The Rosenbaum Law Firm P.C. Blog

While the Department of Labor (DOL) heard the loud complaints concerning their intention to imposing disclosure requirements for plan sponsors on self directed brokerage accounts within retirement plans, it doesn’t exempt plan sponsors from liability in having these brokerage accounts within these plans. In that same bulletin that relieves plan sponsors of these disclosure requirements, the DOL stated that ERISA’s general fiduciary duties of prudence and loyalty apply to the selection and monitoring and the quality of services provided in connection with the broker-dealers who provide such accounts by plan sponsors.

In addition, I am still convinced that plan sponsors as a fiduciary, have a requirement to monitor the investments made by participants within these accounts and may have liability issues if participants lose their shirts within these accounts. I am still convinced that a participant who loses all their retirement savings by investing in one stock within their brokerage account can sue a plan sponsor for those losses and may have a good shot at beating a motion for summary judgment if the plan sponsor provided no education to these plan participants.

I have never been a big fan of self directed brokerage accounts within retirement plans, so I just wanted to share with you that the liability concerns with these accounts are still there.

My latest newsletter, geared towards financial advisors can be found here.

My latest JDSupra.com article can be found here.

I am not a big fan of participant directed brokerage accounts within self directed 401(k) plans because it can lead to a whole host of issues and problems that plan sponsors may not anticipate. So while I’m not a big fan of this option within 401(k) plans, I will let my clients and the advisors I work with to decide whether to add this option or not.

Thankfully, the Department of Labor (DOL) reined themself in after coming up with a Field Assistance Bulletin that should have had any plan sponsor that offered a self directed brokerage account a lot of heartburn.

Back in May, the DOL took the position that, in some cases, plan fiduciaries have a duty to investigate how participants were investing in individual brokerage accounts. Basically, the DOL said that, if there are similar investment patterns among participant individual brokerage accounts, it was possible that those similar investments would need to be treated as designated investment alternatives and, therefore, a variety of disclosures would need to be made to all participants, including the performance history of those investments, expense ratios, appropriate benchmarks, turnover ratios, etc. This would have been a disclosure nightmare for plan sponsor and their plan providers alike.

Of course, there was backlash from plan sponsors and the rest of the retirement plan industry because this really came out of the blue because the DOL has always taken a laissez faire approach to self directed brokerage accounts, so this created an uproar.

Thankfully, the DOL listened and clarified their position, by stating that:

• Plan fiduciaries do not have an obligation to investigate and/or monitor and/or disclose the investments within individual brokerage accounts.

• Plan fiduciaries do have a fiduciary duty, under the Prudent Man Rule, to prudently select and monitor the providers of brokerage accounts and to provide the 404(a)(5) disclosures to participants about the operation and availability of the brokerage accounts, as well as the fees involved with these accounts.

So that fire is put out, what’s next?

I was never part of the in crowd. Look at my picture, could I ever be in the “in crowd”. While I always heard the excuse “that everyone is doing it”, I was always the guy who wasn’t. That’s it for my therapy today.

A big part of my practice is assisting financial advisors, third party administration (TPA) firms, and plan sponsors nationally with what I call an open phone policy. Financial advisors, TPAs, and plan sponsors can call me up with any questions they have about qualified and non-qualified plans without having to worry that they are going to be charged for just getting an answer to a question. I am all about building relationships and helping people in the retirement plan community, save one retirement plan at a time. So if you need any quick answer or help, give me a call (cheap plug).

That being said, I got two questions on the left coast that were different but both ended with that saying I have heard so many times over the last 14 years as an ERISA attorney.

The first question came from a TPA in California. A defined benefit plan sponsor wanted to invest in a mortgage in a building that the plan sponsor would buy and the plan sponsor would live in. Of course, there is something called a prohibited transaction and an exemption from the Department of Labor won’t happen. Of course, the client’s financial advisor claimed that what the plan sponsor wanted to do was fine “because everyone does it.”

In the second question, an attorney friend of mine asked me about a client of theirs who had a retirement plan, but wasn’t covering the leased employees in their office. Since the leased employees didn’t meet any of the exceptions set out by the Internal Revenue Code, they had to be covered. Of course the client thought that not covering the leased employees was fine “because everyone does it.”

As an ERISA attorney, I have to counsel my clients to operate their sponsorship of retirement plans within the limits of the Internal Revenue Code and ERISA. I don’t care what everyone else is doing if what they are doing would result in plan disqualification or sanction if caught by the Internal Revenue Service and Department of Labor. Plan sponsors and plan trustees are plan fiduciaries and have to act prudently within the confines of the law. Simply saying everyone is breaking these laws is no defense.

I have a client being sued by the government because as a plan fiduciary, they didn’t make sure the TPA was doing their job. Saying that they aren’t liable because most other plan sponsors don’t make sure their TPAs are doing their job is no defense.

The DOL and IRS won’t care if everyone is doing it, they just want to make sure plan sponsors don’t.

My latest newsletter can be found here

My latest JDSupra.com article can be found here.

An article on Plansponsor.com featuring me, based on a previous article that I wrote. Please see here.

The next big thing in the retirement plan industry is the proliferation of companies offering ERISA §3(16) services. This is a result of the Department of Labor ill-advised Advisory Opinion which destroyed the business model of many “Open” MEPs (multiple employer plans), as well as the advertising 3(16) as an outsourcing solution where employers can outsource the headache of plan administration to a 3(16) named fiduciary.

The “Plan Administrator” of a qualified retirement plan is defined in section 3(16) of ERISA. The Plan Administrator should not be confused with a “Pension Administrator” or a “Third Party Administrator” (TPA).

Unlike the TPA, the Plan Administrator actually has the following primary responsibilities:

◦     Ensures all filings with the federal government (form 5500, etc.) are timely made;

◦     Makes important disclosures to plan participants;

◦     Hires plan service providers if no other fiduciary has that responsibility; and

◦     Fulfills other responsibilities as set forth in plan documents.

A TPA is delegated these responsibilities, but the plan sponsor bears the responsibility. The §3(16) fiduciary/administrator assumes that responsibility, as the plan sponsor outsources it.

This is great, isn’t it? While I have been working with TPAs and financial advisor in trying to help them offer these services (cheap plug), I do see an issue? Unlike a §3(21) or §3(38) fiduciary that requires some sort of registration as a financial advisor, a §3(16) administrator much like a TPA does not need any accreditation. So nothing would stop someone from coming in out of nowhere and proclaiming themselves as the king or queen of 3(16) fiduciaries without having either the competence and/or honesty to be one. This industry has had its share of incompetent and/or fraudulent plan providers and without any requirement to be one, there will be an issue when a 3(16) administrator does go badly.

So obviously, a plan sponsor must be careful to vet any provider they are considering to be a 3(16) administrator.  If you are interested in finding a 3(16) administrator or becoming one, you know where to reach me.