The DOL gets one

A third party administrator (TPA) that has its own affiliated registered investment advisor business is called a producing TPA. What they produce, I still have no idea.

I always have trepidations regarding producing TPAs because of my experience with one I worked for and the abuses that went on when the RIA arm was directing the selection of mutual funds, mainly for revenue sharing and pocketing that revenue sharing without letting the client know.  In addition, we were known for stealing business from the brokers and advisors who brought us clients.

Of course, folks who work for producing TPAs will point out these abuses are a rarity and that the bulk of producing TPAs don’t target mutual funds for revenue sharing and don’t steal business from referring brokers and advisors. I’m sure that’s true and I believe the fee disclosure regulations will curtail most of the potential abuses when plan sponsors get a disclosure of real plan administrative costs.

So the Department of Labor (DOL) recently came down on a TPA affiliated RIA for revenue sharing abuses prior to the Section 408(b)(2) regulations. USI Advisors Inc., a subsidiary of Goldman Sachs owned TPA, USI Consulting Group has agreed to pay $1,265,608.70 to 13 defined benefit plans.

The crux of the DOL’s complaint? From 2004-2010, the RIA arm made investments in mutual funds on behalf of defined benefit plan clients and received 12b-1 fees from those funds. The RIA failed to fully disclose the receipt of the 12b-1 fees, and failed to use those fees for the benefit of the plans either by directly crediting the amounts to the plans or by offsetting other fees the plans would be obligated to pay the RIA arm or TPA arm.  So they steered investments towards 12b-1 paying mutual funds and just pocketed the money without letting the clients know about it.

To be honest, what USI did in my opinion was more egregious than what my old bosses did because unlike participant directed plans, defined benefit plans are trustee directed which means that USI certainly had more influence in which actual plan investments were made. A participant directed 401(k) plan could potentially have far less revenue sharing than a defined benefit plan if participants chose more mutual funds that don’t pay revenue sharing.

Going forward, USI will have to abide by the plan sponsor disclosures by acknowledging their fiduciary role, outlining the services they offer, and the fees they are compensated by the plan or by a third party.

So this was just another reason why we need fee disclosure.

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