Why 408(g)?

408(g) is the EZ-Pass to delivering the service that investors want and need without walking the tightrope of advice versus education. With the EZ-Pass you can deliver as much or as little assistance as you choose, including covering any one or all of the following:

  • The investments or investment mix to use
  • An appropriate advisor or investment manager
  • Which account arrangement such as brokerage or advisory
  • Whether to rollover, transfer or take a distribution

The 408(g) EZ-Pass supports the business with a minimum of hassle:

  • The computer model exemption retains commissions and other incentives
  • The fee leveling exemption means no computer model is needed
  • The certification and audit are non-intrusive and low cost, typically requiring simple tests
  • Advisors and representatives can fully answer questions to win business and serve clients
  • 408(g) is well established, having been in effect since 2011
  • Using 408(g) avoids twists and turns of the DoL Fiduciary Rule

Computer Model 

The 408(g) computer model may be as simple as an algorithm to identify an appropriate advisor or as complex as a comprehensive separately managed account covering a wide ranging investment platform. The 408(g) computer model automates the applicable decision process and removes the risk of human error or bias.

The 408(g) computer model eliminates the restrictions and limitations on the nature or the amount of compensation.

The 408(g) computer model must be independently certified (click to see certification description) and audited (click to see audit description). The cost of certification and audit starts at $5,000 each and depends on the scope and complexity of the computer model. Certifications and audits are typically performed remotely.

Fee Leveling

408(g) fee leveling is the alternative that requires no computer model. Under fee leveling, compensation must be disassociated from any recommendations or advice provided as part of the service to a client. This disassociation can take the form of a fee offset, in which the client agrees to a specific compensation and any payments received are used to pay the specified compensation. The specified compensation can be in the form of a flat fee, hourly rate of basis points.

The 408(g) fee leveling must be independently audited (click to see audit description). The cost of audits starts at $5,000 each and depends on the scope and complexity of the service arrangement. Audits are typically performed remotely.

Implementing 408(g)

The 408(g) EZ-Pass is usually implemented in four steps:

  • Qualification Questionnaire: This 4 page questionnaire is used to assess if the 408(g) EZ-Pass can be applied in the situation being contemplated and to determine the scope and complexity of the implementation. (Get one here)
  • Pre-Certification or Pre-Audit: Based on the Qualification Questionnaire, a recommendation is made for a detailed review that simulates a live certification or audit. The results are used to identify and make any changes before the official version is conducted.
  • Live Certification or Audit: The results of this step are made public in compliance with the 408(g) regulations.
  • Annual Recertification or Audit: The certification or audit is repeated annually in compliance with the regulations and to reflect any changes that have occurred.

Click here to learn all about 408(g) from the four volume series “Making the Most of 408(g)”

The four volumes cover 408(g) certification and audit requirements and uses in the areas of:



408(g) Audits

What are 408g Audits?

408g audits differ greatly from all other audits (such as financial audits, FINRA audits,
401(k) audits, etc.) in purpose, nature and scope.

The purpose of 408g audit is to establish that a fiduciary adviser is in compliance with ERISA section 408(g) (part 2550.408g of Title 29 of the Code of Federal Regulations).

What are the Requirements of a 408g Audit?

Fiduciary Advisers are required to submit to an annual audit that consists of the assessments outlined below and require compliance with the Department of Labor requirements as described in the “Adviser Selection & Monitoring Guidelines”. These audit guidelines are only applicable when preceded by satisfactory adviser selection and monitoring processes.

Assessments Required for Adviser Audit:

1) RECORDS RETENTION: Adviser must show that adequate records are maintained per PPA.

2) LEVEL COMPENSATION: Adviser must disclose sources and amounts of compensation to establish that it was not derived from advice given.

3) RECOMMENDATIONS UNBIASED: Records are examined to determine that adviser recommendations are in line with investment mix of benchmark advisers.

4) DISCLOSURES MADE: A representative sample of participants who use the adviser are asked if they received required disclosures.

5) COMPENSATION IS REASONABLE: Compensation level of adviser is compared on a per participant basis to benchmark advisers.

Who performs 408g Audits?  

Subsection 408(g)(5) requires that the auditor be independent and be able to demonstrate expertise and proficiency in ERISA and the ability to conduct the audit in writing. An auditor is considered to be independent if he has no material contractual relationship, is not related to the fiduciary adviser or to any person providing investment options under the plan. Consequently, affiliated companies may not audit each other nor can a Fiduciary Adviser use an auditor over which he has control.

How is the Audit performed?

