ERISA Compliance Articles
Tips and Traps for Broker-Dealers and Investment Advisers
I. Plan-Level Fee Disclosure under 408(b)(2)
- Are investment advisors to pooled plans required to report operating expenses and other fees of the funds they use to the plan sponsor? Also, I would like to confirm that SIMPLEs and SEPs are not covered under this legislation.
The new participant-level disclosure requirements under ERISA 404(a) only apply to plans that allow participants to direct the investments of their individual accounts (e.g., 401(k) plans). Pooled plans are not covered by this rule but are covered by the new plan-level fee disclosure requirements under ERISA 408(b)(2). Plan-level disclosures must be provided by all covered service providers no later than July 1, 2012. RIAs and broker-dealers are considered to be covered under 408(b)(2). All plans subject to ERISA are subject to 408(b)(2) except for certain 403(b) plans, SEPs, SIMPLEs and IRAs.
- Is the broker or advisor personally responsible for supplying disclosure under 408(b)(2) or will this be expected from the broker-dealer or RIA?
The plan-level disclosures are required to be provided by the covered service provider (e.g., RIA or broker-dealer vs. IAR or registered representative); however, the disclosure must describe the services actually provided, and that tends to vary based upon the experience level of the IAR or rep.
- Can you define ‘Affiliate Entity’ as it applies to broker-dealers?
ERISA 408(b)(2) defines “Affiliate” as: A person’s or entity’s ‘‘affiliate’’ directly or indirectly (through one or more intermediaries) controls, is controlled by, or is under common control with such person or entity; or is an officer, director, or employee of, or partner in, such person or entity. Consequently, a broker-dealer would be an affiliate of an RIA where it “controls” the activities (e.g., outside business activities, supervisory policies, etc.) of its representatives. Similarly, a broker-dealer may be an affiliate of an investment fund if the fund company is under common control.
- As an independent advisor, if I have a selling agreement with a custodian, is that custodian an affiliate of my organization?
A custodian would not typically be considered an affiliate of an RIA or IAR unless the arrangement meets the above-referenced definition.
- Are self directed accounts exempted from reporting requirements for both 408(b)(2) and 404(a)(5) where the RIA is hired to make buy sell decisions on behalf of the participant?
If the plan hires the RIA to provide discretionary management over participants’ accounts, the RIA would be required to comply with ERISA 408(b)(2). If the RIA was hired by the participant outside of the plan, the RIA would not be a covered service provider to the plan, and 408(b)(2) would not apply. Participant disclosures, under 404(a), are required to be made by the plan; however, the RIA may be required to report information to the plan to allow it to meet the requirements if the RIA provides services through the plan.
- Can an RIA use its Form ADV as a disclosure for 408(b)(2) purposes?
The plan-level 408(b)(2) disclosures must describe the services rendered and compensation received in connection with the services for each covered plan. Form ADV disclosures may be too general to meet the requirements unless the RIA provides the same services to all plans for the same fee. We recommend including the disclosures in the advisory contract, which are specific to each client, and describing the services and compensation generally (i.e., ranges) in the ADV.
- If the employer pays the management fee for an RIA to manage participant accounts (from corporate assets vs. plan assets), does the RIA still need to comply with 408(b)(2)?
Where corporate assets vs. plan assets are used to compensate service providers, the 408(b)(2) requirements would not apply to the service provider.
- Would a 1-person account, such as a Keough Profit Sharing Plan, Individual 401(k), etc. be covered under new regulations?
Only “employee benefit plans” are covered by 408(b)(2). A “Keogh” or “H.R. 10” plan under which only partners or only a sole proprietor are plan participants is not an ‘‘employee benefit plan.” Under the final rule, a pension plan without “employees” who are participants in the plan would not be covered.
- Can I use sample ADV language from a public website to describe my retirement plan services?
Given the difference in the nature and scope of services provided, and the technical requirements of ERISA, we do not recommend adopting “sample” ADV language for retirement plan services. PRI can assist with the development of supplemental language for ADV disclosures.
- Are trustee-directed or pooled profit sharing plans subject to 408(b)(2)?
Pooled or trustee-directed plans are covered by 408(b)(2), but only plans that allow participant to direct the investment of their individual accounts are subject to the new requirements of 404(a)(5).
- If we are a fiduciary advisor, and only receive direct compensation via retainer, do we need to issue our own 408b2 disclosure? If so, how do we figure what format is required?
If services are provided by an RIA to a covered plan, then 408(b)(2) applies regardless of whether the compensation is paid directly or indirectly. There is no particular “format” that is required under the current rule so long as the information is disclosed in writing. That said, the DOL is seeking to determine whether it should require the disclosures to be made in a summary format.
- Does 408(b)(2) apply to Defined Benefit Plans?
Yes, 408(b)(2) requires all covered services providers (including broker-dealers and investment advisers) to provide disclosures to all ERISA-covered plans except for SEPs, SIMPLEs, IRAs and certain 403(b) plans. It is worth noting, however, that only “employee benefit plans” are covered by 408(b)(2). A “Keogh” or “H.R. 10” plan under which only partners or only a sole proprietor are plan participants is not an ‘‘employee benefit plan.” Under the final rule, a pension plan without “employees” who are participants in the plan would not be covered.
- For prospecting ERISA plans, is the covered service provider (i.e., broker-dealer, RIA, etc.) required to provide its 408(b)(2) disclosure at the point of proposal (bid) or the point of sale (contracts are being signed)?
