Leveraging ERISA Attorneys
The retirement specialist advisory profession is ripe with opportunity, but under the Employee Retirement Income Security Act (ERISA), working as an adviser to tax-qualified retirement plans brings substantial liability and potential legal pitfalls. Advisers must also adhere to general investment advice rules, as well as securities law and tax obligations, enforced by groups including the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and the Internal Revenue Service (IRS).
ERISA is a landmark piece of legislation that sets the terms and limits of advisers’ fiduciary status for qualified plan clients, among many other functions related to employee benefits. While not all brokers and advisers touching retirement plans choose to serve as fiduciaries for their clients, the Department of Labor (DOL) is clearly interested in making more advice providers into fiduciaries—demonstrated by the department’s ongoing fiduciary redefinition effort (see Capital News, page 30).
As such, ERISA is now and will remain a constant source of both challenges and opportunities for the advisory profession, suggests David Levine, a principal with Groom Law Group in Washington, D.C., who specializes in ERISA plan issues. He explains that employee benefits law under ERISA is a complex amalgam of labor, tax and securities law, along with other rulings and precedent, “all overlapping in a complex, fascinating way that makes working in the field interesting and ensures things are constantly evolving.” That, he says, is why having access to and relationships with ERISA attorneys is so valuable for plan advisers.
“As an adviser, there really are countless ways you can rely on an ERISA attorney, whether your goal is to protect your practice or grow your value-add,” Levine says. “Any given relationship is going to depend on the particular needs and resource availability of the adviser’s firm, along with something I refer to as the adviser’s ‘business personality.’”
Levine defines business personality as the elements of a practice that go beyond the objective client service and practice management processes. A firm’s size and business model often have much to do with determining its personality. Some advisories make collaboration and uniform service the center of their ethos; others might take a silo approach, meaning advisers work more independently. Some firms are large enough to bring ERISA counsel in-house, but smaller firms can only dream of that possibility.
“Whatever the firm makeup, finding the right ERISA attorney is a matter of a business and a cultural fit,” Levine continues. “Just as each adviser is different in terms of what he feels will be useful for his practice, what he is willing to pay for, what his risk tolerance is and how willing he is to push limits, each attorney is different in his conservatism, creativity and practicality,” he says.
Informal polling at the 2014 PLANADVISER National Conference showed advisers today often get compliance support and access to ERISA attorneys as a part of their relationships with recordkeepers or defined contribution investment only (DCIO) firms—and they consult with these attorneys for a variety of purposes. Other advisers choose to establish a third-party relationship with an ERISA attorney or wider law firm, perhaps to do compliance and contract review work on retainer or on a per-project fee basis.
“Most obvious, I think, is when ERISA attorneys provide support with litigation—whether on a specific legal matter or as a general practice to address litigation risk,” Levine says. “There are also many opportunities that go beyond courtroom litigation and can help prevent or blunt the impact of future litigation.”
One ongoing practice, according to Kenneth Catanella, Philadelphia-based managing director and senior retirement plan consultant for The Catanella Institutional Consulting Team, part of the UBS Institutional Consulting Group, is to utilize ERISA attorneys during current and prospective client meetings.
“We rely on our recordkeepers and have used them over the years to bring in ERISA attorneys to talk with our plan sponsors about their fiduciary responsibility, or we’ll bring in an attorney to do a deep dive on the target-date fund [TDF] selection picture,” Catanella says. “Frankly, it’s a mistake not to leverage your service providers this way.”
Drawing on these kinds of resources does not have to break the bank, Catanella says, and advisers will often be surprised to learn exactly how much support recordkeepers can provide. Even when the adviser needs to invest more money, doing so at the start can solidify a client relationship, ensuring better retention and risk mitigation. “It shows the adviser is doing everything he can to deliver value-add and justify his fees,” Catanella concludes.
Compliance support for sponsors is also important for plan outcomes: Although leading plan sponsors continue to refine best practices and push for better retirement plan outcomes, the last three years have actually brought a decline overall in sponsors’ awareness of fiduciary regulations and responsibilities, according to research from AllianceBernstein. A recent study from the firm shows 37% of sponsors are even unaware that they are fiduciaries, up from 30% in 2011. The report warns that advisers who have such clients probably put themselves at risk, due to the prevalence of co-fiduciary and functional fiduciary liability under ERISA.
Levine likens the ERISA attorney selection process to the investment fund selection process, in that fees are important to the quality of outcomes but are not the sole determinant. Some advisers may think it worthwhile to pay a little more for improved speed and depth of services. Others may have robust internal compliance expertise and need only a second opinion here and there.
“You need to clearly identify and document the places, upfront, where you need help, and you should assign clear goals to the relationship,” Levine says. “Personally, I have worked with both independent advisers and larger shops on a pretty regular basis, and the terms and compensation involved can really differ, depending on the firm.”
According to Levine, the fiduciary redefinition proposal from the DOL “has caused many people in the retirement advisory industry who have never really felt compelled to bring in an ERISA attorney to start asking whether they’d better bring one in now. There are many advisers and brokers and wealth managers out there right now who are seeing all this come out of the DOL, and they’re really not sure what to think about it yet or whether their business practices could be impacted,” he says. The general principal: It is better to bring in the resources and ensure you are compliant from the outset, rather than wait for a disruptive piece of litigation to arise.
Another expanding area for adviser/attorney collaboration is emerging as more advisers look to offer customizable products and services, Levine notes. This is especially true in the area of managed accounts and made-to-order asset-allocation solutions that serve as qualified default investment alternatives (QDIAs). “This business line in particular has really picked up for ERISA attorneys because many advisers are looking to diversify and improve their value-add beyond just a pure investment consultant role,” he says. “They’re managing money in new ways and taking on new litigation risks as a result.”
Levine concludes that increasing cross-channel competition will push advisers into new service areas and ways of doing business in the years ahead—implying an ongoing need for ERISA expertise.
“There really is a lot of competition in this industry. If you look at a recordkeeper, it will often try to poach some of the opportunities that advisers are selling on, and then you’ll find plan advisers trying to do the same thing with personal wealth managers. Then you’ll see some of these money managers try to do things that tax experts or accountants do, and it goes on and on,” Levine says. “The way to navigate this environment effectively is to ask, ‘How can I collaborate with all these resources to promote the best end result for the clients on the ground?’”