Category Archives: fiduciary

DOL Investigations: Broker-Dealers and RIAs as Targets


408(b)(2), broker-dealers, DOL, fiduciary, prohibited transaction, registered investment advisers

Together with Bruce Ashton and Summer Conley, I have authored an article titled “DOL Investigations: Broker-Dealers and RIAs as Targets.” To see the full text of the article, click on the link included here:

http://www.drinkerbiddle.com/resources/publications/2011/dol-investigations-broker-dealers-and-rias-as-targets

In the article we discuss that in recent months, we have heard of at least eight, and been involved in three, Department of Labor (DOL) investigations of broker-dealers related to their services to ERISA retirement plans. These investigations appear to be part of the DOL’s ongoing Consultant/Adviser Project (CAP). The CAP initiative is a national enforcement project designed to focus on “the receipt of improper or undisclosed compensation by employee benefit plan consultants and investment advisers.” This article discusses the background that led to the creation of CAP, the issues that financial advisers need to focus on and steps they may wish to take now to avoid liability exposure under ERISA.

Share

More Issues Presented Under 408(b)(2) Regulations


408(b)(2), fiduciary, plan sponsors, prohibited transaction, recordkeeper, service providers, TPA

This is another in a series of articles on interesting issues presented under the 408(b)(2) regulation and its disclosure requirements.

It has become fairly common for plans to have expense recapture accounts (which are also known as ERISA budget accounts, PERAs—plan expense recapture or reimbursement accounts, and by a variety of other names). Typically, those accounts are established within a plan when a service provider (most often the recordkeeper) receives compensation through revenue sharing in excess of its reasonable charges. For example, if a reasonable charge for the recordkeeping/TPA services was $50,000 and the recordkeeper received $60,000 in revenue sharing, the excess amount would be deposited into the expense recapture account—thereby avoiding the prohibited transaction issue of excess compensation.

However, sometimes the recordkeeper/TPA places the money in its corporate account and tells the plan sponsor that the money can be spent for the benefit of the plan . . . at the direction of the plan sponsor. While that presents a number of fiduciary and prohibited transaction issues, it also presents an interesting, and problematic, 408(b)(2) compliance issue for service providers.

For example, when an accounting firm audits a 401(k) plan, it is usually compensated by the plan or the plan sponsor . . . and in that context, the accounting firm is not a “covered” service provider for 408(b)(2) purposes. Since the accounting firm is not covered by the 408(b)(2) regulation, it is not required to make the disclosures under the regulation. However, when an accountant receives “indirect compensation” (which, generally stated, is a payment from anyone other than the plan or plan sponsor), the accounting firm becomes a “covered” service provider and thus must make the required disclosures. Since a payment from a recordkeeper/TPA is not from the plan or the plan sponsor, it is “indirect compensation,” and as a result the accounting firm has become a covered service provider and must make the 408(b)(2) disclosures. But, what happens if the accounting firm hasn’t made those disclosures? The answer is simple . . . the arrangement is a prohibited transaction and the compensation belongs to the plan and not to the accounting firm. But, what if the accounting firm didn’t realize that it was being paid from an account of the recordkeeper/TPA? Unfortunately, there doesn’t seem to be any relief from the prohibited transaction consequences.

Similar issues exist for attorneys, actuaries, consultants and others who receive indirect payments.

Share

Short article about interesting issues under the DOL’s new disclosure requirements


408(b)(2), broker-dealers, DOL, fiduciary, prohibited transaction, registered investment advisers

This is another in a series of short articles about interesting issues under the DOL’s new disclosure requirements.

If a covered service provider (for example, an RIA or a broker-dealer, or their individual advisers) fails to timely provide the disclosures required under 408(b)(2), the “arrangement,” or relationship, between the service provider and the plan is a prohibited transaction. But, what are the consequences? Unfortunately, the law is not clear. Here are some possibilities:

  • The entire arrangement must be unwound . . . investments, services, compensation, and so on. This would be Draconian . . . especially since it would probably be asserted after the investments had suffered losses. In that case, to unwind the arrangement the provider would have to bear those investment losses. However, I do not think this is the likely outcome (except, perhaps, in egregious cases).
  • All of the compensation received by the provider (plus interest) would have to be restored to the plan. This appears to be the likely outcome.
  • Only the non-disclosed part of the compensation would need to be restored to the plan. If the compensation that was not disclosed to the fiduciary was insignificant (that is, would not have affected the decision of a reasonable fiduciary), this interpretation has some appeal.

In addition to those payments, there are 15% and 100% taxes under the Internal Revenue Code and a  20% penalty under ERISA. Those will be discussed in a future article.

Share

Interesting 408(b)(2) Disclosure Issues


408(b)(2), fiduciary, plan sponsors, prohibited transaction, registered investment advisers, service providers

This is another in a series of emails about interesting issues related to 408(b)(2) disclosures. Since we are doing a considerable amount of work helping service providers comply with 408(b)(2), we have run across a number of less common, or even unusual, situations where the rules may—or may not—apply.

Occasionally, retirement plans invest in partnerships, limited partnerships and LLCs. As a general rule, if 25% or more of a class of equity interest in the entity is held by “benefit plan investors,” the entity is deemed to hold plan assets. As a result, the managing partner will be a fiduciary under ERISA’s rules (similar in concept to a collective trust, in the sense that the assets are held outside the plan, but nonetheless constitute plan assets). In those cases, the managing partner will be a covered service provider under the 408(b)(2) regulation and must make the required disclosures concerning services, status and compensation. The failure to do so will cause the arrangement to become a prohibited transaction.

On the other hand, if less than 25% of the entity is held by benefit plan investors, the holdings of the entity will not be plan assets and, as a result, the managing partner will not be considered to be a covered service provider. Similarly, under ERISA, the assets in a mutual fund are not considered to be plan assets and, as a result, the investment manager of a mutual fund is not a plan fiduciary and is not a covered service provider.

Interestingly—or perhaps curiously—however, plan sponsors must still report compensation arrangements about non-ERISA entities (such as hedge funds with less than 25% benefit plan investors) and mutual funds on Schedule C to the Form 5500. That creates the odd circumstance where plan sponsors are required to report that information on Schedule C, but unlike the arrangements that are subject to 408(b)(2) disclosures, those entities are not required, at least by ERISA, to provide the necessary information to plan sponsors. In other words, we have a regulatory regime that does not fully integrate.

I make these points for several reasons. First, it may be that some people don’t understand that the Schedule C reporting requirements are slightly different than the 408(b)(2) disclosure requirements. That is, while they are identical in most regards, there are also some significant differences, such as the ones described in this article. Secondly, it is likely that some service providers—perhaps RIAs—are managing investments in partnerships or other entities that could be subject to these rules—but that may not realize it. As a result, anyone who manages investments in an entity that is outside retirement plans, but which accepts retirement plan investments, should work with their ERISA counsel to evaluate their status, both under the fiduciary laws and under 408(b)(2).

Share

Interesting Issues under 408(b)(2)


408(b)(2), broker-dealers, DOL, fiduciary, registered investment advisers

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.

Share