The final rule requires disclosure be provided “reasonably in advance of the date the contract or arrangement is entered into, and extended or renewed.” The preamble provides the following additional guidance:
“The final rule gives plan fiduciaries and service providers some flexibility to determine when an arrangement is entered into. However, to ensure that the responsible plan fiduciary can review, analyze, and consider the disclosures in compliance with his or her ERISA fiduciary obligations, the covered service provider must furnish the disclosures ‘‘reasonably in advance’’ of the date that the parties enter into the contract or arrangement. The Department is confident that the parties to a service contract or arrangement will be able to determine what is ‘‘reasonable’’ in this context.”
- If the covered service provider takes over an already-established plan from another broker-dealer through an Agent of Record change or Broker of Record change, when does the 408(b)(2) disclosure need to be provided? The compensation amount and the investments do not change, it is the broker-dealer assigned to the plan that has changed by request of the plan sponsor.
Please see above and note that the services will vary from firm-to-firm, so new disclosure would be required.
- If a financial advisor leaves the broker-dealer or RIA and a new advisor is assigned to the plan, is this a change that requires the supervising firm to provide another disclosure?
The Final Rule is silent on this issue, however, it is the broker-dealer or RIA that is the “covered” service provider, and not its registered or investment adviser representative. That said, if the financial advisor intends to provide more, fewer or different services, then the supervising firm should update its disclosure to reflect the change in service provided.
- Some of the vendors we work with are sending us year-to-date compensation paid to the broker-dealer, along with the compensation formula or schedule. Which should we use in our disclosure for the plans we have on that vendor’s platform?
The Final Rule allows compensation to be expressed as “a monetary amount, formula, percentage of the covered plan’s assets, or a per capita charge for each participant or beneficiary or, if the compensation or cost cannot reasonably be expressed in such terms, by any other reasonable method.”
- Can the ADV Part II be updated as part of the annual amendment due 90 days after the fiscal year end or does it need to be updated by July 1 and distributed to clients.
ERISA does not require changes to be made to the ADV; however, depending upon the arrangement, the Advisers Act may require updating the ADV. Additionally, if the 408(b)(2) disclosures, presumably made via the advisory contract, are inconsistent with the ADV, it should be before the new contract is provided.
- Does a having the plan sponsor sign a Client Agreement on annual basis (which discloses fees) suffice for purposes of the disclosure?
The plan-level disclosures under 408(b)(2) must be provided no later than July 1, 2012, and changes must be disclosed within 60 days.
II. Participant-Level Disclosures under 404(a)(5)
- If the employer pays the management fee for an RIA to manage participant accounts (from corporate assets vs. plan assets), does it still need to comply with 404(a)(5)?
There are a number of items required to be disclosed under 404(a)(5), many of which are not investment-related, so the plan sponsor will likely have to provide some form of disclosure. Depending upon the specifics of the arrangement with the RIA, additional disclosures may also be required.
- Are trustee-directed or pooled profit sharing plans subject to 404(a)(5)?
No. Only plans that allow participant to direct the investment of their individual accounts are subject to the requirements of 404(a)(5).
III. Fiduciary Status under ERISA
- If you only have a few clients in a plan and are hired by the client to just help that person on a discretionary basis, are you considered a fiduciary under ERISA?
Anyone who exercises discretion over plan assets (including a participant’s individual account) is considered to be a fiduciary under ERISA regardless of whether any services are provided to the plan. The requirements of ERISA 408(b)(2), however, only apply to service providers hired by the plan.
- As an RIA, are you a fiduciary to the plan or a co-fiduciary of the plan with the plan trustee?
All fiduciary status under ERISA arises out of the activities set forth in Section 3(21). “Co-fiduciary” is not a defined term under ERISA but is simply a useful way of describing the shared nature of investment-related liabilities between and RIA and an ERISA plan. In other words, the RIA and the plan fiduciaries/trustees are jointly responsible for ensuring the plan’s investments are prudently selected and monitored.
IV. Cross-Selling and IRA Rollovers
- What is the opinion governing IRA rollovers from ERISA-covered plans and how do I know if it covers me?
Advisory Opinion 2005-23A (available at: www.pension-resources.com/resources/) sets forth the DOL’s position with respect to cross-selling (marketing additional services or products, including IRA rollovers, to plan participants and beneficiaries). The cautionary guidance centers on the advisor’s role as an ERISA fiduciary. The test for determining whether he/she is rendering investment advice (a fiduciary act) versus investment education (non-fiduciary) is set forth in DOL Interpretative Bulletin 96-1 (also available at www.pension-resources.com/resources).
- Can we indicate that we are fiduciaries to the Plan Sponsor and not to the participants? If so can we then handle rollovers?
ERISA does not distinguish between plan- and participant-level fiduciary status. That said, one’s exposure to the prohibited transaction risk relating to IRA rollovers depends upon from whether a fiduciary uses the status that makes him/her a fiduciary to “cause” the participant to pay greater compensation to the fiduciary or an affiliate. If the authority that makes an advisor a fiduciary is plan-level investment advice (e.g., helping the employer select, monitor and replace designed investments), then it would be more difficult to demonstrate that the advisor used that authority to cause a participant to do something. On the other hand, if the advisor provides ongoing, individualized investment advice to plan participants, then he/she may be in a position to influence participants in a way that causes them to take action that results in greater compensation being paid to the advisor or an affiliate. Given the DOL’s focus on this issue and the severity of the consequences of getting it wrong, we encourage advisors to seek expertise in developing compliant disclosures and procedures relating to IRA rollovers.