What can plan advisers do when they learn a client is violating an Employee Retirement Income Security Act (ERISA) duty? If efforts to get the client to do the right thing fail, at what point does the adviser have a duty to report the client, or at what point should the adviser walk away from the relationship?
Adam Pozek, a partner at DWC ERISA Consultants in Salem, New Hampshire, says, “It varies widely depending on what type of infraction there is. No one wants the reputation of turning a client in when something small happens, but in a situation where there is outright theft, most would agree the adviser has a duty to report it.”
Pozek also says it hinges to some degree on whether the adviser is acting in a fiduciary capacity. If not, in general, the adviser has less of a responsibility legally. However, depending on what titles they hold, they may have ethical or professional standards to consider. “It’s a judgment call for advisers who are not fiduciaries,” he states.
Scott Liggett, JD, director of ERISA compliance at Lawing Financial, an independent, registered investment adviser (RIA), in Overland Park, Kansas, says there is nothing concrete about such rules for advisers, but in the qualified plan space, one has to look to fiduciary rules under ERISA 3(21) or 3(38). “This is when fiduciary rules start kicking in. An adviser can be liable for not making reasonable efforts to remedy a breach of which they become aware,” he says. “As the trend is for more and more advisers to serve as ERISA fiduciaries, that will trigger co-fiduciary rules.” However, he adds that it depends on facts and circumstances.NEXT: Look at intent
Pozek suggests advisers look at plan sponsor intent when deciding how to handle misbehavior. “If the plan sponsor knows it is doing wrong and just doesn’t care, the situation escalates to where reporting is required,” he says. “If the plan sponsor doesn’t know what it is doing is wrong, the adviser can make them aware it is an illegal fiduciary breach and help them fix it.”
Liggett believes advisers should get to know their plan sponsor clients’ intentions up front. “When a plan sponsor wants to engage your services, you need to do a due diligence on the plan sponsor,” he says. “Find out what level of engagement with you the plan sponsor wants and what the operations history of the plan is. You’ll want copies of previous audits and to know things like, has the sponsor had a preponderance of compliance testing issues?”
Liggett adds that if an adviser is going to be a fiduciary, he or she needs to ask questions ahead of time to get a feel for the plan sponsor’s thoughts about fiduciary training. “The adviser is the expert, the plan sponsor is not, see how receptive the client is to training and education.”
Education is the first step when an adviser becomes aware of a fiduciary breach, Pozek says. “If the plan sponsor is willing to fix the problem, I would give them a deadline to get it fixed,” he states. “As a consulting firm, if there is an ongoing infraction and no action on the plan sponsor’s part to fix it, we resign,” Pozek says. “If an adviser can show proof he or she took steps to try to get the sponsor to fix the error, and after the plan sponsor refused to do so, the adviser resigned, hopefully it will lower the adviser’s liability for the breach.”
Liggett adds that, if there are egregious violations, the adviser should report them. “If an engaged adviser gets a call from a retirement plan participant who says, ‘My statement is not showing my deferrals going into my account,’ the adviser cannot turn a blind eye; that warrants, at a minimum, asking questions,” he says.
Even if there are no fiduciary breaches, if an adviser has come up with workable processes for a plan sponsor to follow to keep them out of trouble, and the plan sponsor refuses to follow them, the adviser may want to withdraw, Liggett adds. “The adviser needs to weigh whether an ongoing relationship is worth the headache of having to look over the plan sponsor’s shoulder constantly, or if the plan sponsor expects the adviser to turn a blind eye.”NEXT: How much to nudge
Pozek says in a typical advisory agreement, an adviser isn’t given the responsibility to make sure the plan sponsor follows all ERISA rules. For example, an adviser responsible for helping plan sponsors with fund selection wouldn’t be responsible for making sure sponsors deposit employee deferrals in a timely manner. On the other hand, some advisers’ service offering is based on ongoing counseling rather than fund selection. “It depends on the level of engagement of the adviser,” he says.
While it doesn’t hurt for advisers to send out reminders to plan sponsors—for example, for the Form 5500 filing deadline—Pozek notes that usually it is up to the recordkeeper or third-party administrator to help plan sponsors with compliance. He says the key is coordination; advisers, sponsors and providers can have a call to discuss who is responsible for what. “This is where an adviser can show value as a coordinator. And, to the extent the adviser does that and follows up with parties to make sure things are moving in the right direction, and keeps documentation of all that, it will protect the adviser from adverse actions,” he says.
Liggett agrees that a unified front, getting the recordkeeper or TPA to confirm the adviser’s information about why the plan sponsor’s conduct will cause trouble, can help. Also, telling plan sponsors someone will be responsible for participant losses, turning it into monetary terms, will get their attention, he adds.
Some advisers take on the role of reminding plan sponsors about compliance, Liggett says. “We do. It is helpful to send reminders or nudges, for example about the timing of testing and sending census data to the recordkeeper on time, or submitting Form 5500 on time so they won’t be subject to a penalty. We are the experts, plan sponsors are not,” he states, adding that “In particular, when there is a change to your contact at the plan sponsor, you can’t always assume the person is well-trained.”