The DALBAR audit consists of the following steps:

  • Fiduciary Adviser initiates the audit through a disclosure questionnaire that is reviewed for compliance with 408(g).
  • After review and acceptance of the disclosure questionnaire DALBAR initiates a request for documents, including eligible investment advice arrangements (EIAA), disclosure documents, tools used in advice delivery, records relating to advice delivery and complete list of plans and participants receiving investment advice.
  • Documents are examined upon receipt for compliance with 408(g) using the auditor’s checklist and compliance tested by contacting a sample of plans and participants.
  • Results are analyzed and two documents are produced: the 408g Audit Report and the Management Letter. (Samples are available)

    • Audit Report contains the findings that are reviewed by the fiduciary adviser and amended if necessary then delivered to adviser and plan sponsors.
    • Management Letter contains observations and recommendations and is delivered only to the fiduciary adviser.
  • Both documents are reviewed with the fiduciary adviser after which the 408g Audit Report is sent to all of plans with whom the fiduciary adviser has an EIAA.

What is the Cost of a 408g Audit?

Costs are based on the number of advisers and associates in a firm providing advice
and the complexity of the audit.

Fees range from $2,500 for a small independent adviser to $150,000 for a large phone center operation.

ERISA 3(38) Certification

What is DALBAR's ERISA 3(38) Certification Program?

The DALBAR 3(38) Certification Program provides investment managers with a powerful combination of sales tool and compliance disclosures to satisfy the requirements of ERISA section 3(38). Certification enables investment managers to use client testimonials to advertise and attract new assets. 

Do you have what it takes to be a great 3(38)?

RIAs can claim to be 3(38)s by putting it on a business card but it is up to the plan fiduciary to make sure that there is substance behind the business card:

  • Competent: Experience, qualifications and knowledge
    • Superior background and performance
    • Reasonable fiduciary arrangement
    • Financial strength to take on the responsibilities

Without solid answers, the career as a 3(38) will not last very long.

Complete the Ultimate 3(38) Questionnaire for an evaluation of your prospects for success as a great 3(38).

What are the Benefits of Participation?  

Gives Certificants the ability to:

  • Use the client testimonials in marketing and promotional materials:
    • Trust – How many of your clients really trust your firm?
      • Results – How many believe their investments performed as expected?
      • Advice – How many respect the quality of investment advice from your firm?
      • Service – What percentage of your clients believe you deliver great service?
    • Support due diligence required by ERISA

What are the Deliverables?

  • Personalized Credential document
  • Certificate of Achievement
  • Client feedback from evaluations performed

What are the Prerequisites?

Financial Professional must:

  • Have a minimum of 5 years experience in the field of financial advice.
  • Be a full time financial professional
  • Pass a background check.

What is the Certification Process?

The following steps are required to obtain the DALBAR rating:

  • Candidate completes application detailing qualifications and experience.
  • DALBAR conducts a background check of the regulatory record of the candidate to determine if the individual qualifies for certification in compliance with SEC rules.
  • DALBAR reviews the client agreement to determine if it services and terms are consistent with ERISA 3(38) and that document is understandable without bias against client.
  • DALBAR evaluates investment theory to determine if it is generally accepted.
  • DALBAR reviews due diligence and investment performance reports to determine if basic tool are available to perform as 3(38) manager.
  • Candidate provides DALBAR with a complete list of clients.
  • DALBAR verifies completeness and evaluates a representative sample of clients to determine if ethical and quality standards have been met.
  • DALBAR issues certification.

What is the Timing and Cost?

Timing:

Certifications take approximately 60 days. Certifications are renewable annually.

Cost:

The cost for certification of the firm is $3,250 for the first time, plus $250 for each IAR. The cost to renew is $2,500.

DALBAR 3(38) Certification Program Description

Application: Part A     Part B

Computer Model Certification

What is DALBAR's Computer Model Certification Program?  

The DALBAR Computer Model Certification provides firms that seek to comply with advice regulations for IRAs and 401(k) participants with the required credentials to comply with the regulations. Certificants receive a distinctive mark of quality in the form of the DALBAR Seal that differentiates the model from the hundreds of other that are non-compliant.

What are the Benefits of Participation?

Gives Certificants the ability to:

  • Leverage the DALBAR Rating in marketing and promotional materials.
  • Attract new clients.
  • Receive a report on the health of the existing client base and current satisfaction to ensure minimal attrition.

What are the Deliverables?

  • Report of the analysis supporting the Certification
  • Certificate of Achievement
  • Pointers on how to best promote DALBAR Rating

What are the Prerequisites?

Financial Professional must:

  • Have a minimum of 5 years experience in the field of financial advice.
  • Be a full time financial professional with a minimum of 100 active clients and at least 25 clients with tenure of 5+ years.
  • Pass a background check.

What is the Certification Process?

The following steps are required to obtain the DALBAR rating:

  • Candidate completes application detailing qualifications and experience.
  • DALBAR conducts a background check of the regulatory record of the candidate to determine if the individual qualifies for certification in compliance with SEC rules.
  • DALBAR evaluates investment theory to determine if it is generally accepted
  • DALBAR reviews investment performance and fees for reasonableness
  • DALBAR tests the computer model using multiple scenarios for reasonableness and compliance with regulations.
  • Candidate provides DALBAR with a complete list of clients.
  • DALBAR verifies completeness and surveys a representative sample of clients to determine if ethical and quality standards have been met.
  • DALBAR issues certification.

