ERISA vista | PLANADVISER May/June 2015

Advice to Plans and Participants

Questions advisers are asking

By Fred Reish and Joan Neri | May/June 2015
Page 1 of 2
Art by June Kim

ADVISER QUESTION: I am a registered investment adviser (RIA) who provides investment services to Employee Retirement Income Security Act (ERISA) retirement plans, individual retirement accounts (IRAs) and individual plan participants. I acknowledge my ERISA fiduciary status when I provide advice to these clients. I understand that Department of Labor (DOL) investigations of advisers are on the rise. I believe everything is in order, but is there anything I should be concerned about?

ANSWER: Maybe. The DOL is especially looking for prohibited transactions (PTs) that have been committed.

408(b)(2) fee disclosures now play an important role in DOL investigations. These investigations include specific questions about such disclosures. We are also seeing the Securities and Exchange Commission (SEC) raise prohibited transaction issues about plans and IRAs it encounters in its examinations.

Whenever a fiduciary adviser makes investment recommendations to an ERISA plan and earns $1,000 or more in the course of performing those services, the adviser is a “covered service provider” (CSP) under the 408(b)(2) disclosure rule. Similarly, if an individual participant hires an investment adviser to provide investment advice about his account and the adviser is paid $1,000 or more out of it, the adviser is a fiduciary CSP. As a result, the adviser needs to disclose his services, compensation and status, as an ERISA fiduciary and RIA, or the engagement would be a prohibited transaction.

A nonfiduciary adviser can also be a CSP. For instance, a representative of a broker/dealer (B/D), or financial adviser, who is not a fiduciary but provides investment services to a plan or participants is a CSP if he receives indirect compensation of $1,000 or more from the investments—e.g., insurance commissions or 12b-1 fees.

The failure of a CSP adviser to make the 408(b)(2) disclosures is a prohibited transaction. To correct it, the adviser would need to return his compensation to the plan, plus interest. He would also need to file a Form 5330 with the Internal Revenue Service (IRS) and pay a 15% excise tax on the amount involved.

But not all retirement plans are covered by the 408(b)(2) disclosure rule. 408(b)(2) does not apply to simplified employee pension plans (SEPs) and savings incentive match plan for employee (SIMPLE) IRAs. Also, 408(b)(2) does not apply to non-ERISA plans, such as IRAs and so-called “one-person” plans—retirement plans that cover only the owner or the owner and his or her spouse. As a result, the written disclosures are not required.

However, the Internal Revenue Code (IRC) prohibited transaction rules apply to IRAs—including SEPs and SIMPLEs—and to one-person, non-ERISA plans. These rules mirror ERISA’s PT rules. Both the IRC and ERISA prohibit fiduciary advisers from receiving “additional” compensation for their advice. That could occur where a fiduciary adviser receives a stated fee and then also receives compensation from the investments he recommends. In other words, advisers are prohibited from receiving any compensation above and beyond their stated fees if that additional compensation is because of their investment advice.