There are a litany of ways in which registered investment adviser (RIA) firms can interact with pension plans, profit sharing plans, and other retirement plans, as well as the assets in such plans. That, of course, means that advisers should be accurately disclosing to clients and regulators the specific manners in which the firm is advising these plans. This blog is the first in a 3-part series providing an overview of three of the main advisory relationships in dealing with plan assets: pension consulting, portfolio management for a pension or profit sharing plan, and investment advice concerning individuals’ retirement plans (e.g., 401(k) plans).
Note: RIA in a Box LLC is not a law firm and does not provide legal advice. We strongly advise that all RIA firms that provide services to pension plans, profit sharing plans, and/or retirement plans to consult with a qualified Employee Retirement Income Security Act of 1974 (“ERISA”) attorney in matters relating to Department of Labor (“DOL”) and ERISA law. This overview is provided for general information purposes only and should not be relied upon to take any action. RIA in a Box LLC does not offer any services or assistance with regards to DOL or ERISA law.
Business owners and executives look to pension consultants for guidance on an array of topics well beyond the ambit of conventional advisory services. Pension consulting entails investment advice about the structure, management, implementation, and supervision of company sponsored retirement programs. Importantly, it is the plan itself and/or its trustee that is the client in this advisory relationship and the consulting agreement will be signed with those parties rather than any individual plan participants.
Specifically, per the U.S. Securities and Exchange Commission (“SEC”), pension consultants provide “advice to pension plans and their trustees with respect to such matters as: (1) identifying investment objectives and restrictions; (2) allocating plan assets to various objectives; (3) selecting money managers to manage plan assets in ways designed to achieve objectives; (4) selecting mutual funds that plan participants can choose as their funding vehicles; (5) monitoring performance of money managers and mutual funds and making recommendations for changes; and (6) selecting other service providers, such as custodians, administrators and broker‑dealers.
Many pension plans rely heavily on the expertise and guidance of their pension consultant in helping them to manage pension plan assets.” The facets of these services most in line with traditional investment advice are the consultant’s recommendation of money managers, identification of specific investment options for the company to offer to plan participants, and ongoing monitoring of same, but pension consulting can (and arguably should) address an array of plan-related issues including:
- Assessing compliance risks, staying abreast of recent legislation, and mitigating risk
- Negotiating lower management fees and associated expenses
- Participant education regarding process and investment options
- Tracking of obligations/liabilities to plan participants
- Increasing efficiencies in operating and administering (either directly or through a third party administrator) the plan
- Providing marketplace assessment to gauge the competitiveness of the plan and recommendation of appropriate changes
- Implementing an ideal array of investment offerings along the conservative to aggressive spectrum
- Calculating and reporting investment-specific performance, manager-specific performance, and overall plan performance
- Ensuring transparency for plan sponsor and potential participants
- Evaluate fees for all providers (managers, funds, administrators, etc.)*
* Recently, more attention has been paid to a particular aspect of the recommendation and monitoring: limiting fees that are passed along to the plan and thus its participants’ returns, is often accomplished by having the plan allow its participants to select low expense ratio mutual funds from providers such as Vanguard, Dimensional Fund Advisors (DFA), and others.
Investment advisers engaging in pension consulting should be aware that they may be subject to the fiduciary standards of Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, and that the ERISA fiduciary duties are in addition to those associated with being a registered investment adviser. Conversely, pension consultants should be aware that providing pension consulting services typically constitute investment advisory activities necessitating registration as an investment adviser.
Specifically, a pension consultant “with respect to assets of plans having an aggregate value of at least $200,000,000 that qualifies for the exemption in rule 203A-2(a)” must register with the SEC, while those firms advising pension plan assets at lower levels will typically register at the state level. For disclosure purposes, investment advisers must ensure that the firm filings properly describe the pension consulting relationship and distinguishes it from other services such as financial planning and portfolio management. At a minimum, the following portions of Form ADV sections should disclose the consulting service:
- Part 1A – Item 5D (types of clients)
- Part 1A – Item 5E (compensation arrangements)
- Part 1A – Item 5G (advisory services)
- Part 2A – Item 4 (advisory services)
- Part 2A – Item 5 (fees)
- Part 2A – Item 7 (types of clients)
Advisers should be aware that those assets for which they provide solely pension consulting services, without additional advisory relationship, will typically not be considered regulatory assets under management. As is the case with all client relationships, it is essential that the parties have a signed agreement memorializing the specifics of the relationship, including services and fees, in order to govern the parties’ respective obligations.
Overall, pension consulting differs from other investment advisory (for individuals, families, businesses, or even pension plans) across the board. It involves different services, fee structures, regulations, and other concerns that are ancillary to or completely absent from prototypical portfolio management and financial planning. Because of this, it is crucial for clients to identify a pension consultant knowledgeable in this arena; it is equally important for the adviser to commit to offer only those pension consulting services in which it has expertise and to stay abreast of the changing landscape.