When are AAMs Considered DIAs?

Posted on April 19, 2012, by Fred Reish in 404a-5, 408(b)(2), Broker-Dealers, fiduciary, Recordkeeper, Registered Investment Advisers, RIA, Service Providers. Comments Off on When are AAMs Considered DIAs?

There is an emerging issue under both the participant and plan disclosure rules concerning the information that must be provided for asset allocation models (AAMs).

It appears that some DOL officials are of the opinion that asset allocation models—at least under certain circumstances—are “designated investment alternatives” or DIAs. If AAMs are classified as DIAs, they are subject to disclosure requirements under both the plan and participant disclosure rules. As a practical matter, it may be impractical or even impossible for recordkeepers, broker-dealers and RIAs to provide that information.

Recordkeepers must provide information about the expenses of DIAs to responsible plan fiduciaries. And,  plan fiduciaries must give participants certain information about DIAs, including performance history and expense ratios. Also, plan fiduciaries must maintain a website that includes other detailed information, such as portfolio turnover ratios for the DIAs. As a practical matter, providers will maintain these websites.

Finally, the final plan disclosure regulation requires that covered service providers (which would include recordkeepers, broker-dealers and RIAs) give the information needed for participant disclosures to responsible plan fiduciaries on or before the date on which the investment alternatives are designated. In other words, that information has to be provided to plan sponsors at the inception of the relationship (or, for existing plans, by July 1, 2012).

So, the key issue is whether—and under what circumstances—AAMs are considered to be DIAs. That is because, when an asset allocation model constitutes a designated investment alternative, all of those 408(b)(2) and 404a-5 disclosure requirements apply. It is our understanding that it may be difficult, if not impossible, to provide the needed information—at least in the short term. As a result, we are already hearing of recordkeepers who are refusing to allow asset allocation models on their platforms.

We have filed comments with the Department of Labor requesting clarification.


Recent Insights

Best Practices for Plan Sponsors #7

Best Practices: Plan Success by the Numbers (Part 1)

I am writing two series of articles that together are called “The Bests.” One is about...

Alert: FINRA’s 529 Plan Share Class Initiative to Self-Report

FINRA is taking the position that broker-dealers need to evaluate the long-term costs of different share classes in 529 plans. In effect, FINRA is...

Open Questions on Open MEPs

One of the shiny new coins of the 401(k) realm is “Open MEPs.” It’s anticipated that Congress will pass legislation this year that permits...