Living in the Boston area these days, there is plenty of talk about the Bruins’ inexorable march to the Stanley Cup finals as well as the continuing series of checks, hits, fights and bites. While “no harm, no foul” may apply on the ice, those who seek to apply it to qualified retirement plans may face more than just a few minutes in the penalty box.
ERISA Section 406 prohibits individuals who have a relationship with a plan (referred to as parties-in-interest) from engaging in certain transactions with the plan if there are conflicts of interest. In many circumstances, these Prohibited Transactions (“PTs”) can be addressed through disclosure of the conflict and/or a determination by plan fiduciaries that any compensation paid is reasonable in light of the services being provided.
However, when a plan fiduciary interacts with the plan in a way that results in a personal benefit, that fiduciary is generally considered to be self-dealing, which is a PT. Unlike other PTs, self-dealing is always prohibited and cannot be cured through disclosure or reasonableness, even if there is no harm to participants and even if the fiduciary has only the best intentions. Consider two examples.
The Line of Credit
A plan sponsor needs to hire a new recordkeeper for its 401(k) plan. The sponsor has a banking relationship with a large, national bank that responds to the recordkeeper RFP. The bank offers to discount the interest rate on the sponsor’s line of credit by 25 basis points if selected. What a great deal, right?! Not quite. Since the sponsor, not the plan, receives the benefit of discounted interest, they would engaged in self-dealing by selecting the bank and accepting the discount.
What if the sponsor still wants to hire the bank and declines the discount? That may address the PT issue, but it would also raise a question of fiduciary prudence. Is it really a good idea to hire a service provider who attempted to solicit your business via a legally prohibited transaction?
Freebies For The Owners
Another plan sponsor is looking for a new investment advisor for its plan. One of the finalists offers free financial planning for all of the shareholders if selected. Again, although no harm befalls the plan, the fact that the shareholders receive personal benefits based on their plan-related decision makes this a self-dealing PT.
The rules regarding PTs are extremely complicated. For more detail and citations, check out this whitepaper written in 2009 by Fred Reish and Joseph Faucher.
These two examples are among the more straight-forward ones. Others are significantly murkier. Consider the question of whether a fiduciary advisor to a 401(k) plan is permitted to accept a rollover from a departing participant in that plan. While DOL has not addresses the question directly on-point, they have provided some guidance in Advisory Opinion 2005-23A (see final paragraph under Q&A 2). A recent discussion from the 401(k) Recon group on LinkedIn illustrates the many variables that are introduced in an attempt to answer this question.
One key factor is whether the advisor's compensation increases as a result of accepting the rollover. What about the advisor's employer or an affiliate? If so, it would seem to indicate a PT…by virtue of the advisor’s position as a plan fiduciary, s/he engaged in a transaction with the plan that resulted in increased compensation. The answer is less clear if the advisor's compensation and the participant's fees remain level.
One commenter suggested that it depends on whether the advisor solicits the rollover or the participant seeks out the advisor. Another suggested the transaction is acceptable because it is beneficial for a participant to work with someone s/he already knows. Still another took the view that many politicians are less than ethical, so they shouldn’t take issue with a well-intentioned advisor trying to help participants…and what’s the big deal if the advisor earns an extra few bucks for his or her efforts.
While some of these arguments may have merit in other arenas, they all ignore the simple fact that ERISA prohibits self-dealing…period. It doesn’t matter who initiates it, how pure their intentions might be, or how much the participants also benefit.
There may be no harm, but there can still be a big foul.
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