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A Series on Reportable Events: The Squealing TPA (Part 2) – Has a Prohibited Transaction Occurred?


Retirement Plan Advisory Services presents the second part of our series on reportable events, better known as the squealing TPA. The regulations are clear about disclosure: if a financial advisor gets paid from plan assets, then failure to disclose the services they provide, the fees they receive and if they are a fiduciary to the plan constitute a prohibited transaction.

In this installation, we will discuss whether a financial advisor, or a Covered Service Provider (CSP) is acting in a fiduciary capacity. The actions of the CSP dictate their fiduciary status. If they are a fiduciary to the plan, then their fiduciary status may create additional prohibited transactions.

Is the Financial Advisor a Fiduciary to the Plan?

The Financial Advisor 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.  

A statement that the Financial Advisor is not a fiduciary does not mean that the Financial Advisor is not a fiduciary. The actions of the Financial Advisor dictate their fiduciary status.

A Registered Investment Advisor, an Investment Advisor Representative or an Investment Manager are all known fiduciaries to a plan. Brokers are not required under current law to be fiduciaries to a plan, it is their actions in performing the services to the plan that determine their fiduciary status. It is not a requirement that a broker state that they are not a fiduciary to the plan, only that they are a fiduciary to the plan, however, best business practice would be to clearly state whether the broker is a fiduciary or not.

For example, if the broker provides recommendations for the selection of the mutual funds to the plan sponsor to be used by the plan participants in their portfolio of their 401(k) plan, that broker is providing a fiduciary service and, as such, is a fiduciary to the plan. If a broker meets with the plan participants, even just the key employee(s) and helps them in the selection of the funds for their portfolio in their retirement plan, then the broker is acting in a fiduciary capacity and is a fiduciary to the plan. This blog will call this group “Fiduciary Brokers.”

If the financial advisor is a fiduciary, then they must be paid level fees; i.e., the broker or their broker dealer cannot get paid more from one investment over another and the broker dealer cannot receive any additional fees or incentives from the plan for any plan asset alternatives (12(b)1, sub-Transfer agent fees, custodial fees or any other revenue sharing arrangements.) (See our white paper on “When the Department of Labor Comes Knocking".)

Hidden Trap

There is a hidden trap in becoming a fiduciary to a qualified plan as a broker. This hidden trap creates additional prohibited transactions. Below is Question 2 from the Department of Labor Advisory Opinion 2005-23A (ERISA Sec. 3(21) ) in regards to prohibited transactions:

“Question2: Does a recommendation that a participant roll over his or her account balance to an individual retirement account (IRA) to take advantage of investment options not available under the plan constitute investment advice with respect to plan assets?

Answer 2: It is the view of the Department that merely advising a plan participant to take an otherwise permissible plan distribution, even when that advice is combined with a recommendation as to how the distribution should be invested, does not constitute “investment advice” within the meaning of the regulation (29 CFR § 2510-3.21(c)).(3) The investment advice regulation defines when a person is a fiduciary by virtue of providing investment advice with respect to the assets of an employee benefit plan. The Department does not view a recommendation to take a distribution as advice or a recommendation concerning a particular investment (i.e., purchasing or selling securities or other property) as contemplated by regulation § 2510.3-21(c)(1)(i). Any investment recommendation regarding the proceeds of a distribution would be advice with respect to funds that are no longer assets of the plan.(4)

Where, however, a plan officer or someone who is already a plan fiduciary responds to participant questions concerning the advisability of taking a distribution or the investment of amounts withdrawn from the plan, that fiduciary is exercising discretionary authority respecting management of the plan and must act prudently and solely in the interest of the participant.(5Moreover, if, for example, a fiduciary exercises control over plan assets to cause the participant to take a distribution and then to invest the proceeds in an IRA account managed by the fiduciary, the fiduciary may be using plan assets in his or her own interest, in violation of ERISA section 406(b)(1).”

As you can see, in the bolded text, a fiduciary is prohibited from rolling over the assets into an IRA and then investing those assets on behalf of the former plan participants. This means that any RIA, IAR, Investment Manager or Fiduciary Broker is prohibited from working with plan participants in taking their distributions from the plan and assisting them in the investments of the proceeds. If they take the action to do so, then a prohibited transaction as occurred.

Prohibited Transactions Due to Actions/Inactions of Broker

To summarize, there are two potential prohibited transactions that may occur due to the actions or inactions of a broker. A prohibited transaction occurs if:

- the financial advisor does not disclose their fees, fiduciary status, services, and payment methods or

-  if the financial advisor is considered a fiduciary to the plan and works with the plan participants to roll the assets over to an IRA or other investment vehicles from which the financial advisor receives payments, commissions or fees. ©

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

        NEXT In Our Series... Where The Broker Is NOT a Fiduciary to the Plan



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