Recently, Defined Contribution retirement plans have been in the news for a handful of reasons. In July the Department of Labor and SEC held a hearing addressing the lackluster and often misleading performance of Target Date investments. Another DOL hot topic is whether plan participants are paying unreasonable or excessive fees in their retirement accounts. Recent litigation has also publicized a rising number of conflicts of interest amongst plan fiduciaries.
In the course of our retirement plan practice, it isn’t uncommon when meeting with new plan sponsors that we identify fiduciaries who are potentially breaching their obligations to their participants. At our initial meeting, the trustee will tell us about his or her plan and identify strengths and weaknesses they would like to address. Despite that, a common statement is, “We are not currently interested in making changes to the plan because we have a relationship with our vendor [or broker].” When asked to explain a little further, common responses often begin with “We do legal work for the company” or “They’re a big client of ours so we don’t want to jeopardize that relationship.” The conversation always ends in their statement of, “You know what I mean?”
In the south, cases like these are often referred to as “the good ol’ boy network.” It is typically perfectly acceptable in most business relationships to do business with your best clients, but when a retirement plan is involved, things get a little dicey. Under ERISA provision 406(a), transactions between a plan and a party of interest can be seen as a prohibited transaction violation.
ERISA 406(a) prohibits plan fiduciaries from doing business or entering in to certain transactions with “parties of interest,” typically plan attorneys, accountants, investment consultants, or plan vendors. According to ERISA 404(a), “a fiduciary shall discharge his duties with respect to the plan solely in the interest of the participants and beneficiaries. Unfortunately, recent court cases have dictated that even if the transaction brings no harm to the plan and the plan participants, it can still be seen as a violation or conflict of interest and can carry severe consequences for all fiduciaries involved.
But what’s the big deal? ERISA’s standards for fiduciaries are extremely tough. In the case of Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan, the courts refer to those standards as “the highest known to law.” At the very least, the appearance of a potential conflict creates the question of whether a fiduciary is acting in the best interest of the participants. The biggest concern is whether actions by the fiduciary are negligent and are adversely impacting the plan. For instance, could the conflict of interest mean participants are paying unreasonable compensation to the vendor or investment advisor? Are there better investment options amongst other plan vendors? Do the participants have access to adequate educational tools and resources?
We’ve highlighted only one example of a potential conflict of interest. Many other examples exist. But what can fiduciaries do to avoid a prohibited transaction? We recommend that you demonstrate Procedural Prudence in all decisions you make:
1. Research and understand your fiduciary responsibilities,
2. Take Action – Do what is required to keep the plan in compliance, and
3. Document all decisions and compliance-related activities.
If you have questions about this subject or want to learn more about how to comply with ERISA guidelines, visit our website at www.retirementplanpros.com.
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Trent Grinkmeyer, Valerie Leonard and Kimberley Fulcher are Registered Representatives and Investment Adviser Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. If you wish to opt out of receiving future e-mails, please respond to this e-mail with “Opt Out” in the subject field. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent.
Tags: Defined Contribution