfolio to be treated as a DIA and, therefore, will require that plans provide historical performance information, expense ratios, turnover rates, and other information to the participants.”

As a practical matter, he says, “that may preclude plans from offering the portfolios. In addition, the 408(b)(2) regulation requires that recordkeepers provide certain investment information about DIAs to plan fiduciaries at the inception of the arrangement.”

Says Reish: “I am concerned that some advisors do not understand that the DOL attached these conditions. I am also concerned that service providers have not yet drafted the needed language for the participant communications” under rule 404a-5.


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