Tech Talk: Allocation Models

Q. An RIA working with an open-architecture platform and designing an investment menu for a plan may select a record keeper that supports the ability to add model portfolios to the plan menu. This allows the RIA to manage these allocations over time as market conditions change, on behalf of the participants in those models. Are these allocation models considered discretionary services?

A. It is these circumstances in which the Securities and Exchange (SEC) rules governing 403(b) and 401(k) plans begin to diverge. When this is no problem for the 401(k) plan investments, the RIA for the 403(b) plan will need to pay close attention to the details of the arrangement. It is one thing for the plan’s fiduciary to hire the RIA to manage the available investments under the plan and to change available funds; it is quite another to actively manage a participant’s 403(b) investments in an asset allocation model. It begins now to look like a mutual fund. Though this practice generally can be done under certain circumstances, it requires the proper design. The adviser should seek advice of their compliance department to determine the particulars of providing this type of service.