How To Protect Yourself From Becoming A Fiduciary

This limited the amount of instruction that was available to participants, hurting their chances of attaining an adequate retirement income. IB 96-1 refers to “a series of graduated safe harbors under ERISA” that are available to plan sponsors and advisors. These safe harbors cover four specific areas of information and materials: “plan information, general financial and investment information, asset allocation models and interactive investment materials.” By understanding these categories, advisors can ensure that they don’t cross the line into the fiduciary realmby offering advice to participants.
Plan Information
According to the DOL, plan information that does not refer to the suitability of “any individual investment option for a particular participant” is not “advice.” Many sources can educate participants on the plan and do not constitute a “recommendation.” This includes information on the benefits of participation and contribution increases. The information can also contain facts on the risk of early withdrawals. These materials can educate participants on the investment alternatives offered within the plan, such as “descriptions of investment objectives and philosophies, risk and return characteristics, historical return information,” etc. Advisors can use this plan information to teach participants about their options without endorsing a specific investment method or product.
General Financial and Investment Information
It is important for advisors to inform investors of common financial concepts, like “risk and return, diversification, dollar cost averaging, compounded return and tax deferred investment.” Investment education should also cover inflation and its effects and how to estimate retirement income needs and assess risk tolerance. Advisors can also present materials on “historic differences in rates of return between different asset classes (e.g., equities, bonds or cash).” As long as the information does not have any immediate connection to the options within the plan, advisors are not acting as a fiduciary.
Asset Allocation Models
Another great education tool, asset allocation models help investors determine their strategies as well as the risks and rewards. These models are:
  •       Available to all participants
  •       Structured on investment theories that are widely accepted and “take into account the historic returns of different asset classes”
  •       Inclusive of all the facts and assumptions that the model was created from
  •       Accompanied by a document that states: “in applying particular asset allocation models to their individual situations,” investors must consider their unique assets, such as home equity, savings, etc. in addition to their plan assets
If these models recognize a specific asset class that is contained within the plan, they must also include a statement indicating where to obtain information on investment alternatives.
Interactive Investment Materials
This final category includes worksheets, questionnaires, software and other materials that participants can use to “estimate future retirement income needs and assess the impact of different asset allocations on retirement income.” These materials can only be based on accepted theories and historic returns. The information must also follow similar guidelines to those under asset allocation models. These materials will help participants assess multiple asset allocations and determine independently their investment strategy.
The bulletin presents advisors with an opportunity to generate clients. If participants want or need investment assistance, advisors can provide the informationoutside of the workplace and in a separate investment counseling arrangement.
Although the DOL has proposed expanding the definition of a fiduciary, IB 96-1 will still provide “safe harbor” education options for advisors. By knowing their limitations, financial advisors can provide better education, while protecting themselves from liability. The DOL’s IB 96-1 helps advisors to remain protected from fiduciary responsibility and provides an outline for proper investment education.

Tracking dates that educational information is provided to participants can further safeguard against liability. Having participants and prospective participants sign agreements stating that they understand that their financial advisor guided them through safe harbor information is another way to reduce the risk of becoming a fiduciary. For more information on how to properly document your activities, see The 401k Coach Wealthcare Report Card that is available to attendees of all Boot Camps and the Year 1 program, which begins April 2012.


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