PLANADVISER - May/June 2019 - 52

ERISA vista
The Cost of Advising
One's Own Plan
To charge a fee is prohibited
QUESTION: We are an RIA [registered investment adviser] firm
that provides investment advisory services to ERISA [Employee
Retirement Income Security Act] clients. Our firm also maintains
a 401(k) plan for our employees. We provide ongoing investment
advice to the plan. Are we permitted to charge the plan an advisory
fee for these services as long as it is reasonable and comparable to
the fee we charge other similar plans?
ANSWER: No. The receipt of a fee for services to your
plan is a prohibited transaction. However, you can avoid a
prohibited transaction by providing the services to the plan
without charge.
In your capacity as the employer plan sponsor, you are
a discretionary fiduciary under ERISA-or, more technically,
a 3(21)(A)(i) management fiduciary and a 3(21)(A)(iii)
administrative fiduciary. As the plan sponsor, you have
a fiduciary duty to prudently select your plan's service
providers. The selection of yourself as investment adviser
is not, on its own, prohibited. However, it is prohibited to
cause the plan to pay an advisory fee to itself.
Here's why. One of the prohibitions under ERISA is selfdealing.
Under the self-dealing prohibited transaction rule,
a fiduciary may not use its fiduciary authority to cause itself
to receive compensation from its own plan. Here, you, as
plan sponsor, are using your fiduciary authority to require
your plan to pay you an advisory fee. If, on the other hand,
no fee is charged for your investment advisory services,
there will not be a prohibited transaction.
In our experience, Department of Labor (DOL)
is defined as a fiduciary's spouse, ancestor (e.g., parent or
grandparent), lineal descendant (e.g., child or grandchild)
and any spouse of a lineal descendant. If, for example, plan
decisions are made by the chief financial officer (CFO) of the
plan sponsor and the CFO hires his spouse as investment
adviser, the payment of the
advisory fee will be a prohibited
transaction.
It should be noted that
the definition of a person in
which the fiduciary has an
interest is very broad. While
it may seem obvious that it
includes children, parents
and others in the bloodline,
we have seen the DOL assert
that a cousin is such a person.
Even if no advisory fee is
charged for the investment
advisory services, a prohibited
transaction could arise if
the RIA receives third-party
payments in connection with
the investment advisory
As the plan
sponsor,
you have a
fiduciary duty
to prudently
select your
plan's service
providers.
investigators
are particularly interested in finding self-dealing
prohibited transactions. In one instance, an RIA's plan
sponsor hired an affiliated RIA to provide investment advisory
services and believed this would enable it to avoid the
prohibited transaction. Unfortunately, it does not because
the self-dealing rule also applies to additional compensation
paid by the plan to " a person in which the fiduciary has
an interest, which may affect the exercise of such fiduciary's best
judgment as a fiduciary. " The rule identifies a " person in which
the fiduciary has an interest " as including entities that share
certain ownership relationships with the employer fiduciary.
For instance, an entity in which the employer owns 50%
or more is a person in which the employer has an interest.
Similarly, the rule applies to an owner of 50% of more of the
employer. Additionally, an employee, officer, director or 10%
or more direct or indirect shareholder of the employer is
considered a person in which the employer has an interest.
The rule also identifies a " relative " as a person in which
the fiduciary has an interest. For this purpose, a relative
services it provides to its plan. For example, let's assume
that the RIA decides to offer a proprietary fund as an investment
option to be made available to plan participants. The
fund is managed by an affiliate of the RIA-a wholly owned
subsidiary-and the affiliate receives a management fee
for overseeing the fund. The receipt by the affiliate of that
management fee in connection with plan assets would be
prohibited unless a prohibited transaction exemption (PTE)
can be used.
Fortunately, there is a prohibited transaction exemption
that can be employed if the fund is a mutual fund.
PTE 77-3 provides relief for utilizing proprietary open-end
mutual funds in one's own plan providing certain conditions
are satisfied. Other payments such as revenue sharing
from custodians or investment providers are also forms of
prohibited compensation.
Fred Reish is chairman 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.
52 | planadviser.com May-June 2019
Art by Tim Bower
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