PLANADVISER - Spring 2023 - 36

Compliance Analysis
How to Avoid Fee Conflicts
Wealth managers can look to ERISA and the tax code for guidance
WEALTH MANAGERS provide discretionary asset management
services or investment advice to plans covered by the
Employee Retirement Income Security Act or to individual
retirement accounts covered by the Internal Revenue Code.
Increasingly, these firms are noting an interest in supplying
such services not just to the plans but also, separately, to the
plans' participants regarding both their plan investments
and outside investments. To do so, the firm and its representatives
would have to avoid conflicts of interest that arise due
to their receipt of compensation for such services.
Someone acts as a fiduciary for purposes of ERISA and the
IRC if, pursuant to ERISA Section 3(21)(i) and (ii) or IRC Section
4975(e)(3)(i) and (ii), 1) the individual exercises any authority
or control over the investment of a plan's assets, or 2) renders
investment advice for a fee or other compensation to the
plan. The person may act also as a fiduciary in connection
with a brokerage account or an advisory account.
Fiduciaries can look to ERISA Section 406(b), and parallel
provisions in IRC Section 4975(c)(1)(E) and (F), to see what
transactions are prohibited. Neither ERISA nor the IRC
prohibit an adviser from providing fiduciary services to the
plan or to participants with regard to their account balance
in the plan or assets held outside of the plan in an IRA.
Further, neither ERISA nor the IRC specifically prohibit a
fiduciary from getting paid for providing each service. Therefore,
the wealth management firm may negotiate separate
arrangements whereby it provides services to the plan and
the participants-including participant assets held in the
plan or outside of it in IRAs-and receive compensation.
In no case, however, do ERISA's or the IRC's prohibited
transaction provisions allow the fiduciary adviser firm to
affect the amount or timing of the compensation that it or
its representative receives, or that a party in which either
entity has an interest-e.g., an affiliate-receives, relating to
the fiduciary's exercise of investment discretion or provision
of investment advice. " Flat fee " or " level fee " arrangements
will often meet the prohibited transaction requirements, but
the arrangement must apply to the adviser firm, its representatives
and their affiliates. Investing in or recommending
investments in proprietary products or utilization of affiliated
managers can give rise to prohibited transactions issues.
Also, investing in or recommending an investment option
that results in the option or its manager paying a fee to the
adviser firm or its affiliate raises issues. Commissions or other
transaction-based compensation-arrangements, rather than
being level fee, raise prohibited fee-conflict issues. While the
36 planadviser.com | Spring 2023 | Participants
Art by Alex Eben Meyer
http://www.planadviser.com
PLANADVISER - Spring 2023

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