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A Series on Reportable Events: The Squealing TPA (Part 1)


Retirement Plan Advisory Services has chosen to write a series for our readers on qualified retirement planning and compliance with the new regulation, ERISA 408(b)(2). It is pertinent that ALL Covered Service Providers are aware of the newest regulation, as it requires full-disclosure of any information regarding services they provide, their fiduciary capacity, the fees they charge and the method and frequency of the payment plans. 

Unfortunately, many providers have NOT adhered to this new regulation, and their failure to disclose information creates a prohibited transaction. 

This series will explain the newest regulation; help you realize if your service is failing to comply with the regulation, and where to go from there. We are here to guide your business seamlessly through the process, in order for you to avoid paying fees, excise taxes and have to file governmental paperwork. If you HAVE complied with ERISA 408(b)(2), we offer advice on how to educate your brokers and make sure there is consistent full compliance and disclosure throughout.            

What is Form 5500?

A plan sponsor of a qualified retirement plan must file a Form 5500 with attachments to the Department of Labor. This disclosure form has a great deal of information regarding the plan. We will concentrate on only one section of the form, reporting of prohibited transactions.

Most plan sponsors hire professionals to assist in preparing the Form 5500 with all the attachments. In general, there are two types of servicing platforms: bundled and unbundled.

A bundled arrangement is where the compliance services (commonly referred to as Third Party Administrator or TPA), the record keeper, and the investment provider are all bundled together. An unbundled arrangement can come in many variations, with the recordkeeping, investment services, and TPA services all separate.

In either arrangement, the compliance section or TPA must complete the Form 5500 for the plan sponsor to execute and submit under penalty of perjury to the U.S. Department of Labor. These forms are several pages in length and have several attachments. The TPA has the option of signing on as a paid preparer or not.

Non-Compliance Creates Prohibited Transactions

On Schedule I or H and Schedule G of the Form 5500, the plan sponsor must indicate if there have been any prohibited transactions for the plan year. These are referred to as “Reportable Events”. 

As a TPA for over 30 years, I have witnessed many Prohibited Transactions (PT’s). There are the obvious ones: the trustees purchases their home residence and rents it back to themselves, the trustees purchase art objects that are on their living room wall, the trustees purchase Club Med memberships since they are good investments and will always go up in price, etc. There are also the not so obvious ones, which are relevant to this discussion.

New Requirements Under ERISA 408(b)(2)

The TPA SHOULD identify the prohibited transaction or the auditor will see it for larger plans.

The new regulations, that became effective July 1, 2012, require that all Covered Service Providers (CSP’s) to a qualified retirement plan, that get paid out of plan assets, disclose the services they provide, if they operate in a fiduciary capacity, the fees they charge, and the method and frequency of the payment of the fees.

We believe that the MAJORITY of advisors have NOT complied with the new regulations under ERISA 408(b)(2) and they will get caught.


ERISA 408(b)(2) states that failure to disclose any of the information above makes all payments, fees or commissions paid after June 30, 2012 a prohibited transaction.

Any financial advisor to a qualified plan is considered a CSP. This includes brokers (registered representatives), Registered Investment Advisers (either state or federally registered) and their Investment Adviser Representatives and Investment Managers that have discretionary or non-discretionary control over plan assets.

Disclosure is Paramount to Avoiding a Prohibited Transaction

Without disclosure the plan has a prohibited transaction from the Covered Service Provider.

If the broker dealer is receiving a portion of the fees from the plan assets through a cut in the commissions, then the broker dealer must disclose their services, fees method and frequency of payment and fiduciary status. If they do not, then they have non-disclosed fees and they are committing a prohibited transaction.

What's Next?

The CSP must determine if they are operating in a fiduciary capacity. The critical issue is how the investment professional acts when performing their services. If the investment professional helps select the vendor, the funds that are used in the plan for participant selection or helps any of the participants in the selection of the funds for their individual portfolio, then they are acting in a fiduciary capacity.  


Is your business complying with federal regulations? Read our complimentary download to find out.

        NEXT In Our Series... Has A Prohibited Transaction Occurred? 


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