Interesting Issues under 408(b)(2)

This is the second in a series of short articles about disclosures to plan sponsors and participants under the new DOL regulations for disclosures to plans and to participants.

FACT: Many investment advisers (RIAs) and broker-dealers (BDs) use asset allocation models (AAMs) to help participants invest appropriately.

RULE: The DOL regulations require certain disclosures about “designated investment alternatives” (DIAs), including the performance history of the investments (to participants).

ISSUE: Are asset allocation models considered to be DIAs, which would invoke the disclosure requirements under both regulations?

ANSWER: Based on informal discussions with the DOL, it appears that they are leaning toward the conclusion that models are DIAs. If so, the disclosure requirements would include, among other things, reports from recordkeepers about the performance history of the models.  However, we believe that most recordkeepers have not been, and may not be able to (on a reasonable basis), calculate and report those returns. (Similar difficulties may exist for AAMs for other disclosures required by the regulations.) This could result in the inability to continue to use those models.

However, if the model is “managed” by a discretionary fiduciary, it appears that the DOL may conclude that is not a model, but instead an investment management service–which apparently would not be considered a DIA.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.