PLANADVISER - September/October 2018 - 56

ERISA vista
Investigations Intensify
The agency homes in on fee arrangements
ADVISER QUESTION: I provide investment
advisory services to ERISA [Employee
Retirement Income Security Act] plans. If
the DOL [Department of Labor] were to
conduct an investigation of my services to
retirement plans, what would it be focused
on, and what factors would increase my
risk of liability?
ANSWER: The DOL is focused on ERISA
violations and especially prohibited
transactions. This means you should pay
particular attention to both your direct
and indirect compensation, and any affiliated
services and/or proprietary products.
In recent DOL examinations, we have
seen a particular focus on compensation
and fee arrangements. This is because
the DOL is looking for self-dealing transactions.
Under
the self-dealing rule, a
fiduciary adviser is prohibited from using his fiduciary
status to cause himself or an affiliate to receive additional
compensation or to receive compensation from a third party
in connection with transactions involving plan assets-e.g.,
from providers or investments.
If a fiduciary adviser commits a self-dealing prohibited
transaction, he must pay back the prohibited compensation,
plus interest on that amount. He must also file a Form 5330
with the IRS and pay an excise tax of 15% of the amount
involved. This increases to 100% if the prohibited transaction
is not resolved in a timely fashion. In addition, if the
DOL steps in, it could assess a 20% penalty on the " amount
involved, " that is, on the prohibited compensation. In sum,
committing a prohibited transaction is costly.
Here is an example of a self-dealing prohibited transaction
that is on the DOL's radar: An adviser commits a selfdealing
prohibited transaction if he recommends an investment
that causes an affiliate to receive a commission or other
compensation. For this reason, in recent DOL examinations,
the department has been requesting detailed information
about investment vehicles-including limited partnerships,
mutual funds and collective investment funds-managed
by an adviser or its affiliate. The DOL's focus is on whether
these investment funds are recommended to the ERISA
plan client and, if so, whether there is a fee paid by the fund
to the adviser or affiliate that manages the fund. If that's
the case, the adviser is engaged in a self-dealing prohibited
transaction.
If a fiduciary
adviser commits
a self-dealing
prohibited
transaction, he
must pay back
the prohibited
compensation,
plus interest on
that amount.
To avoid this result, the adviser will
need to use a prohibited transaction
exemption (PTE), if one is available. For
example, PTE 77-4 can be used if an
adviser recommends a proprietary openend
mutual fund. However, PTE 77-4 has
strings attached, and, to get the benefit of
the exemption, those conditions must be
satisfied.
But what if there isn't a PTE? In that
case, the adviser can avoid the prohibited
transaction by crediting-i.e., offsetting-
the investment fund's management fee,
paid by the fund against its advisory fees.
The offset must be dollar for dollar. (See
the DOL's Frost Bank Advisory Opinion
97-15A.)
In other DOL examinations, the department
has been asking specific questions
about disclosures-in particular, about
408(b)(2) disclosures. ERISA's 408(b)(2) regulation requires
that advisers make written disclosures to ERISA retirement
plans. The disclosure must describe the adviser's services,
compensation and status-both as a fiduciary and as a registered
investment adviser (RIA)-or the engagement and the
compensation will be prohibited transactions.
The DOL is paying special attention to the compensation
description in the disclosure and evaluating whether
it is accurate and complete. Here is specific language
from a recent DOL examination where the department is
requesting a " schedule of all direct fees (e.g., management
fees, advisory fees and consulting fees) and indirect fees
(e.g., revenue-sharing fees, referral fees and 12b-1 fees)
paid or received by [adviser] or an affiliate or subsidiary of
[adviser] for services provided to ERISA clients. "
Based upon these document requests, it is clear that
advisers need to pay close attention to indirect compensation
and assess whether it is received in connection with
services provided to an ERISA plan-before receiving a
letter from the DOL.
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 September-October 2018
Art by Tim Bower
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