PANC 2018: DOL Audits of Retirement Plan Advisers

“The Department of Labor [DOL] has become very focused on investment advisers,” said David Kaleda, principal, Groom Law Group, Chartered, speaking on the “DOL Audits of Retirement Plan Advisers” panel at the 2018 PLANADVISER National Conference. “The Employee Benefits Security Administration [EBSA] manual says they will target the adviser and provider communities.”

In particular, DOL is interested in compensation disclosures, Kaleda said. Groom Law Group is currently helping clients handle more than 30 DOL investigations, he said. In 1996, it was typical to be working on only five.

What prompts the DOL investigations are referrals from the Securities and Exchange Commission (SEC) about non-level compensation from a third party or other indirect payments that could potentially be construed as conflicted, he said, as well as private lawsuits or complaints lodged with the DOL by a retirement plan fiduciary or participant.

Sheridan Road Financial was subject to a DOL investigation of its Employee Retirement Income Security Act (ERISA) practice in 2015, said Jim O’Shaughnessy, managing partner. “It put us on the defensive and lasted two and a half years, only ending earlier this year,” he said. “It was actually very good practice for us to go through,” O’Shaughnessy said. “The DOL is trying to understand our ERISA advisory practice, what services we provide and how we are compensated.”

The fact of the matter is that advisers are compensated in numerous ways, he said, sometimes through ERISA budgets at the recordkeeper, or as a broker, a registered investment adviser (RIA), a 3(38) fiduciary or through a forfeiture account. “The main area of the DOL’s concern is to look for settlor, non-fiduciary actions, which may have been compensated through the plan, which is not permitted,” he said.

Changes to plan design cannot be paid for by the plan, Kaleda said. As a result of the DOL investigation, Sheridan Road Financial reworked all of its contracts to include settlor functions paid for directly by the plan sponsor, O’Shaughnessy said. “We are now even more transparent about the services we provide, and the DOL likes that model,” he said.

It is important for retirement plan advisers to ensure that settlor and fiduciary decisions are separate, Kaleda added. To this point, O’Shaughnessy said, all of the plans Sheridan Road Financial oversees now have both a fiduciary investment committee and an operational committee.

The DOL also wants to ensure that retirement plan advisers are delivering on all services listed in their contracts with retirement plan sponsors, O’Shaughnessy said.

Furthermore, if an investment committee has placed a fund on a watch list for a long period of time, say two years, and has not made any decision, the DOL will likely investigate the adviser to the plan, Kaleda said. The DOL could also become concerned if an adviser charges various pricing models, O’Shaughnessy said.

Kaleda said that DOL investigations are handled by regional DOL offices, and some are more sophisticated than others, particularly those in Kansas City, Chicago, Atlanta and Los Angeles. If they start an investigation, they send a 15- to 20-page questionnaire with a 30-day deadline, he said. “Call them to ask for an extension and ask them to scale back their requests,” he recommended. It is also helpful to “educate them on how your business works, such as whether you are a dual registrant or an affiliate. It is also important to demonstrate your compliance procedures to comply with ERISA.”