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This is part two of a two-part series. Part one, A Primer on Retirement Plan Compliance, appeared last week.
When isn’t an investment provider an investment provider? When they are a retirement-plan investment provider. Although they are still operating under SEC and/or FINRA, they also need to take into consideration ERISA and understand who they are and what they do. Being out of compliance can harm you, your plan-sponsor clients and even the participants.
I first encountered this years ago with a RIA/BD hybrid whose outside compliance officer contacted my firm because she recognized there could be differences and wanted some help. What we found was that even though their standard investment procedures, polices and mindset were compliance-minded, when it came to retirement plans, there were gaps that could harm them and their plan sponsor clients with the Department of Labor. As we met with other compliance and investment professionals, we found the same types of ERISA regulation non-compliance even though their SEC/FINRA compliance was sound.
Here are some of the differences I have seen with my clients and through my own experience:
1. With whom is the contract and who signs it?
Make sure the retirement plan contract is between the plan and the investment provider, and the appropriate person has signing authority to do so. I had a consulting client who executed an agreement between the plan-sponsor entity and the investment provider. This plan-sponsor entity individual signed the contract and they were not a designated signer for the plan.
2. Who is the client?
This should be a simple question and an even easier answer, but I have found it isn’t. Usually the person or company that signs the contract is the client and thus you can give appropriate advice to that client. But with ERISA, as noted above, what appears to be straightforward isn’t always that way. There can be two types of clients, the plan and the participants. Each would need a different contract and the service provider would need to do two different RFPs.
- Plan: If the contract is to provide investment services to the plan, the plan is your client and thus you cannot give individualized one-on-one advice to the participants. You are allowed to meet with the participants individually, but the “advice” is limited to generic, non-specific investment education for things such as model asset allocations, risk levels and the funds in the plan. Proper documentation when talking to participants is needed to show that improper advice was not given.
- This was an issue for an investment consulting client. They had two of their advisers meeting with participants quarterly. A participant met with one advisor the first quarter and the second advisor the second quarter. The participant claimed they gave conflicting advice and it was personalized. I reviewed the documentation in the files and found it was limited about the conversations and did not disprove what the participant was saying, nor show exactly what was discussed. From an SEC/FINRA perspective, with a paying client, the notes would have been okay, but not for the participants under this arrangement. Ultimately, I redesigned their participant’s forms and created new procedures to ensure proper documentation was created for the adviser’s files that would adhere better to ERISA.
- Participants: If the plan has contracted with the investment provider to provide formal advice to their participants (via a §408g-1 arrangement) or a participant has contracted directly with an investment provider, then one-one one personalized advice is acceptable. Remember, a plan must perform an RFP to hire an investment provider for their participants. The two types of investment providers can be different. If the plan’s investment provider also acts as a participant’s investment provider, they should verify there are no prohibited transaction issues.
3. SEC or FINRA exam versus an ERISA investigation
SEC and FINRA perform examinations on the registered entity. The DOL does investigations not only on a firm, but also on a single representative of a firm. The length of a DOL investigation is often longer, reaching over a year at times and what is being investigated is also different.
4. Definition of compensation
This is a place that is easy for an investment provider to get into trouble. With ERISA, the definition of a provider’s compensation is broad and includes not only money, but anything of value, thus conflicts of interests are easier under ERISA. Under SEC and FINRA, its monetary compensation only.
5. Different definitions or categories of investment providers:
There was a time when there was a simple distinction between a broker and an adviser. The former was purely transactional and commission-based and worked for a broker/dealer. An investment adviser was advice-based and fee-only and worked for a money management firm. Those were the days when it was easy to tell the difference; that is no longer the case. Now both groups use similar titles, sell similar products and advertise as if there is no difference between them. Not only is the general public confused, but often investment “insiders” don’t know the difference based simply on a person’s title or the products they sell.
Generally speaking, brokers sell investment products to their clients and advisers buy investment products for their clients.
Under ERISA, the lines are a little clearer. There are three types of different of investment-advice providers for plan sponsors. Two of which, under §3(38) and §3(21), are fiduciaries per Section 401 Qualified Pension, Profit-Sharing, And Stock Bonus Plans. With both of these, the investment provider must state they have fiduciary responsibilities in the contracts. The remaining type of investment provider is determined by default and can be considered simply “investment education” to a plan sponsor. In this case, which is the most popular type of provider, all decisions and responsibility, including all the fiduciary responsibility, is with the plan sponsors. The paperwork, compliance and responsibilities for both the plan sponsor and the investment provider differ greatly depending on the type of provider chosen.
Now you can see why a retirement plan investment provider isn’t just an investment provider. Not complying with all the regulators can ultimately hurt you, your plan sponsor clients and the participants. As a provider, you need to either learn the regulations, hire an ERISA compliance person who can help you, or hand your accounts over to an investment provider who does.
Deborah A. Castellani, CFA, is a principal of Akros Fiduciary Management, a non-producing Registered Investment Adviser, who specializes in working with investment professionals to increase sales and to help bring them (and their plan sponsors) into compliance with ERISA.
Read more articles by Deborah A. Castellani
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives
