Tuesday, January 17, 2012

An Oldie but a Goodie - Criminal Rule, listen up Bank Lenders!

This is an oldie but a goodie. The story goes like this, Plan Sponsor of a 401(k) Plan receives a call from their Bank. Specifically, it is from their lender. The Loan Officer, subtley or maybe not so subtley, tells the client that their credit is at risk if they don't put more assets with the bank. Subsequently, a broker (bank registered rep) is introduced and a few short months later the 401(k) Plan is moved to the bank or a different spin where the credit isn't at risk, instead the client is told that their rate will be reduced in exchange for the plan.

For those of us practicing in the ERISA Qualified Plan arena, this story or one like it is very familiar. We all competed against this type of scenario and we all know that it isn't legal. I've often cited that this is a Prohited Transaction (PT) and violates several different ones. Well, thanks to a linked in post that led me to this blog post from the Business of Benefits (nice one Mr. Toth) we can all now specifically cite the US Criminal code when this scenario presents itself. http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/

To summarize the post, this behavior violates ERISA's Prohibited Transaction rules, but it also violates the US Criminal Code, specifically, 18 USC §1954. It specifically is an Anti-Kickback rule and is broad in nature although it does specify ERISA plans that

Whoever being—
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan

receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both.

Many scenarios could fall under this, but specifically, the act of Tying a company loan to the 401(k) Plan would fall under this. So, sometimes we need to look past ERISA to the Criminal Code itself to find something specific. I wonder if the banks have contemplated that this, technically, should be disclosed as compensation under 408(b)-2.......

Thanks Linked-In and thanks Mr. Toth for the good intelligence.

Friday, January 13, 2012

What!!! For a change, apparently No Delay on Fee Disclosure

In a shocking move by the DOL, they've actually held firm on the Fee Disclosure Deadline!


This is despite that fact that with approx. 3 months to go they still have not issued the final guidance needed for the variety of different service providers to all comply.

In this author's experience, this is typical. The Fee Disclosure rules, both 408(b)(2) and 404(a)(5) have been around for several years now and it would seem to me that all of the relevant issues have been discussed and vetted ad nauseum, so one would think that final guidance would have been here long before now. But, that is the problem with the regulating bodies. They claim to be sympathetic to industry concerns, but alas not so concerned that they would give industry enough time to implement changes to be in compliance.

Ethically/Morally, we've always been in favor of Fee Disclosure (see former blog posts on the subject) but we remain skeptical that the newly "informed" consumer, i.e. the Plan Sponsor and Participants will either be better off with this new information or outraged by it. Frankly, we believe it very possible that harm will be caused in the form of fewer participants saving money and more plans becoming out of compliance.

In fact, we think it is likely that a whole bunch of Plans that were previously in compliance with ERISA (teh heh....) will now be out of compliance and in many cases be engaging in Prohibited Transactions unknowingly. What remains to be seen is whether or not any of this will actually be enforced. In the meantime, as Samuel Jackson once said in the movie Jurassic Park.... "Hold onto your Butts!"

Friday, January 6, 2012

Discretionary v. Directed Trustees: Fiduciary Focus

In case you haven't seen it, yesterday in Morningstar's Fiduciary Focus column, Here --> http://www.morningstar.com/advisor/t/50458854/discretionary-trustees-vs-directed-trustees.htm, author Scott Simon tackled a topic that we, and our firm, Unified Trust, have been tackling for years. The topic is Discretionary Trustees vs. Directed Trustees. I got rather excited, thinking to myself selfishly that finally, someone else is going to discuss the merits of appointing a discretionary corporate trustee and the advantages of that over the more common, less valueable step-sister, the Directed Corporate Trustee.

Note, that while the article is, in my opinion, well written, factual and fairly thorough, I was disappointed, nonetheless, to read that he was referring to Discretionary Trustees in the broader sense. He makes the valid point that all trustees appointed by the Plan Sponsor are Discretionary Trustees unless specifically appointed as a Directed Trustee. That includes individuals, such as business owners or boards or officers appointed in this role. The only place he even mentions that you can appoint a Discretionary CORPORATE Trustee is as an aside where he states how uncommon this appointment is. He doesn't go into the merits of Prudent Fiduciary Appointment, or even compare contrast the differences between the two types of Corporate Trustees. You can incidentally find that on this blog.

Here -->http://the401kplanblog.blogspot.com/2011/11/practical-differences-of-various.html
Here -->http://the401kplanblog.blogspot.com/2011/04/338-im-discretionary-trustee-service.html

Disappointment aside, he does make a few very good points.

1.) All trustees are Discretionary unless specifically identified as Directed in the Plan Document at which point the responsibilities of trustee fall back to the Named Fiduciary, typically the Plan Sponsor. The good example of US Airways and their relationship to Fidelity Trust Company is provided.

2.) Directed Trustees provide a very limited array of services, typically asset custody, following direction and ensuring transaction accuracy. They are a highly limited fiduciary, and most (that I've seen) disavow fiduciary status in the contracts.

3.) No one can ensure blanket relief from fiduciary liability. There are only degrees of limited relief. Unfortunately, he doesn't point out that the highest degree is to prudently appoint a Discretionary Corporate Trustee.

So, long story short (too late, I know), Scott Simon wrote a decent article making the point that the devil is in the details, and that Plan Sponsors should be wary of unscrupulous sales pitches about fiduciary relief.