PLANADVISER - July/August 2018 - 56

ERISA vista
Prohibited
Transaction Relief
How the DOL's policy affects ERISA plans
ADVISER QUESTION: I heard that the Department of Labor
[DOL] has adopted a nonenforcement policy. How does it affect
the investment advisory services I provide to Employee Retirement
Income Security Act [ERISA] plans, plan participants and
individual retirement accounts [IRAs]?
ANSWER: The DOL nonenforcement policy provides relief
from inadvertent prohibited transactions now that the new
DOL fiduciary rule and best interest contract (BIC) exemption
have been vacated-i.e., thrown out. The IRS has also
adopted the policy for IRAs. However, the policy provides
only partial relief, and advisers may want to modify some
practices to avoid a prohibited transaction.
The DOL will not treat an adviser
as committing a prohibited
transaction if he satisfies the
impartial conduct standards.
When an adviser is a fiduciary to an ERISA plan or an IRA,
he is prohibited from receiving certain forms of compensation.
Under the prohibited transaction rules in ERISA and
the Internal Revenue Code (IRC), two types of compensation
are prohibited. One is that received from a third party. For
example, if a fiduciary adviser recommends an investment
that causes a 12b-1 fee to be paid to himself or an affiliate,
the 12b-1 fee is prohibited.
The second type is variable compensation. A fiduciary
adviser is prohibited from making recommendations that
can generate more compensation to himself depending upon
the recommendation. For instance, a fiduciary adviser who
receives a commission on each recommended transaction
is committing a prohibited transaction. Another example is
a fiduciary adviser who recommends a plan rollover to an
IRA where he will receive an advisory fee from the IRA. (We
discussed the issues with rollovers in our last column, " Rollover
Recommendations, " PLANADVISER, May-June.)
As a practical matter, most investment advisers will
be considered fiduciaries for their advisory services to
ERISA plans and IRAs. Therefore, they will be subject to
these prohibitions even though the new fiduciary rule was
vacated. This is because the old rule now comes back into
effect. Under that, an adviser is a fiduciary if a five-part test
is satisfied: The adviser 1) provides advice about investments
for a fee or other compensation, 2) on a regular basis,
3) pursuant to a mutual understanding 4) that the advice
will be a primary basis for investment decisions and 5)
that the advice is individualized based upon the particular
needs of the plan or IRA owner. The services provided by
investment advisers to ERISA plans and IRAs typically meet
these requirements.
How can a fiduciary adviser address these prohibited
transaction issues?
One solution would be to utilize an exemption. However,
the best interest contract (BIC) exemption was vacated by
the 5th Circuit. Unfortunately, there isn't any other exemption
that provides broad-based relief.
An alternative is for the fiduciary adviser to levelize his
compensation and avoid the prohibited transaction. For
third-party payments, this can be accomplished by offsetting
the payment dollar-for-dollar against a level advisory
fee. This offset method was approved by the DOL in advisory
opinions issued to Frost Bank in the context of an ERISA plan
(97-15A) and Country Trust in the context of IRAs (2005-10A).
However, the offset method cannot be used for all prohibited
transactions. For example, it cannot be used for a plan
rollover recommendation that results in payment of an IRA
advisory fee.
Another alternative is the nonenforcement policy. Under
treat an adviser as committing
that,
the DOL will not
prohibited transactions if he satisfies the impartial conduct
standards-i.e., a best interest standard, a reasonable fee
and no materially misleading statements. The IRS has also
adopted the policy for IRAs. However, the policy does not
provide complete relief. First, it does not apply to discretionary
investment management. Second, for ERISA plans,
it does not protect against private rights of action by plans
against advisers. This is not an issue for IRAs because only
the IRS can enforce the IRC's rules.
Clearly, exemptive relief is needed. We anticipate that
the DOL will propose an exemption-similar to the nonenforcement
policy-at some point in the future, and we
hope that it will be retroactive to cover transactions that
complied with the policy.
Fred Reish is chair of the financial services ERISA practice at law firm
Drinker Biddle & Reath LLP. A nationally recognized expert in employee
benefits law, Reish has written four books and many articles on ERISA,
pension plan disputes, and audits by the IRS and Department of Labor.
Joan Neri is counsel in the firm's financial services ERISA practice,
where she focuses on all aspects of ERISA compliance affecting
registered investment advisers and other plan service providers.
56 | planadviser.com july-august 2018 Art by Tim Bower
http://www.planadviserdigital.com/planadviser/july_august_2018/TrackLink.action?pageName=56&exitLink=http%3A%2F%2Fplanadviser.com
PLANADVISER - July/August 2018

Table of Contents for the Digital Edition of PLANADVISER - July/August 2018
