Advisor Blog

Ameriprise has consistently recommended its own RiverSource (now renamed Columbia - fund companies love to change names when the old name is associated with unpleasantry) funds to its clients despite their high expense ratios and often poor performance while ignoring better alternatives.  This is what happens when an advisor eschews fiduciary duty and operates under the FINRA suitability rule.  Stuffing accounts full of their own proprietary mutual funds is a very effective way of transferring clients' wealth to the owners/shareholders of the firm. 

However, ERISA law requires that the sponsor of an employee retirement plan must act as a fiduciary.  Ameriprise tried to do the same thing with its plan participants and offered them its own funds as investment choices within their 401(k) plan.  The result is a lawsuit by their own employees/plan participants.  Apparently, they resent having to invest in the same funds that Ameriprise recommends to its clients!  According to Barron's "surely thousands of articles have been written on how to pick the best mutual funds and spot the worst. But here's a tip that doesn't often come up: If a fund company's employees are suing for being forced to invest in their own firm's mutual funds, you probably want to steer clear".  We agree.

Many business owners and 401(k) plan sponsors are scrambling to understand and comply with the new Department of Labor mandated fee disclosure regulations that will become effective only a few months from now. The new regulations explained under sections 408(b)(2) and 404(a) of the Employee Retirement Income Security Act of 1974 (ERISA) require additional disclosures to be made to plan sponsors and plan participants, and require all plan service providers to furnish much more information about their services, expenses and fees. ERISA section 408(b)(2), the service provider rules, become effective April 1, 2012, while the new 404(a) participant disclosure rules become effective May 31, 2012.

Employer sponsored retirement plans, including 401(k) plans, are governed by the Employee Retirement Income Security Act of 1974, commonly known as ERISA.  Both ERISA and the Internal Revenue Code generally prohibit investment advisors from providing personalized advice to 401(k) participants if the advisor receives compensation from the investment vehicles that they recommend.  This protects participants from conflicts of interest - specifically, from the advisor's incentive to recommend more expensive products that may increase the advisor's compensation.

So, if you're a participant in a typical 401(k) plan - one that's sold by a broker or an insurance company - chances are that you can't get individualized advice from the "advisor" who sold your company the plan.  There are some new exceptions to this rule under the Pension Protection Act of 2006, but the advice is subject to safeguards and provisions preventing the slanting of advice by advisors for their own financial benefit.  Essentially, this means providing advice based on a certified computer model or on a "level fee" basis, which must be supported by an annual audit.

There is a better way.  A fee-only Registered Investment Advisor is compensated directly and solely by the retirement plan and has none of these conflicts of interest.  Thus, a fee-only RIA, like Talis Advisors, can provide individualized investment advice to 401(k) plan participants without any restrictions.