What is the Timing and Cost?

Timing:
It depends on the scope and nature of the computer model.  Certifications are renewable annually.

Cost:
The cost for certification depends on the scope and nature of the computer model and the uses to which the model will be put.  Multiple versions are priced on request.

Detailed Fact Sheet

Request for Proposal

Qualified Default Investment Alternative (QDIA) Validation

What is the Objective of QDIA Validation?

The QDIA Validation establishes a standard for evaluating QDIAs for compliance with regulatory requirements and supports the process of selection and monitoring of QDIAs required of ERISA plan fiduciaries.

The standards of the QDIA Validation permit plan fiduciaries and advisers to use consistent metrics to compare the variety of QDIA alternatives with very different styles and methods.

DALBAR uses these standards to evaluate QDIAs in any of their various forms and issues a detailed report of findings to QDIA providers, advisers and plan sponsors.

Why is QDIA Validation Necessary?

Interwoven throughout the QDIA regulations is the emphasis on making prudent selections and ongoing monitoring in order to obtain protection from fiduciary liability. Fiduciaries are exposed to prohibited transaction penalties should they fail to meet the requirements. On the other hand, relief from fiduciary liability offered by QDIAs through federal law is the best protection available.

QDIAs are expected to soon become the dominant investment choice in employer sponsored retirement plans.

Program Outline

In the absence of detailed standards from regulators that defines what prudent selection and monitoring is required, ambiguity has existed about what constitutes compliance with the selection and monitoring requirement.

In response to this need to demonstrate procedural prudence DALBAR has developed the QDIA Validation standards.

What are the Benefits of QDIA Validation?

QDIA Validation provides plan sponsors and other fiduciaries with the process to demonstrate procedural prudence that can be examined by regulators and can be used as defense in the event of litigation.

QDIA Validation provides advisers with a meaningful tool to select and recommend QDIAs to clients. Advisers may review previously issued validation reports or may commission customized evaluations.

QDIA Validation provides firms that offer QDIAs with the ability to make necessary adjustments to pre-certify their QDIA offerings. Pre-certified QDIAs add value to the firm’s offerings by simplifying the procedural prudence required of plan sponsors and fiduciaries.

What is the Scope of QDIA Validation?  

The QDIA Validation may be applied to all QDIA alternatives referenced in the
Employee Retirement Income Security Act of 1974, as amended [ERISA] Section
404(c)(5) and associated regulations.

These include:

Three forms of investment:

  • Funds
  • Annuities
  • Computer models

And five investment alternatives:

  • Age based
  • Risk based
  • Managed account
  • Short term investment
  • Grandfathered investment

What is the Method and Time-frame of QDIA Validation?  

QDIA Validation can be performed on a plan specific basis or an investment specific basis.

Plan specific QDIA Validation engagements are between DALBAR and a plan sponsor or other fiduciary. This requires collecting information about the plan and employee demographic differences as well as details concerning the QDIA(s) under consideration. This information is evaluated against the QDIA Validation standards and a confidential report is issued to the plan sponsor or fiduciary.

This process requires four to eight weeks after an established start date. The start date is based on all required information being available in good order and mutual acceptance of the engagement.

Investment specific QDIA Validation engagements are between DALBAR and QDIA providers or advisers. Details of each investment contemplated for use as a QDIA must be provided as well as the availability of an individual to answer questions and probes. Each investment is then tested against the QDIA Validation standards and a preliminary confidential report is issued for review.

Providers have an opportunity to correct deficiencies and DALBAR will amend the Validation report as appropriate. After successful validation DALBAR issues an opinion and makes QDIA Validation report public on its Website and proactively to the press.

This process requires four to twelve weeks from a start date, depending on the complexity and number of investments involved. The start date is based on all required information being available in good order and mutual acceptance of the engagement.

What is the Cost of QDIA Validation?  

There is a minimum engagement fee of $5,000, which will typically cover one plan or three similar investments. Estimates are provided before the start of an engagement.

The minimum requirement may be waived for services added to an initial engagement and for annual updates of the validation.

Due Diligence Toolkit

Adviser Due Diligence Disclosure 

Click here to access DALBAR's Due Diligence Disclosure form for advisers seeking certification and/or auditing.

Due Diligence for ERISA Advisers

The Department of Labor has defined minimum requirements for prudent selection and monitoring of ERISA advisers. Click here to view DALBAR's summary of DoL minimum requirements as well as standards used by DALBAR to further protect participants.

SEC Pension Consultant Selection and Monitoring Link

Click here to view the SEC's Selecting and Monitoring Pension Consultants: Tips for Plan Fiduciaries directly from the Securities and Exchange Commission Website.

For more information about DALBAR's Audits & Due Diligence, please contact Cory Clark at 617.624.7156.